e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010.
Or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-14471
MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
52-1574808 |
|
|
|
(State or other jurisdiction
of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
7720 N. Dobson Road, Scottsdale, Arizona
|
|
85256-2740 |
|
|
|
(Address of principal executive office)
|
|
(Zip Code) |
Registrants telephone number, including area code: (602) 808-8800
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered |
|
|
|
Class A common stock, $0.014 par value
Preference Share Purchase Rights
|
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form or any amendment to this Form 10-K 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 definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o No þ
The aggregate market value of the voting stock held on June 30, 2010 by non-affiliates of the
registrant was $1,077,833,896 based on the closing price of $21.88 per share as reported on the New
York Stock Exchange on June 30, 2010, the last business day of the registrants most recently
completed second fiscal quarter (calculated by excluding all shares held by executive officers,
directors and holders known to the registrant of ten percent or more of the voting power of the
registrants common stock, without conceding that such persons are affiliates of the registrant
for purposes of the federal securities laws). As of February 22, 2011, there were 60,746,469
outstanding shares of Class A common stock, including 1,766,749 shares of unvested restricted stock
awards.
Documents incorporated by reference:
Portions of the Proxy Statement for the registrants 2011 Annual Meeting of Shareholders (the Proxy Statement)
are incorporated herein by reference in Part III of this Form 10-K to the extent stated herein.
PART I
Item 1. Business
The Company
Medicis Pharmaceutical Corporation (Medicis, the Company, or as used in the context of
we, us or our), together with our wholly owned subsidiaries, is a leading independent
specialty pharmaceutical company focusing primarily on helping patients attain a healthy and
youthful appearance and self-image through the development and marketing in the United States
(U.S.) of products for the treatment of dermatological and aesthetic 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, Inc. (LipoSonix) in July 2008.
We believe that the U.S. market for dermatological pharmaceutical sales exceeds $6 billion
annually. According to the American Society for Aesthetic Plastic Surgery (ASAPS), a national
not-for-profit organization for education and research in cosmetic plastic surgery, nearly 10
million cosmetic surgical and nonsurgical procedures were performed in the U.S. during 2009,
including more than 8.5 million nonsurgical cosmetic procedures. LipoSonix, now known as Medicis
Technologies Corporation, is a medical device company developing non-invasive body sculpting
technology. In the U.S., the LIPOSONIXTM system is an investigational device and is
currently not cleared or approved for sale.
See Item 7 of Part I of this report, Managements Discussion and Analysis of Financial Condition
and Results of Operation and Note 20, Subsequent
Events, in the notes to the consolidated
financial statements listed under Item 15 of Part IV of this report,
Exhibits, Financial Statement Schedules, for information concerning
our plans to explore strategic alternatives with respect to
our LipoSonix business, including but not limited to, the sale of the stand-alone business.
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 the leading plastic surgeons in the U.S.
We offer a broad range of products addressing various conditions or aesthetic improvements,
including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging,
psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).
We currently offer 16 branded products. Our primary brands are DYSPORT®
(abobotulinumtoxinA) 300 Units for Injection, PERLANE® Injectable Gel,
RESTYLANE® Injectable Gel, SOLODYN® (minocycline HCl, USP) Extended Release
Tablets, VANOS® (fluocinonide) Cream 0.1%, and ZIANA® (clindamycin phosphate
1.2% and tretinoin 0.025%) Gel. Many of our primary brands currently enjoy branded market
leadership in the segments in which they compete. Because of the significance of these brands to
our business, we concentrate our sales and marketing efforts in promoting them to physicians in our
target markets. We also sell a number of other products that we consider less critical to our
business.
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 disorders and non-invasive body sculpting
technology. Our non-dermatological field also includes contract revenues associated with licensing
agreements and authorized generic agreements. The following table sets forth the percentage of net
revenues for each of our product categories for 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Category |
|
2010 |
|
2009 |
|
2008 |
|
Acne and acne-related dermatological products |
|
|
68.9 |
% |
|
|
69.7 |
% |
|
|
62.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-acne dermatological products |
|
|
25.0 |
% |
|
|
23.4 |
% |
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-dermatological products (including
contract revenues) |
|
|
6.1 |
% |
|
|
6.9 |
% |
|
|
8.6 |
% |
3
Our Products
We currently market 16 branded products. Our sales and marketing efforts are currently
focused on our primary brands. The following chart details certain important features of our
primary brands:
|
|
|
|
|
Brand |
|
Treatment |
|
U.S. Market Impact |
DYSPORT®
|
|
Temporary improvement in the
appearance of moderate to severe
glabellar lines in adults younger
than 65 years of age
|
|
Launched in June 2009 following U.S. Food and
Drug Administration (FDA) approval on April 29,
2009 |
|
PERLANE®
|
|
Implantation into the deep dermis to
superficial subcutis for the correction
of moderate to severe facial wrinkles
and folds, such as nasolabial folds
|
|
Launched in May 2007 following FDA approval on
May 2, 2007; PERLANE-L® was approved
by the FDA on January 29, 2010 |
RESTYLANE®
|
|
Implantation into the mid to deep
dermis for the correction of moderate
to severe facial wrinkles and folds,
such as nasolabial folds
|
|
The first hyaluronic acid dermal filler approved in the
U.S., and the most-studied dermal filler in the world;
launched in January 2004 following FDA approval
on December 12, 2003; RESTYLANE-L® was
approved by the FDA on January 29, 2010 |
SOLODYN®
|
|
Once daily dosage for the treatment of
inflammatory lesions of non-nodular
moderate to severe acne vulgaris in
patients 12 years of age and older
|
|
The #1 dermatology medication by dollars in the
U.S.; launched in July 2006 following FDA approval
on May 8, 2006 |
|
VANOS®
|
|
Super-high potency topical corticosteroid
for the relief of the inflammatory and
pruritic manifestations of corticosteroid
responsive dermatoses (e.g., psoriasis) in
patients 12 years of age or older
|
|
Launched in April 2005 following FDA
approval on February 11, 2005 |
|
ZIANA®
|
|
Once daily topical treatment of acne
vulgaris in patients 12 years of age
and older
|
|
First commercial sales to wholesalers in December
2006 and launched in January 2007 following FDA
approval on November 7, 2006 |
Prescription Pharmaceuticals
Our principal branded prescription pharmaceutical products are described below:
SOLODYN®, launched to dermatologists in July 2006 after approval by the FDA on May
8, 2006, is the only branded oral minocycline approved for once daily dosage in the treatment of
inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age or
older. SOLODYN® is the first and only extended release minocycline with eight
FDA-approved dosing strengths. SOLODYN® is available by prescription in 45mg, 55mg,
65mg, 80mg, 90mg, 105mg, 115mg and 135mg extended release tablet dosages. The 45mg, 90mg and 135mg
strengths were approved as a part of the original FDA approval on May 8, 2006. The 65mg and 115mg
dosages were approved by the FDA in July 2009. The 55mg, 80mg and 105mg strengths were approved by
the FDA in August 2010. Minocycline, the active ingredient in SOLODYN®, is lipid
soluble, and distributes in the skin and sebum. SOLODYN® is not bioequivalent to any
immediate release minocycline products, and is in no way interchangeable with any immediate release
forms of minocycline. SOLODYN® has four issued patents (see also Item 1A. Risk
Factors). U.S. patent No. 5,908,838 (the 838 Patent), which expires in 2018, relates to the use
of the SOLODYN® unique dissolution rate. We believe all forms of SOLODYN®
currently approved for use are covered by one or more claims of the 838 Patent. The FDA listed
this patent in the FDAs Approved Drug Products with Therapeutic Equivalents (the Orange Book)
for SOLODYN® in December 2008. U.S. Patent No. 7,541,347 (the 347 Patent), which
expires in 2027, relates to the use of the 90mg controlled-release oral dosage form of minocycline
to treat acne. U.S. Patent No. 7,544,373 (the 373 Patent), which expires in 2027, relates to
the composition of the 90mg dosage form. The FDA listed these two patents in the Orange Book for
SOLODYN® in June 2009. On September 8, 2010, the U.S. Patent and Trademark Office
(USPTO) issued U.S. Patent No. 7,790,705 (the 705 Patent) related to the use of
SOLODYN®. The new patent, entitled Minocycline Oral Dosage Forms for the Treatment of
Acne, relates to the use of dosage forms of SOLODYN® which provide approximately 1
mg/kg dosing based on the body weight of the person, and expires in 2025 or later. Multiple patent
4
applications directed to key dosing, labeling and formulation aspects of SOLODYN® are
pending (see also Item 1A. Risk Factors).
VANOS® Cream, launched to dermatologists in April 2005 after approval by the FDA on
February 11, 2005, is a super-high potency (Class I) topical corticosteroid indicated for the
relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses
(e.g., psoriasis) in patients 12 years of age or older. The active ingredient in VANOS®
is fluocinonide 0.1%, and is the only fluocinonide available in the Class I category of topical
corticosteroids. Two double-blind clinical studies have demonstrated the efficacy, safety and
tolerability of VANOS®. Its base was formulated to have the cosmetic elegance of a
cream with ointment-like ingredients. In addition, physicians have the flexibility of prescribing
VANOS® either for once or twice daily application for corticosteroid responsive
dermatoses. VANOS® Cream is available by prescription in 30 gram, 60 gram and 120 gram
tubes. VANOS® Cream is protected by one U.S. patent that expires in 2021, two U.S.
patents that expire in 2022 and two U.S patents that expire in 2023.
ZIANA® Gel, which contains clindamycin phosphate 1.2% and tretinoin 0.025%, was
approved by the FDA on November 7, 2006. Initial shipments of ZIANA® to wholesalers
began in December 2006, with formal promotional launch to dermatologists occurring in January 2007.
ZIANA® is a combination of clindamycin and tretinoin approved for once daily use for
the topical treatment of acne vulgaris in patients 12 years and older. ZIANA® was also
the first approved acne product to combine an antibiotic and a retinoid. ZIANA® is
available by prescription in 30 gram and 60 gram tubes. ZIANA® is protected by two U.S.
patents for both composition of matter on the aqueous-based vehicle and method that expire in 2015
and 2020. Each of these patents cover aspects of the unique vehicle which are used to deliver the
active ingredients in ZIANA®.
Facial Aesthetic Products
Our principal branded facial aesthetic products are described below:
DYSPORT®, an injectable botulinum toxin type A formulation, is an acetylcholine
release inhibitor and a neuromuscular blocking agent. We market DYSPORT® in the U.S.
for the aesthetic indication of temporary improvement in the appearance of moderate to severe
glabellar lines in adults younger than 65 years of age. DYSPORT® was approved by the
FDA on April 29, 2009 and launched by us in June 2009. We acquired the rights to the aesthetic use
of DYSPORT® in the U.S., Canada and Japan from Ipsen, S.A. (Ipsen) in March 2006.
According to the ASAPS, injections of botulinum toxin type A have been the number one nonsurgical
cosmetic procedure for the past five years, with over 2.5 million total procedures in 2009 alone.
The U.S. aesthetic market for botulinum toxin type A is estimated to be approximately $300 million
to $400 million annually.
RESTYLANE®,
RESTYLANE-L®,
PERLANE®,
PERLANE-L® and
RESTYLANE FINE LINESTM are injectable, transparent, stabilized hyaluronic acid gels,
which require no patient sensitivity tests in advance of product administration. Their unique
particle-based gel formulations offer structural support and lift when implanted into the skin. On
a worldwide basis, more than 11 million treatments of RESTYLANE® have been successfully performed in more than 70
countries since market introduction in 1996. In the U.S., the FDA regulates these products as
medical devices. We began offering RESTYLANE® and PERLANE® in the U.S. on
January 6, 2004 and May 21, 2007, respectively, following FDA approvals on December 12, 2003 and
May 2, 2007, respectively. RESTYLANE® is the most-studied dermal filler, and is the
first and only hyaluronic acid dermal filler whose FDA-approved label includes duration data up to
18 months with one follow-up treatment. On January 29, 2010, the FDA approved
RESTYLANE-L® and PERLANE-L®, which include the addition of 0.3% lidocaine.
We began shipping RESTYLANE-L® and PERLANE-L® during the first quarter of
2010. We offer RESTYLANE®, PERLANE® and RESTYLANE FINE LINESTM in
Canada. RESTYLANE FINE LINES TM is not approved by the FDA for use in the U.S. We
acquired the exclusive U.S. and Canadian rights to these facial aesthetic products from Q-Med AB, a
Swedish biotechnology and medical device company and its affiliates (collectively Q-Med) through
license agreements in March 2003.
Research and Development
We have historically developed and obtained marketing and distribution rights to
pharmaceutical agents in various stages of development. We have a variety of products under
development, ranging from new products to existing product line extensions and reformulations of
existing products. Our product development strategy involves the rapid evaluation and formulation
of new therapeutics by obtaining preclinical safety and efficacy data, when
5
possible, followed by rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we
have begun adding long-term projects to our development pipeline. Historically, we have
supplemented our research and development efforts by entering into research and development and
license agreements with other pharmaceutical and biotechnology companies for the development of new
products and the enhancement of existing products.
We incurred total research and development costs for all of our sponsored and unreimbursed
co-sponsored pharmaceutical projects for 2010, 2009 and 2008, of $58.3 million, $72.5 million and
$100.4 million, respectively. Research and development costs for 2010 include $15.0 million, in
aggregate, of up-front and milestone payments made to a privately-held U.S. biotechnology company
and $3.9 million, in aggregate, of milestone payments to a Medicis partner. Research and
development costs for 2009 include $12.0 million, in aggregate, of milestone payments made to Impax
Laboratories, Inc. (Impax) related to our joint development agreement with Impax, $10.0 million
paid to Revance Therapeutics, Inc. (Revance) related to a license agreement with Revance, $5.3
million paid to Glenmark Generics Ltd. and Glenmark Generics Inc., USA (collectively, Glenmark)
related to a license and settlement agreement with Glenmark and $5.0 million paid to Perrigo Israel
Pharmaceutical Ltd. and Perrigo Company (collectively, Perrigo) related to a joint development
agreement with Perrigo. Research and development costs for 2008 include a $40.0 million payment to
Impax related to our joint development agreement with Impax and a $25.0 million payment to Ipsen
upon the FDAs May 2008 acceptance of the filing of Ipsens Biologics License Application (BLA) for
DYSPORT®.
On February 9, 2011, we entered into a research and development agreement with Anacor
Pharmaceuticals, Inc. (Anacor) for the discovery and development of boron-based small molecule
compounds directed against a target for the potential treatment of acne. Under the terms of the
agreement, we paid Anacor $7.0 million in connection with the execution of the agreement, and will
pay up to $153.0 million upon the achievement of certain research, development, regulatory and
commercial milestones, as well as royalties on sales by us. Anacor will be responsible for
discovering and conducting the early development of product candidates which utilize Anacors
proprietary boron chemistry platform, while we will have an option to obtain an exclusive license
for products covered by the agreement. The initial $7.0 million payment will be recognized as
research and development expense during the three months ended March 31, 2011.
On September 10, 2010, we entered into a sublicense and development agreement with a
privately-held U.S. biotechnology company to develop an agent for specific dermatological
conditions in the Americas and Europe and a purchase option to acquire the privately-held U.S.
biotechnology company. Under the terms of the agreements, we paid the privately-held U.S.
biotechnology company $5.0 million in connection with the execution of the agreement, and will pay
additional potential milestone payments totaling approximately $100.5 million upon successful
completion of certain clinical, regulatory and commercial milestones. During the three months
ended December 31, 2010, a development milestone was achieved, and we made a $10.0 million payment
to the privately-held U.S. biotechnology company pursuant to the development agreement. The
initial $5.0 million payment and the $10.0 million milestone payment were recognized as research
and development expense during the year ended December 31, 2010.
On November 14, 2009, we entered into an Asset Purchase and Development Agreement with
Glenmark. In connection with the agreement, we purchased from
Glenmark the North American rights of a dermatology product currently under development, including
the underlying technology and regulatory filings. In accordance with terms of the agreement, we
made a $5.0 million payment to Glenmark upon closing of the
transaction. The agreement also provided that we would make additional
payments to Glenmark of up to $7.0 million upon the achievement of certain development and
regulatory milestones, as well as certain royalty payments on sales of the product. The
initial $5.0 million payment was recognized as research and development expense during the year
ended December 31, 2009. On October 4, 2010, we gave notice
to Glenmark that we had determined to stop development of the product
in accordance with the terms of the agreement, and on January 6,
2011, we gave notice to Glenmark that the parties obligations
under the agreement have been fulfilled and that the agreement has
expired.
On November 26, 2008, we entered into a joint development agreement with Impax, which was
amended on January 21, 2011, whereby we and Impax will collaborate on the development of five
strategic dermatology product opportunities, including an advanced-form SOLODYN®
product. Under the 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, September 30, 2009 and
December 31, 2009, we paid Impax $5.0 million, $5.0 million and $2.0 million, respectively, upon
the achievement of three separate clinical milestones, in accordance
with the terms of the agreement.
In addition, we are required to pay up to $11.0 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 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
6
payment was recognized as research and development expense during the three months ended December 31, 2008, and the three
separate $5.0 million, $5.0 million and $2.0 million clinical milestone achievement payments were
recognized as research and development expense during the year ended December 31, 2009.
On April 8, 2009, we entered into a Joint Development Agreement with Perrigo whereby we will
collaborate with Perrigo to develop a novel proprietary product for which we will have the sole
right to commercialize. 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 upon execution of the agreement. During the three months
ended September 30, 2009, a development milestone was achieved, and we made a $2.0 million payment
to Perrigo pursuant to the agreement. We will make additional payments to Perrigo of up to $3.0
million upon the achievement of other certain development and regulatory milestones. We will pay
to Perrigo royalty payments on sales of the novel proprietary product. The $3.0 million up-front
payment and the $2.0 million development milestone payment were recognized as research and
development expense during the year ended December 31, 2009.
On March 17, 2006, we entered into a development and distribution agreement with Ipsen,
whereby Ipsen granted us the rights to develop, distribute and commercialize Ipsens botulinum
toxin type A product in the U.S., Canada and Japan for aesthetic use by healthcare professionals.
During the development of the product, the proposed name of the product for aesthetic use was
RELOXIN®. In May 2008, the FDA accepted the filing of Ipsens BLA for
RELOXIN®, and in accordance with the agreement, we paid Ipsen $25.0 million during the
three months ended June 30, 2008. In December 2008, we paid Ipsen $1.5 million upon the
achievement of an additional regulatory milestone. The $25.0 million payment was recognized as research and development expense during the three months ended June 30, 2008, and the
$1.5 million payment was recognized as research and development expense during the three months
ended December 31, 2008. On April 29, 2009, the FDA approved the BLA for Ipsens botulinum toxin
type A product, DYSPORT®. 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 DYSPORT®. Ipsen
markets DYSPORT® in the U.S. for the therapeutic indication (cervical dystonia), while
we began marketing DYSPORT® in the U.S. in June 2009 for the aesthetic indication
(glabellar lines). In accordance with the agreement, we 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 our consolidated balance sheet. Ipsen will manufacture and
provide the product to us for the term of the agreement, which extends to December 2036. Ipsen
will receive a royalty based on sales and a supply price, as defined under the agreement. Under
the terms of the agreement, we are responsible for all remaining research and development costs
associated with obtaining the products approval in Canada and Japan. We will be required to pay
Ipsen an additional $2.0 million upon regulatory approval of the product in Japan.
On December 11, 2007, we entered into a strategic collaboration with Revance 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.
Our option is exercisable after Revance completes an End of
Phase 2 meeting as determined by the FDA. 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 was expected to be used by Revance
primarily for the development of the new 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 consolidated balance sheets as of December 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 year 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 us
in North America. We 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
7
during commercialization worldwide.
Our option is exercisable after Revance completes an end of
Phase 2 meeting as determined by the FDA. 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, as defined in the
license. If we elect to exercise the option, the financial terms for the acquisition or license
will be determined through an independent valuation in accordance with specified methodologies.
On July 28, 2009, we entered into a license agreement with Revance 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 $10.0 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 $10.0 million payment was recognized as research and
development expense during the year ended December 31, 2009.
Sales and Marketing
Our combined dedicated sales force, consisting of 229 employees as of December 31, 2010,
focuses on high patient volume dermatologists and plastic surgeons. Since a relatively small
number of physicians are responsible for writing a majority of dermatological prescriptions and
performing facial aesthetic procedures, we believe that the size of our sales force is appropriate
to reach our target physicians. Our therapeutic dermatology sales force consists of 133 employees
who regularly call on approximately 10,000 dermatologists. Our facial aesthetic sales force
consists of 96 employees who regularly call on leading plastic surgeons, facial plastic surgeons,
dermatologists and dermatologic surgeons. We also have four national account managers who
regularly call on major drug wholesalers, managed care organizations, large retail chains,
formularies and related organizations.
Our strategy is to cultivate relationships of trust and confidence with the high prescribing
dermatologists and the leading plastic surgeons in the U.S. We use a variety of marketing
techniques to promote our products including sampling, journal advertising, promotional materials,
specialty publications, coupons, educational interactions and informational websites. We also
promote our facial aesthetic products through television and radio advertising.
We believe we have created an attractive incentive program for our sales force that is based
upon goals in prescription growth, market share achievement and customer service.
Warehousing and Distribution
We utilize an independent national warehousing corporation to store and distribute our
pharmaceutical products in the U.S. from primarily two regional warehouses in Nevada and Georgia,
as well as an additional warehouse in North Carolina. Upon the receipt of a purchase order through
electronic data input (EDI), phone, mail or facsimile, the order is processed through our
inventory management systems and is transmitted electronically to the appropriate warehouse for
picking and packing. Upon shipment, the warehouse sends back to us via EDI the necessary
information to automatically process the invoice in a timely manner.
8
Customers
Our customers include certain of the nations leading wholesale pharmaceutical distributors,
such as AmerisourceBergen Corporation (AmerisourceBergen), Cardinal Health, Inc. (Cardinal) and
McKesson Corporation (McKesson) and other major drug chains. During 2010, 2009 and 2008, these
customers accounted for the following portions of our net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
McKesson |
|
|
42.6 |
% |
|
|
40.8 |
% |
|
|
45.8 |
% |
Cardinal |
|
|
35.4 |
% |
|
|
37.1 |
% |
|
|
21.2 |
% |
AmerisourceBergen |
|
|
10.8 |
% |
|
|
* |
|
|
|
* |
|
McKesson is the sole distributor of our RESTYLANE® and PERLANE® branded
products and DYSPORT® in the U.S.
Third-Party Reimbursement
Our operating results and business success depend in large part on the availability of
adequate third-party payor reimbursement to patients for our prescription brand products. These
third-party payors include governmental entities such as Medicaid, private health insurers and
managed care organizations. Because of the size of the patient population covered by managed care
organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve
many of these organizations has become important to our business.
The trend toward managed healthcare in the U.S. and the growth of managed care organizations,
as well as the implementation of the Patient Protection and Affordable Care Act of 2010 and the
Health Care and Education Reconciliation Act of 2010, together known as the Affordable Care Act,
could significantly influence the purchase of pharmaceutical products, resulting in lower prices
and a reduction in product demand. Managed care organizations and other third-party payors try to
negotiate the pricing of medical services and products to control their costs. Managed care
organizations and pharmacy benefit managers typically develop formularies to reduce their cost for
medications. Formularies can be based on the prices and therapeutic benefits of the available
products. Due to their lower costs, generic products are often favored. The breadth of the
products covered by formularies varies considerably from one managed care organization to another,
and many formularies include alternative and competitive products for treatment of particular
medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage
in the managed care organization patient population. Payment or reimbursement of only a portion of
the cost of our prescription products could make our products less attractive, from a net-cost
perspective, to patients, suppliers and prescribing physicians.
Some of our products may be covered for Medicare beneficiaries under the expanded prescription
drug benefit for all Medicare beneficiaries known as Medicare Part D. This is a voluntary benefit
that is implemented through private plans under contractual arrangements with the federal
government. These plans negotiate discounts from drug manufacturers and pass some of the savings to
Medicare beneficiaries. Beginning in 2011, the Affordable Care Act makes several changes to
Medicare Part D to phase-out the patient coverage gap (e.g., doughnut hole) by reducing patient
responsibility in the coverage gap from 100% in 2010 to 25% in 2020. Also beginning in 2011, drug
manufacturers will be obligated to pay quarterly applicable discounts of 50% of the negotiated
price of branded drugs issued to Medicare Part D patients in the coverage gap. Medicis likely will
be obligated to pay new rebates to the federal government under this Medicare Part D Coverage Gap
Discount Program.
Some of our products, such as our facial aesthetics products DYSPORT®,
RESTYLANE® and PERLANE®, are not of a type generally eligible for
reimbursement. It is possible that products manufactured by others could address the same effects
as our products and be subject to reimbursement. If this were the case, some of our products may
be unable to compete on a price basis. In addition, decisions by state regulatory agencies,
including state pharmacy boards, and/or retail pharmacies may require substitution of generic for
branded products, may prefer competitors products over our own, and may impair our pricing and
thereby constrain our market share and growth.
9
Seasonality
Our business, taken as a whole, is not materially affected by seasonal factors. We schedule
our inventory purchases to meet anticipated customer demand. As a result, relatively small delays
in the receipt of manufactured products by us could result in revenues being deferred or lost.
Manufacturing
We currently, except for the LIPOSONIXTM technology, outsource all of our
manufacturing needs, and we are required by the FDA to contract only with manufacturers who comply
with current Good Manufacturing Practices (cGMP) regulations and other applicable laws and
regulations. Typically our manufacturing contracts are short term. We review our manufacturing
arrangements on a regular basis and assess the viability of alternative manufacturers and suppliers
of raw materials if our current manufacturers are unable to fulfill our needs. If any of our
manufacturing partners are unable to perform their obligations under our manufacturing agreements
or if any of our manufacturing agreements are terminated, we may experience a disruption in the
manufacturing of the applicable product that would adversely affect our results of operations. In
some cases, the sources of our raw materials are outside of the U.S., and as such we cannot always
guarantee that the political and industry climate in these countries will always be stable and
provide a surety of supply. We also work though U.S. agents for the supply of active
pharmaceutical ingredients brought into the U.S. and in some cases are only able to purchase on a
purchase order basis. While we attempt to understand and mitigate risks within the supply chain
for manufacturers and suppliers, it is not always feasible and possible to identify willing
alternate sources, often due to the nature of the product lines we produce. In certain cases, we
may increase inventory levels as a risk mitigating activity. Additionally, in many cases our
manufacturers and suppliers are privately-held or closely-held corporations, so it potentially can
be difficult to assess the financial health and viability of our manufacturers and suppliers. We
attempt to mitigate this risk through up-front diligence as well as ongoing diligence of the
financial status and operational capabilities of our manufacturers and suppliers.
Under several exclusive supply agreements, with certain exceptions, we must purchase most of
our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier
relationships were terminated, we would be forced to find a replacement manufacturer or supplier.
The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDAs
regulations, including the cGMP regulations applicable to manufacturing processes. The cGMP
validation of a new facility, the qualification of a new supply source and the approval of that
manufacturer for a new drug product may take a year or more before commercial manufacture can begin
at the facility. Delays in obtaining FDA qualification and validation of a replacement
manufacturing facility could cause an interruption in the supply of our products. Although we have
business interruption insurance to assist in covering the loss of income for products where we do
not have a secondary manufacturer, which may reduce the harm to us from the interruption of the
manufacturing of our largest-selling products caused by certain events, the loss of a manufacturer
could still cause a significant reduction in our sales, margins and market share, as well as harm
our overall business and financial results.
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are currently available from only one source
and others may in the future become available from only one source. We try to maintain inventory
levels at various in-process stages (e.g., raw material inventory and finished product inventory)
that are no greater than necessary to meet our current projections, which could have the effect of
exacerbating supply problems. Any interruption in the supply of finished products could hinder our
ability to timely distribute finished products and prevent us from increasing raw material and
finished product inventory levels to mitigate supply risks as a temporary solution. If we are
unable to obtain adequate product supplies to satisfy our customers orders, we may lose those
orders and our customers may cancel other orders and stock and sell competing products. This, in
turn, could cause a loss of our market share and reduce our revenues. In addition, any disruption
in the supply of raw materials or an increase in the cost of raw materials to our manufacturers
could have a significant effect on their ability to supply us with our products, which would
adversely affect our financial condition and results of operations.
Our VANOS® and ZIANA® branded products are manufactured by Contract
Pharmaceuticals Limited pursuant to a manufacturing agreement that automatically renews on an
annual basis, unless terminated by either party. We are also in the process of evaluating
alternative manufacturing facilities for some of these products.
10
Our RESTYLANE® and PERLANE® branded products in the U.S. and Canada are
manufactured by Q-Med pursuant to a long-term supply agreement that expires no earlier than 2014.
Our DYSPORT® branded product is manufactured by Ipsen pursuant to a long-term
supply agreement that expires in 2036.
Our SOLODYN® branded product is manufactured by Wellspring Pharmaceutical and
aaiPharma pursuant to long-term supply agreements that expire in
2012 unless extended by mutual agreement. We are also in the process of evaluating an alternative
packaging facility for future SOLODYN® production.
Raw Materials
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are currently available from only one source
and others may in the future become available from only one source. Any disruption in the supply of
raw materials or an increase in the cost of raw materials to our manufacturers could have a
significant effect on their ability to supply us with our products. We are also in the process of
evaluating alternative raw material suppliers for some of our products.
License and Royalty Agreements
Pursuant to license agreements with third parties, we have acquired rights to manufacture, use
or market certain of our existing products, as well as many of our development products and
technologies. Such agreements typically contain provisions requiring us to use our best efforts or
otherwise exercise diligence in pursuing market development for such products in order to maintain
the rights granted under the agreements and may be canceled upon our failure to perform our payment
or other obligations. In addition, we have licensed certain rights to manufacture, use and sell
certain of our technologies outside the U.S. and Canada to various licensees.
Trademarks, Patents and Proprietary Rights
We believe that trademark protection is an important part of establishing product and brand
recognition. We own a number of registered trademarks and trademark applications. U.S. federal
registrations for trademarks remain in force for 10 years and may be renewed every 10 years after
issuance, provided the mark is still being used in commerce.
We have obtained and licensed a number of patents covering key aspects of our products,
including a U.S. patent expiring in December 2017 or later covering RESTYLANE®, two U.S.
patents expiring in February 2018 and November 2025 or later covering SOLODYN® Tablets,
two U.S. patents expiring in February 2015 and August 2020 covering ZIANA® Gel, one U.S.
patent expiring in December 2021, two U.S. patents expiring in January 2023 and two U.S. patents
expiring in August and September 2022, respectively, covering VANOS® Cream, two U.S.
patents expiring in October 2024 and October 2026 covering LIPOSONIXTM technology and
two U.S. patents expiring in April 2027 covering 90mg SOLODYN® Tablets. We have patent
applications pending relating to SOLODYN® Tablets and LOPROX® Shampoo
(ciclopirox) 1%. We are also pursuing several other U.S. and foreign patent applications. We hold
additional LIPOSONIXTM patents, and have numerous LIPOSONIXTM patent
applications pending in the U.S. and in other countries.
We rely and expect to continue to rely upon unpatented proprietary know-how and technological
innovation in the development and manufacture of many of our principal products. Our policy is to
require all our employees, consultants and advisors to enter into confidentiality agreements with
us, and we employ other security measures to protect our trade secrets and other confidential
information. Our success with our products will depend, in part, on our ability to obtain, and
successfully defend if challenged, patent or other proprietary protection. Our patents are
obtained after examination by the USPTO and are presumed valid. However, the issuance of a patent
is not conclusive as to its validity or as to the enforceable scope of the claims of the patent.
Accordingly, our patents may not prevent other companies from developing similar or functionally
equivalent products or from successfully challenging the validity of our patents. As a result, if
our patent applications are not approved or, even if approved, patents arising from such patent
applications are circumvented or not upheld in a legal proceeding, our ability to competitively
exploit our patented products and technologies may be significantly reduced. Also, such patents
may
11
or may not provide competitive advantages for their respective products or they may be
challenged or circumvented by competitors, in which case our ability to commercially exploit these
products may be diminished.
Third parties may challenge and seek to invalidate, limit or circumvent our patents and patent
applications relating to our products, product candidates and technologies. Such challenges may
result in potentially significant harm to our business. The cost of responding to these challenges
and the inherent costs of defending the validity of our patents, including the prosecution of
infringements and the related litigation, can require a substantial commitment of our managements
time, be costly and can preclude or delay the commercialization of products or result in the
genericization of markets for our products. See Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and Contingencies, in the notes to the consolidated
financial statements listed under Item 15 of Part IV of this report, Exhibits, Financial Statement
Schedules, for information concerning our current intellectual property litigation.
From time to time, we may need to obtain licenses to patents and other proprietary rights held
by third parties to develop, manufacture and market our products. If we are unable to timely obtain
these licenses on commercially reasonable terms, our ability to commercially exploit such products
may be inhibited or prevented.
Competition
The pharmaceutical and facial aesthetics industries are characterized by intense competition,
rapid product development and technological change. Numerous companies are engaged in the
development, manufacture and marketing of health care products competitive with those that we
offer. As a result, competition is intense among manufacturers of prescription pharmaceuticals and
dermal injection products, such as for our primary brands.
Many of our competitors are large, well-established pharmaceutical, chemical, cosmetic or
health care companies with considerably greater financial, marketing, sales and technical resources
than those available to us. Additionally, many of our present and potential competitors have
research and development capabilities that may allow them to develop new or improved products that
may compete with our product lines. Our products could be rendered obsolete or made uneconomical
by the development of new products to treat the conditions addressed by our products, technological
advances affecting the cost of production, or marketing or pricing actions by one or more of our
competitors. Each of our products competes for a share of the existing market with numerous
products that have become standard treatments recommended or prescribed by dermatologists and
administered by plastic surgeons and aesthetic dermatologists. In addition to product development,
other competitive factors affecting the pharmaceutical industry include testing, approval and
marketing, industry consolidation, product quality and price, product technology, reputation,
customer service and access to technical information.
The largest competitors for our prescription dermatological products include Allergan,
Galderma, Johnson & Johnson, Sanofi-Aventis, GlaxoSmithKline, plc (Stiefel Laboratories) and Warner
Chilcott. Several of our primary prescription brands compete or may compete in the near future
with generic (non-branded) pharmaceuticals, which claim to offer equivalent therapeutic benefits at
a lower cost. In some cases, insurers, third-party payors and pharmacies seek to encourage the use
of generic products, making branded products less attractive, from a cost perspective, to buyers.
Our facial aesthetics products compete primarily against certain products of Allergan.
DYSPORT® competes directly with Allergans Botox® Cosmetic, an established
botulinum toxin product that was approved by the FDA for aesthetic purposes in 2002. Allergan is a
larger company than Medicis, and has greater financial resources than those available to us. There
are also other botulinum toxin products under development, including products from Johnson &
Johnson and its subsidiary Mentor Corporation and Merz Aesthetics, which claim to offer equivalent
or greater aesthetic benefits than DYSPORT® and, if approved, the companies producing
such products could charge less to doctors for their products.
Among other dermal filler products, Allergan markets Juvéderm® Ultra,
Juvéderm® Ultra XC, Juvéderm® Ultra Plus and Juvéderm® Ultra Plus
XC. Other dermal filler products on the market include: Artefill© by Suneva Medical,
ElevessTM and HydrelleTM by Anika Therapeutics, Prevelle® Silk by
Mentor Corporation, Radiesse® by Merz Aesthetics and Sculptra® Aesthetic by
Sanofi-Aventis. Patients may differentiate these products from RESTYLANE®,
RESTYLANE-L®,
PERLANE®
and PERLANE-L® based on price, efficacy
and/or duration, which may appeal to some patients. In addition, there are several dermal filler
products under development and/or in the FDA pipeline for approval, including products from
Allergan, Fibrocell Science, Johnson & Johnson and its
12
subsidiary Mentor Corporation and Merz
Aesthetics, which claim to offer equivalent or greater facial aesthetic benefits than
RESTYLANE®, RESTYLANE-L®, PERLANE® and PERLANE-L® and,
if approved, the companies producing such products could charge less to doctors for their products.
Government Regulation
The manufacture and sale of medical devices, drugs and biological products are subject to
regulation principally by the FDA, but also by other federal agencies, such as the Drug Enforcement
Administration (DEA), and state and local authorities in the United States, and by comparable
agencies in certain foreign countries. The Federal Trade Commission (FTC), the FDA and state and
local authorities regulate the advertising of medical devices, prescription drugs, over-the-counter
drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended (FDCA) and the
regulations promulgated thereunder, and other federal and state statutes and regulations, govern,
among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record
keeping, approval, sale, distribution, advertising and promotion of our products.
The FDA requires a Boxed Warning (sometimes referred to as a Black Box Warning) for products
that have shown a significant risk of severe or life-threatening adverse events. Because there
have been post-marketing reports of serious adverse events (reported hours to weeks after
injection) for botulinum toxin products that are consistent with this class of products, a Boxed
Warning is now required for all marketed botulinum toxin products, including our product
DYSPORT®, and competitor products Botox®, Botox® Cosmetic,
Myobloc® and Xeomin®. This is known as a class label. The FDAs
requirement for a Boxed Warning on all marketed botulinum toxin products is the culmination of a
safety review of Botox®, Botox® Cosmetic and Myobloc® that the
agency announced in early 2008. In addition to the Boxed Warning, the FDA has required
implementation of a Risk Evaluation and Mitigation Strategy (REMS) for all marketed botulinum
toxin products. The REMS will help ensure that healthcare professionals and patients are
adequately informed about product risks. The FDA notified the manufacturers of Botox®,
Botox® Cosmetic, Myobloc® and Xeomin® that label changes (e.g.,
the Boxed Warning) and a REMS are necessary to ensure product risks are adequately communicated to
healthcare providers and patients. The Boxed Warning and REMS for DYSPORT® were
approved by the FDA as part of the product approval.
Our RESTYLANE® and PERLANE® dermal filler products are prescription
medical devices intended for human use and are subject to regulation by the FDA in the U.S. Unless
an exemption applies, a medical device in the U.S. must have a Premarket Approval Application
(PMA) in accordance with the FDCA, or a 510(k) clearance (a demonstration that the new device is
substantially equivalent to a device already on the market). RESTYLANE®,
PERLANE® and non-collagen dermal fillers are subject to PMA regulations that require
premarket review of clinical data on safety and effectiveness. FDA device regulations for PMAs
generally require reasonable assurance of safety and effectiveness prior to marketing, including
safety and efficacy data obtained under clinical protocols approved under an Investigational Device
Exemption (IDE) and the manufacturing of the device requires compliance with quality system
regulations (QSRs), as verified by detailed FDA inspections of manufacturing facilities. These
regulations also require post-approval reporting of alleged product defects, recalls and certain
adverse experiences to the FDA. Generally, FDA regulations divide medical devices into three
classes. Class I devices are subject to general controls that require compliance with device
establishment registration, product listing, labeling, QSRs and other general requirements that are
also applicable to all classes of medical devices but, at least currently, most are not subject to
premarket review. Class II devices are subject to special controls in addition to general controls
and generally require the submission of a premarket notification 510(k) clearance before marketing
is permitted. Class III devices are subject to the most comprehensive regulation and in most
cases, other than those that remain grandfathered based on clinical use before 1976, require
submission to the FDA of a PMA application that includes biocompatibility, manufacturing and
clinical data supporting the safety and effectiveness of the device as well as compliance with the
same provisions applicable to all medical devices such as QSRs. Annual reports must be submitted
to the FDA, as well as descriptions of certain adverse events that are reported to the sponsor
within specified timeframes of receipt of such reports. RESTYLANE® and
PERLANE® are regulated as Class III PMA-required medical devices. RESTYLANE®
and PERLANE® have been approved by the FDA under a PMA.
In general, products falling within the FDAs definition of new drugs, including both drugs
and biological products, require premarket approval by the FDA. Products falling within the FDAs
definition of drugs and that are generally recognized as safe and effective (and therefore not
new drugs) may not require premarketing clearance although all drugs must comply with a host of
marketing requirements, such as product
13
labeling, and post-market regulations, including but not
limited to, manufacture under cGMP and adverse experience reporting.
New drug products are thoroughly tested to demonstrate their safety and effectiveness.
Preclinical or biocompatibility testing is generally conducted on laboratory animals to evaluate
the potential safety and toxicity of a drug. The results of these studies are submitted to the FDA
as a part of an Investigational New Drug Application (IND), which must be effective before
clinical trials in humans can begin. Typically, clinical evaluation of new drugs involves a time
consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small
number of healthy subjects to determine the early safety profile, the relationship of safety to
dose, and the pattern of drug distribution and metabolism. In Phase II, one or more clinical
trials are conducted with groups of patients afflicted with a specific disease or condition to
determine preliminary efficacy and expanded evidence of safety; the degree of effect, if any, as
compared to the current treatment regimen; and the optimal dose to be used in large scale trials.
In Phase III, typically at least two large-scale, multi-center, comparative trials are conducted
with patients afflicted with a target disease or condition to provide sufficient confirmatory data
to support the efficacy and safety required by the FDA. The FDA closely monitors the progress of
each of the three phases of clinical trials and may, at its discretion, re-evaluate, alter, suspend
or terminate the testing based upon the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient.
The steps required before a new drug may be marketed, shipped or sold in the U.S. typically
include (i) preclinical laboratory and animal testing of pharmacology and toxicology; (ii)
submission to the FDA of an IND; (iii) at least two adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug (for some applications, the FDA may accept one large
clinical trial) beyond those human clinical trials necessary to establish a safe dose and to
identify the human absorption, distribution, metabolism and excretion of the active ingredient or
biological substance as applicable; (iv) submission to the FDA of an NDA or BLA; (v) FDA approval
of the NDA or BLA; and (vi) manufacture under cGMPs as verified by a pre-approval inspection
(PAI) by the FDA. In addition to obtaining FDA approval for each product, each
drug-manufacturing establishment must be registered with the FDA.
Generic versions of new drugs may also be approved by the agency pursuant to an Abbreviated
New Drug Application (ANDA) if the product is pharmaceutically equivalent (i.e. it has the same
active ingredient, strength, dosage form and route of administration) and bioequivalent to the
reference listed drug (RLD). The agency will not approve an ANDA, however, if the RLD has
statutory marketing exclusivity. If the RLD has patent protection and the patent is listed in the
FDAs Orange Book, the FDA will approve an ANDA generally only if the applicant filed a paragraph
IV certification and there is no 30-month stay in place. For oral or parental dosage forms,
approval of an ANDA does not generally require the submission of clinical data on the safety and
effectiveness of the drug product. For certain topical drug products submitted under ANDAs,
clinical studies demonstrating equivalence to the innovator drug product may be required. For
solid oral dosage forms, the applicant must provide dissolution and/or bioequivalence studies to
show that the active ingredient in the generic drug sponsors application is comparably
bioavailable as the RLD upon which the ANDA is based.
FDA approval is required before a new drug product may be marketed in the U.S. However,
many historically over-the-counter (OTC) drugs are exempt from the FDAs premarket approval
requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to evaluate the safety and
effectiveness of all OTC active ingredients and associated labeling (OTC drugs). Through this
process, the FDA issues monographs that set forth the specific active ingredients, dosages,
indications and labeling statements for OTC drugs that the FDA will consider generally recognized
as safe and effective and therefore not subject to premarket approval. Before issuance of a final
OTC drug monograph as a federal regulation, OTC drugs are classified by the FDA in one of three
categories: Category I ingredients and labeling which are deemed generally recognized as safe and
effective for OTC use; Category II ingredients and labeling, which are deemed not generally
recognized as safe and effective for OTC use; and Category III ingredients and labeling, for which
available data are insufficient to classify as Category I or II, pending further studies. Based
upon the results of these ongoing studies and pursuant to a court order, the FDA is required to
reclassify all Category III ingredients as either Category I or Category II before issuance of a
final monograph through notice and comment rule-making. For certain categories of OTC drugs not
yet subject to a final monograph, the FDA usually permits such drugs to continue to be marketed
until a final monograph becomes effective, unless the drug will pose a potential health hazard to
consumers. Stated differently, the FDA generally permits continued marketing only of any Category
I products and Category II products that are safe but unknown efficacy products during the
pendency of a final monograph. Drugs subject to final monographs, as well as drugs that are
subject only to proposed monographs, are also and separately subject to
14
various FDA regulations
concerning, for example, cGMP, general and specific OTC labeling requirements and prohibitions
against promotion for conditions other than those stated in the labeling. OTC drug manufacturing
facilities are subject to FDA inspection, and failure to comply with applicable regulatory
requirements may lead to administrative or judicially imposed penalties.
The active ingredient in the LOPROX® (ciclopirox) products has been approved by the
FDA under multiple NDAs. The active ingredient in the DYNACIN® (minocycline HCl
Tablets, USP) branded products has been approved by the FDA under multiple ANDAs. Benzoyl
peroxide, the active ingredient in the TRIAZ® products (including TRIAZ®
(benzoyl peroxide) 3%, 6% and 9% Foaming Cloths, Cleansers and Pads), has been classified as a
Category III ingredient under a final FDA monograph for OTC use in treatment of labeled conditions,
effective March 4, 2011. The TRIAZ® products, which we currently sell on a prescription
basis, have the same ingredients at the same dosage levels as the OTC products. As of the
effective date of the final monograph, prescription TRIAZ® will no longer be sold by
Medicis; however, we are considering whether to sell TRIAZ® as an OTC product after
March 4, 2011.
Our TRIAZ® branded products must meet the composition and labeling requirements
established by the FDA for OTC products containing their respective basic ingredients. We believe
that compliance with those established standards avoids the requirement for premarket clearance of
TRIAZ® if sold OTC. There can be no assurance that the FDA will not take a contrary
position in the future. Our PLEXION® branded products (including PLEXION®
(sodium sulfacetaminde 10% and sulfur 5%) Cleanser, Cleansing Cloths and SCT), which contain the
active ingredients sodium sulfacetamide and sulfur, are marketed under the FDA compliance policy
entitled Marketed New Drugs without Approved NDAs or ANDAs.
We believe that certain of our products, as they are promoted and intended by us for use, are
exempt from being considered new drugs and therefore do not require premarket clearance. There
can be no assurance that the FDA will not take a contrary position in the future. If the FDA were
to do so, we may be required to seek FDA approval for these products, market these products as OTC
products or withdraw such products from the market.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug
intended to treat a disease or condition that affects populations of fewer than 200,000 individuals
in the U.S. or a disease whose incidence rates number more than 200,000 where the sponsor
establishes that it does not realistically anticipate that its product sales will be sufficient to
recover its costs. The sponsor that obtains the first marketing approval for a designated orphan
drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for
the orphan indication for a period of seven years. AMMONUL® (sodium phenylacetate and
sodium benzoate) Injection 10%/10%, adjunctive therapy for the treatment of acute hyperammonemia
and associated encephalopathy in patients with deficiencies in enzymes of the urea cycle, has been
granted orphan drug status.
We also will be subject to foreign regulatory authorities governing clinical trials and
pharmaceutical sales for products we seek to market outside the U.S. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory authorities of foreign
countries must be obtained before marketing the product in those countries. The approval process
varies from country to country, the approval process time required may be longer or shorter than
that required for FDA approval, and any foreign regulatory agency may refuse to approve any product
we submit for review.
Our History
We filed our certificate of incorporation with the Secretary of State of Delaware on July 28,
1988. We completed our initial public offering during our fiscal year ended June 30, 1990, and
launched our initial pharmaceutical products during our fiscal year ended June 30, 1991.
Employees
At December 31, 2010, we had 679 full-time employees. No employees are subject to a
collective bargaining agreement. We believe we have a good relationship with our employees.
15
Available Information
We make available free of charge on or through our Internet website, www.Medicis.com,
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports, if any, filed or furnished pursuant
to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We
also make available free of charge on or through our website our Code of Business Conduct and
Ethics, Corporate Governance Guidelines, Nominating and Governance Committee Charter, Stock Option
and Compensation Committee Charter, Audit Committee Charter, Employee Development and Retention
Committee Charter and Compliance Committee Charter. The information contained on our website is
not incorporated by reference into this Annual Report on Form 10-K.
Item 1A. Risk Factors
Our statements in this report, other reports that we file with the SEC, our press releases and
in public statements of our officers and corporate spokespersons contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21 of the
Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995. You can identify these statements by the fact that they do not relate strictly to historical
or current events, and contain words such as anticipate, estimate, expect, project,
intend, will, plan, believe, should, outlook, could, target and other words of
similar meaning in connection with discussion of future operating or financial performance. These
include statements relating to future actions, prospective products or product approvals, future
performance or results of current and anticipated products, sales efforts, expenses, the outcome of
contingencies such as legal proceedings and financial results. 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. Such statements are subject to a number of assumptions, risks and uncertainties,
many of which are beyond our control. These forward-looking statements reflect the current views
of senior management with respect to future events and financial performance. No assurances can be
given, however, that these activities, events or developments will occur or that such results will
be achieved, and actual results may vary materially from those anticipated in any forward-looking
statement. Any such forward-looking statements, whether made in this report or elsewhere, should
be considered in context of the various disclosures made by us about our businesses including,
without limitation, the risk factors discussed below. We do not plan to update any such
forward-looking statements and expressly disclaim any duty to update the information contained in
this filing except as required by law.
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.
Risks Related To Our Business
Certain of our primary products could lose patent protection in the near future and become subject
to competition from generic forms of such products. If that were to occur, sales of those products
would decline significantly and such decline could have a material adverse effect on our results of
operations.
We depend upon patents to provide us with exclusive marketing rights for certain of our
primary products for some period of time. If product patents for our primary products expire, or
are successfully challenged by our competitors, in the United States and in other countries, we
would face strong competition from lower price generic drugs. Loss of patent protection for any of
our primary products would likely lead to a rapid loss of sales for that product, as lower priced
generic versions of that drug become available. In the case of products that contribute
significantly to our sales, the loss of patent protection could have a material adverse effect on
our results of operations.
We currently have two issued patents, the 838 Patent and the 705 Patent, relating to
SOLODYN® that do not expire until 2018 and 2025 or later, respectively, and two other
issued patents, the 347 Patent and the 373 Patent, relating to 90mg SOLODYN® Tablets
that do not expire until 2027. As part of our patent strategy, we are currently pursuing
additional patent applications for SOLODYN®. However, we cannot provide any assurance
that any additional patents will be issued relating to SOLODYN®. The failure to obtain
additional patent protection
16
could adversely affect our ability to deter generic competition, which
would adversely affect SOLODYN® revenue and our results of operations.
We have faced generic competition in the past and expect to face additional generic competition in
the near future.
Competition from manufacturers of generic drugs is, and we expect will continue to be, a
significant challenge for us. Upon the expiration or loss of patent protection for one of our
products, or upon the at-risk launch (despite pending patent infringement litigation against the
generic product) by a generic manufacturer of a generic version of one of our products, we can lose
a significant portion of sales of that product in a very short period, which can adversely affect
our business. In addition, our patent-protected products may face competition in the form of
generic versions of branded products of competitors that lose their market exclusivity. Further,
the patents covering our products, including SOLODYN®, VANOS® and
LOPROX®, continue to be challenged by generic manufacturers and we expect additional
challenges. Under the Hatch-Waxman Act, any generic pharmaceutical manufacturer may file an ANDA
with a certification, known as a Paragraph IV certification, challenging the validity of or
claiming non-infringement of a patent listed in the FDAs Approved Drug Products with Therapeutic
Equivalence Evaluations, which is known as the FDAs Orange Book, four years after the pioneer
company obtains approval of its New Drug Application. Multiple companies have filed, and we expect
additional companies will file, Paragraph IV certifications challenging the patents associated with
some of our key products. Companies typically do not advise us as to the timing or status of the
FDAs review of their ANDA filings, or whether they have complied with FDA requirements for proving
bioequivalence. Paragraph IV certifications commonly allege that one or more of our patents is
invalid and/or will not be infringed by the filers manufacture, use, sale and/or importation of
the products for which the ANDA was submitted. If a Paragraph IV challenge were to succeed, any
affected product would face generic competition and its sales would likely decline materially. We
have from time to time entered into settlement agreements with certain companies that have filed
Paragraph IV certifications, but there can be no assurance that we will be able to enter into such
settlements in the future.
In addition, we have on occasion entered into license and settlement agreements with certain companies, including agreements to market authorized generic
versions of our branded products. It is possible that such
agreements could result in the forfeiture of any marketing
exclusivity held by those companies resulting in the FDA potentially approving additional generic versions of our branded products.
If any of our primary products are rendered obsolete or uneconomical by
competitive changes, including generic competition, our results of operation would be materially
and adversely affected.
See Item 3 of Part I of this report, Legal Proceedings, and Note 12, Commitments and
Contingences, in the notes to the consolidated financial statements under Item 15 of Part IV of
this report, Exhibits, Financial Statement Schedules.
If we are unable to secure and protect our intellectual property and proprietary rights, or if our
intellectual property rights are found to infringe upon the intellectual property rights of other
parties, our business could suffer.
Our success depends in part on our ability to obtain patents or rights to patents, protect
trade secrets, operate without infringing upon the proprietary rights of others, and prevent others
from infringing on our patents, trademarks, service marks and other intellectual property rights.
The patents and patent applications in which we have an interest may be challenged as to their
validity or enforceability or infringement. Any such challenges may result in potentially
significant harm to our business and enable generic entry to markets for our products. The cost of
responding to any such challenges and the cost of prosecuting infringement claims and any related
litigation, could be substantial. In addition, any such litigation also could require a
substantial commitment of our managements time.
See Item 3 of Part I of this report, Legal Proceedings, and Note 12, Commitments and
Contingencies in the notes to the consolidated financial statements under Item 15 of Part IV of
this report, Exhibits, Financial Statement Schedules, for information concerning our current
intellectual property litigation.
We are pursuing several United States patent applications, but we cannot be sure that any of
these patents will ever be issued. We also have acquired rights under certain patents and patent
applications in connection with our licenses to distribute products and by assignment of rights to
patents and patent applications from certain of our consultants and officers. These patents and
patent applications may be subject to claims of rights by third parties. If there are conflicting
claims to the same patent or patent application, we may not prevail and, even if we do have some
rights in a patent or patent application, those rights may not be sufficient for the marketing and
distribution of products covered by the patent or patent application.
17
The ownership of a patent or an interest in a patent does not always provide significant
protection. Others may independently develop similar technologies or design around the patented
aspects of our products. We only conduct patent searches to determine whether our products
infringe upon any existing patents when we think such searches are appropriate. As a result, the
products and technologies we currently market, and those we may market in the future, may infringe
on patents and other rights owned by others. If we are unsuccessful in any challenge to the
marketing and sale of our products or technologies, we may be required to license the disputed
rights, if the holder of those rights is willing to license such rights, otherwise we may be
required to cease marketing the challenged products, or to modify our products to avoid infringing
upon those rights. A claim or finding of infringement regarding one of our products could harm our
business, financial condition and results of operations. The costs of responding to infringement
claims could be substantial and could require a substantial commitment of our managements time.
The expiration of patents may expose our products to additional competition.
We believe that the protection of our trademarks and service marks is an important factor in
product recognition and in our ability to maintain or increase market share. If we do not
adequately protect our rights in our various trademarks and service marks from infringement, their
value to us could be lost or diminished. If the marks we use are found to infringe upon the
trademark or service mark of another company, we could be forced to stop using those marks and, as
a result, we could lose the value of those marks and could be liable for damages caused by an
infringement.
We also rely upon trade secrets, unpatented proprietary know-how and continuing technological
innovation in developing and manufacturing many of our primary products. It is our policy to
require all of our employees, consultants and advisors to enter into confidentiality agreements
prohibiting them from taking or disclosing our proprietary information and technology and we employ
other strategies to protect our trade secrets and other confidential information. Nevertheless,
these agreements may not provide meaningful protection for our trade secrets and proprietary
know-how if they are used or disclosed. Despite all of the precautions we may take, people who are
not parties to confidentiality agreements may obtain access to our trade secrets or proprietary
know-how. In addition, others may independently develop similar or equivalent trade secrets or
proprietary know-how.
The FDA may authorize sales of certain prescription pharmaceuticals on an over-the-counter drug or
a non-prescription basis, which would reduce the profitability of our prescription products.
From time to time, the FDA may elect to permit sales of certain pharmaceuticals currently sold
on a prescription basis, without a prescription. FDA approval of the sale of our products without
a prescription would reduce demand for our competing prescription products and, accordingly, reduce
our profits. The FDA may also require us to stop selling our product as a prescription drug and
obtain approval of the product for OTC sale or require us to comply with an OTC monograph, which
may materially and adversely affect our business, financial condition and results of operations.
For example, the FDA recently classified benzoyl peroxide, the active ingredient in our
TRIAZ® products, as a Category III ingredient under a final FDA monograph for OTC use in
treatment of labeled conditions, effective March 4, 2011. Because our TRIAZ® products,
which we sell on a prescription basis, have the same ingredients at the same dosage levels as the
OTC products, as of the effective date of the final monograph, TRIAZ® will no longer be
available by prescription.
In addition to the impact described above relating to the FDAs approval of the sale of
certain pharmaceutical products on an OTC drug or a non-prescription basis, the FDA imposes certain
composition and labeling requirements on OTC products, which may also have an adverse effect on the
profitability of any affected pharmaceutical products.
We depend on licenses from others, and any loss of such licenses could harm our business, market
share and profitability.
We have acquired the rights to manufacture, use and market certain products, including certain
of our primary products. We also expect to continue to obtain licenses for other products and
technologies in the future. Our license agreements generally require us to develop a market for
the licensed products. If we do not develop these markets within specified time frames, the
licensors may be entitled to terminate these license agreements.
We may fail to fulfill our obligations under any particular license agreement for various
reasons, including insufficient resources to adequately develop and market a product, lack of
market development despite our diligence
18
and lack of product acceptance. Our failure to fulfill
our obligations could result in the loss of our rights under a license agreement.
Our inability to continue the distribution of any particular licensed product could harm our
business, market share and profitability. Also, certain products we license are used in connection
with other products we own or license. A loss of a license in such circumstances could materially
harm our ability to market and distribute these other products.
Obtaining FDA and other regulatory approvals is time consuming, expensive and uncertain.
The research, development and marketing of our products are subject to extensive regulation by
government agencies in the U.S, particularly the FDA, and other countries. The process of
obtaining FDA and other regulatory approvals is time consuming and expensive. Clinical trials are
required, and the manufacturing of pharmaceutical and medical device products is subject to
rigorous testing procedures. We may not be able to obtain FDA approval to conduct clinical trials
or to manufacture or market any of the products we develop, acquire or license on a timely basis or
at all. Moreover, the costs to obtain approvals could be considerable, and the failure to obtain
or delays in obtaining an approval could significantly harm our business performance and financial
results. Marketing approval or clearance of a new product or new indication for an approved
product may be delayed, restricted, or denied for many reasons, including:
|
|
|
determination by the FDA that the product is not safe and effective; |
|
|
|
|
a different interpretation of preclinical and clinical data by the FDA; |
|
|
|
|
failure to obtain approval of the manufacturing process or facilities; |
|
|
|
|
results of post-marketing studies; |
|
|
|
|
changes in FDA policy or regulations related to product approvals; and |
|
|
|
|
failure to comply with applicable regulatory requirements. |
No amount of time, effort, or resources invested in a new product or new indication for an
approved product can guarantee that regulatory approval will be granted.
The FDA vigorously monitors the ongoing safety of products, which can affect the approvability
of our products or the continued ability to market our products. If adverse events are associated
with products that have already been approved or cleared for marketing, such products could be
subject to increased regulatory scrutiny, changes in regulatory approval or labeling, or withdrawal
from the market. Even if pre-marketing approval from the FDA is received, the FDA is authorized to
impose post-marketing requirements such as:
|
|
|
testing and surveillance to monitor the product and its continued compliance with
regulatory requirements, including cGMPs for drug and biologic products and the QSRs
for medical device products; |
|
|
|
|
submitting products, facilities and records for inspection and, if any inspection
reveals that the product is not in compliance, prohibiting the sale of all products
from the same lot; |
|
|
|
|
suspending manufacturing; |
|
|
|
|
switching status from prescription to over-the-counter drug; |
|
|
|
|
completion of post-marketing studies; |
|
|
|
|
changes to approved product labeling; |
|
|
|
|
advertising or marketing restrictions, including direct-to-consumer advertising; |
|
|
|
|
REMS; |
|
|
|
|
recalling products; and |
|
|
|
|
withdrawing marketing clearance. |
In their regulation of advertising, the FDA and FTC from time to time issue correspondence to
pharmaceutical companies alleging that some advertising or promotional practices are false,
misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for
such advertising practices, and the receipt of correspondence from the FDA alleging these practices
could result in the following:
|
|
|
incurring substantial expenses, including fines, penalties, legal fees and costs to
comply with the FDAs requirements; |
19
|
|
|
changes in the methods of marketing and selling products; |
|
|
|
|
taking FDA-mandated corrective action, which may include placing advertisements or
sending letters to physicians rescinding previous advertisements or promotion; and |
|
|
|
|
disruption in the distribution of products and loss of sales until compliance with
the FDAs position is obtained. |
In addition to the potential impact of any FDA allegations or enforcement described above, the
FTC has the power to impose a number of sanctions, including prohibiting us from making certain
claims about our products or requiring us to stop selling certain products.
In recent years, various legislative proposals have been offered in Congress and in some state
legislatures that include major changes in the health care system. These proposals have included
price or patient reimbursement constraints on medicines, restrictions on access to certain
products, re-importation of products from Canada or other sources and mandatory substitution of
generic for branded products. We cannot predict the outcome of such initiatives, and it is
difficult to predict the future impact of the broad and expanding legislative and regulatory
requirements affecting us.
If we market products in a manner that violates health care fraud and abuse laws, we may be subject
to civil or criminal penalties.
Federal health care program anti-kickback statutes prohibit, among other things, knowingly and
willfully offering, paying, soliciting or receiving remuneration to induce, or in return for
purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item
or service reimbursable under Medicare, Medicaid, or other federally financed health care programs.
This statute has been interpreted to apply to arrangements between pharmaceutical and medical
device manufacturers on one hand and prescribers, purchasers and formulary managers on the other.
In March 2010, the President of the United States signed the Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively,
the Affordable Care Act, which, among other things, amends the intent requirement of the federal
anti-kickback statute. In particular, a person or entity no longer needs to have actual knowledge
of the anti-kickback statute or specific intent to violate it. In addition, the Affordable Care Act
provides that the government may assert that a claim including items or services resulting from a
violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes
of the False Claims Act. Although there are a number of statutory exemptions and regulatory safe
harbors protecting certain common activities from prosecution, the exemptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing,
or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
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. Although we
believe that we are in compliance, our practices may be determined to fail to meet all of the
criteria for safe harbor protection from anti-kickback liability.
The Affordable Care Act also imposes new reporting and disclosure requirements on
pharmaceutical and device manufacturers for any transfer of value made or distributed to
prescribers and other health care providers, effective March 30, 2013. Such information will be
made available on the Internet in a searchable format beginning on September 30, 2013. In
addition, pharmaceutical and device manufacturers will be required to report and disclose any
investment interests held by physicians and their immediate family members during the preceding
calendar year. The failure to submit required information may result in civil monetary penalties
of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for
knowing failure), for all payments, transfers of value or ownership or investment interests not
reported in an annual submission. Effective April 1, 2012, pharmaceutical manufacturers and
distributors must provide the U.S. Department of Health and Human Services with an annual report on
the drug samples they provide to physicians.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to get a false claim paid. Pharmaceutical and medical device companies
have been prosecuted under these laws for a variety of alleged promotional and marketing
activities, such as allegedly providing free product to customers with the expectation that the
customers would bill federal programs for the product; reporting to pricing services inflated
average wholesale prices that were then used by federal programs to set reimbursement rates;
engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered
off-label uses; and submitting inflated best price information to the Medicaid Rebate Program. The
majority of states also have statutes or regulations
20
similar to the federal anti-kickback law and
false claims laws, which apply to items and services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the payor. Sanctions under these federal and
state laws may include civil monetary penalties, exclusion of a manufacturers products from
reimbursement under government programs, criminal fines, and imprisonment. Because of the breadth
of these laws and the narrowness of the safe harbors, it is possible that some of our business
activities could be subject to challenge under one or more of such laws.
On April 25, 2007, we entered into a Settlement Agreement with the Justice Department, the
Office of Inspector General of the Department of Health and Human Services (OIG) and the TRICARE
Management Activity (collectively, the United States) and private complainants to settle all
outstanding federal and state civil suits against us in connection with claims related to our
alleged off-label marketing and promotion of LOPROX® and LOPROX® TS products
to pediatricians during periods prior to our May 2004 disposition of our pediatric sales division
(the Settlement Agreement). The settlement is neither an admission of liability by us nor a
concession by the United States that its claims are not well founded. Pursuant to the Settlement
Agreement, we agreed to pay approximately $10 million to settle the matter. Pursuant to the
Settlement Agreement, the United States released us from the claims asserted by the United States
and agreed to refrain from instituting action seeking exclusion from Medicare, Medicaid, the
TRICARE Program and other federal health care programs for the alleged conduct. These releases
relate solely to the allegations related to us and do not cover individuals. The Settlement
Agreement also provides that the private complainants release us and our officers, directors and
employees from the asserted claims, and we release the United States and the private complainants
from asserted claims.
As part of the settlement, we have entered into a five-year Corporate Integrity Agreement (the
CIA) with the OIG to resolve any potential administrative claims the OIG may have arising out of
the governments investigation. The CIA acknowledges the existence of our comprehensive existing
compliance program and provides for certain other compliance-related activities during the term of
the CIA, including the maintenance of a compliance program that, among other things, is designed to
ensure compliance with the CIA, federal health care programs and FDA requirements. Pursuant to the
CIA, we are required to notify the OIG, in writing, of: (i) any ongoing government investigation or
legal proceeding involving an allegation that we have committed a crime or have engaged in
fraudulent activities; (ii) any other matter that a reasonable person would consider a probable
violation of applicable criminal, civil, or administrative laws; (iii) any written report,
correspondence, or communication to the FDA that materially discusses any unlawful or improper
promotion of our products; and (iv) any change in location, sale, closing, purchase, or
establishment of a new business unit or location related to items or services that may be
reimbursed by Federal health care programs. We are also subject to periodic reporting and
certification requirements attesting that the provisions of the CIA are being implemented and
followed, as well as certain document and record retention mandates. We have hired a Chief
Compliance Officer and created an enterprise-wide compliance function to administer our obligations
under the CIA. Failure to comply under the CIA could result in substantial civil or criminal
penalties and being excluded from government health care programs, which could materially reduce
our sales and adversely affect our financial condition and results of operations.
On or about October 12, 2006, we and the United States Attorneys Office for the District of
Kansas entered into a Nonprosecution Agreement wherein the government agreed not to prosecute us
for any alleged criminal violations relating to the alleged off-label marketing and promotion of
LOPROX®. In exchange for the governments agreement not to pursue any criminal charges
against us, we agreed to continue cooperating with the government in its ongoing investigation into
whether past and present employees and officers may have violated federal criminal law regarding
alleged off-label marketing and promotion of LOPROX® to pediatricians. As a result of
the investigation, prosecutions and other proceedings, certain past and present sales and marketing
employees and officers separated from the Company. See Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and Contingencies, in the notes to the consolidated
financial statements listed under Item 15 of Part IV of this report, Exhibits, Financial Statement
Schedules, for information concerning our current litigation.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable U.S. federal and state regulations and all potentially applicable foreign regulations.
The development, manufacturing, distribution, pricing, sales, marketing and reimbursement of
our products, together with our general operations, is subject to extensive federal and state
regulation in the United States and in foreign countries. While we have developed and instituted a
corporate compliance program based on what we believe to be current best practices, we cannot
assure you that we or our employees are or will be in compliance with all potentially applicable
federal, state or foreign regulations and/or laws or the CIA we entered
21
into with the OIG. If we
fail to comply with the CIA or any of these regulations and/or laws, a range of actions could
result, including, but not limited to, the failure to approve a product candidate, restrictions on
our products or manufacturing processes, including withdrawal of our products from the market,
significant fines, exclusion from government healthcare programs or other sanctions or litigation.
We depend on a limited number of customers for a substantial portion of our revenues, and if we
lose any of them, our business could be harmed.
Our customers include some of the United States leading wholesale pharmaceutical
distributors, such as Cardinal, McKesson, and major drug chains. We are party to distribution
services agreements with McKesson and Cardinal. During 2010, McKesson and Cardinal accounted for
42.6% and 35.4%, respectively, of our net revenues. During 2009, McKesson and Cardinal accounted
for 40.8% and 37.1%, respectively, of our net revenues. During 2008, McKesson and Cardinal
accounted for 45.8% and 21.2%, respectively, of our net revenues. The loss of either of these
customers accounts or a material reduction in their purchases could harm our business, financial
condition or results of operations. McKesson is our sole distributor of our RESTYLANE®
and PERLANE® branded products and DYSPORT® in the U.S.
The consolidation of drug wholesalers could increase competition and pricing pressures throughout
the pharmaceutical industry.
We sell our pharmaceutical products primarily through major wholesalers. These customers
comprise a significant part of the distribution network for pharmaceutical products in the United
States. This distribution network is continuing to undergo significant consolidation marked by
mergers and acquisitions. As a result, a smaller number of large wholesale distributors control a
significant share of the market. In addition, the number of independent drug stores and small
chains has decreased as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the combination or elimination
of warehouses which may result in product returns to us, cause a reduction in the inventory levels
of distributors and retailers, result in reductions in purchases of our products or increase
competitive and pricing pressures on pharmaceutical manufacturers, any of which could harm our
business, financial condition and results of operations.
We derive a majority of our sales revenue from our primary products, and any factor adversely
affecting sales of these products would harm our business, financial condition and results of
operations.
We believe that the prescription volume of our primary prescription products, in particular,
SOLODYN®, VANOS® and ZIANA®, and sales of our facial aesthetic
products, DYSPORT®, RESTYLANE® and PERLANE®, will continue to
constitute a significant portion of our sales revenue for the foreseeable future. Accordingly, any
factor adversely affecting our sales related to these products, individually or collectively, could
harm our business, financial condition and results of operations.
DYSPORT® competes directly with Allergans Botox® Cosmetic, an
established botulinum toxin product that was approved by the FDA for aesthetic purposes in 2002.
We are experiencing intense competition in the dermal filler market. Other dermal filler
products on the market include: Juvéderm®, Prevelle® Silk,
Radiesse®, Sculptra® Aesthetic, Artefill® and
HydrelleTM. Patients may differentiate these products from our RESTYLANE®
and PERLANE® branded products based on price, efficacy and/or duration, which may appeal
to some patients. In addition, there are several dermal filler products under development and/or
in the FDA pipeline for approval which claim to offer equivalent or greater facial aesthetic
benefits to RESTYLANE® and PERLANE® and, if approved, the companies producing
such products could charge less to doctors for their products.
We are involved in patent litigation with certain competitors, primarily related to our
SOLODYN® and VANOS® branded products. See the previously listed Risk Factor,
Certain of our primary products could lose patent protection in the near future and become subject
to competition from generic forms of such products. If that were to occur, sales of those products
would decline significantly and such decline could have a material adverse effect on our results of
operations, Item 3 of Part I of this report, Legal Proceedings, and Note 12, Commitments
and Contingencies in the notes to the consolidated financial statements under Item 15 of Part IV
of this report, Exhibits, Financial Statement Schedules for information concerning our current
intellectual property
22
litigation. There can be no assurance that we will prevail in patent
litigation or that these competitors will not successfully introduce products that would cause a
loss of our market share and reduce our revenues.
Sales related to our primary prescription drug products, including SOLODYN®,
VANOS® and ZIANA®, and sales of our facial aesthetic products,
DYSPORT®, RESTYLANE® and PERLANE® could also be adversely affected
by other factors, including:
|
|
|
manufacturing or supply interruptions; |
|
|
|
|
the development of new competitive pharmaceuticals and technological advances to
treat the conditions addressed by our primary products, including the introduction of
new products into the marketplace; |
|
|
|
|
generic competition; |
|
|
|
|
marketing or pricing actions by one or more of our competitors; |
|
|
|
|
regulatory action by the FDA and other government regulatory agencies; |
|
|
|
|
importation of other dermal fillers; |
|
|
|
|
changes in the prescribing or procedural practices of dermatologists and/or plastic
surgeons; |
|
|
|
|
changes in the reimbursement or substitution policies of third-party payors or
retail pharmacies; |
|
|
|
|
product liability claims; |
|
|
|
|
the outcome of disputes relating to trademarks, patents, license agreements and
other rights; |
|
|
|
|
changes in state and federal law that adversely affect our ability to market our
products to dermatologists and/or plastic surgeons; |
|
|
|
|
restrictions on travel affecting the ability of our sales force to market to
prescribing physicians and plastic surgeons in person; and |
|
|
|
|
restrictions on promotional activities. |
Our continued growth depends upon our ability to develop new products.
Our ability to develop new products is the key to our continued growth. Our research and
development activities, as well as the clinical testing and regulatory approval process, which must
be completed before commercial sales can commence, will require significant commitments of
personnel and financial resources. We cannot assure you that we will be able to develop products
or technologies in a timely manner, or at all. Delays in the research, development, testing or
approval processes will cause a corresponding delay in revenue.
We may not be able to identify and acquire products, technologies and businesses on acceptable
terms, if at all, which may constrain our growth.
Our strategy for continued growth includes the acquisition of products, technologies and
businesses. These acquisitions could involve acquiring other pharmaceutical companies assets,
products or technologies. In addition, we may seek to obtain licenses or other rights to develop,
manufacture and distribute products. We cannot be certain that we will be able to identify
suitable acquisition or licensing candidates, if they will be accretive in the near future, or if
any will be available on acceptable terms. Other pharmaceutical companies, with greater financial,
marketing and sales resources than we have, are also attempting to grow through similar acquisition
and licensing strategies. Because of their greater resources, our competitors may be able to offer
better terms for an acquisition or license than we can offer, or they may be able to demonstrate a
greater ability to market licensed products. In addition, even if we identify potential
acquisitions and enter into definitive agreements relating to such acquisitions, we may not be able
to consummate planned acquisitions on the terms originally agreed upon or at all.
We reevaluate our research and development efforts regularly to assess whether our efforts to
develop a particular product or technology are progressing at a rate that justifies our continued
expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon
in the future, our efforts on a particular product or technology. Products that we research or
develop may not be successfully commercialized. If we fail to take a product or technology from
the development stage to market on a timely basis, we may incur significant expenses without a
near-term financial return.
We have in the past, and may in the future, supplement our internal research and development
by entering into research and development agreements with other pharmaceutical companies. We may,
upon entering into such agreements, be required to make significant up-front payments to fund the
projects. We cannot be sure, however, that we will be able to locate adequate research partners or
that supplemental research will be available on terms
23
acceptable to us in the future. If we are
unable to enter into additional research partnership arrangements, we may incur additional costs to
continue research and development internally or abandon certain projects. Even if we are able to
enter into collaborations, we cannot assure you that these arrangements will result in successful
product development or commercialization.
Our products may not gain market acceptance.
There is a risk that our products may not gain market acceptance among physicians, patients
and the medical community generally. The degree of market acceptance of any medical device or
other product that we develop will depend on a number of factors, including demonstrated clinical
efficacy and safety, cost-effectiveness, potential advantages over alternative products, and our
marketing and distribution capabilities. Physicians will not recommend our products until clinical
data or other factors demonstrate their safety and efficacy compared to other competing products.
Even if the clinical safety and efficacy of using our products is established, physicians may elect
to not recommend using them for any number of other reasons, including whether our products best
meet the particular needs of the individual patient.
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter and year
to year for a number of reasons. The following events or occurrences, among others, could cause
fluctuations in our financial performance from period to period:
|
|
|
development and launch of new competitive products, including OTC or generic
competitor products; |
|
|
|
|
the timing and receipt of FDA approvals or lack of approvals; |
|
|
|
|
the timing and receipt of patent claim issuances or lack of issuances or rejections
in prosecution or reexamination proceedings before the USPTO; |
|
|
|
|
changes in the amount we spend to develop, acquire or license new products,
technologies or businesses; |
|
|
|
|
costs related to business development transactions; |
|
|
|
|
untimely contingent research and development payments under our third-party product
development agreements; |
|
|
|
|
changes in the amount we spend to promote our products; |
|
|
|
|
delays between our expenditures to acquire new products, technologies or businesses
and the generation of revenues from those acquired products, technologies or
businesses; |
|
|
|
|
changes in treatment practices of physicians that currently prescribe our products; |
|
|
|
|
changes in reimbursement policies of health plans and other similar health insurers,
including changes that affect newly developed or newly acquired products; |
|
|
|
|
increases in the cost of raw materials used to manufacture our products; |
|
|
|
|
manufacturing and supply interruptions, including failure to comply with
manufacturing specifications; |
|
|
|
|
changes in prescription levels and the effect of economic changes in hurricane and
other natural disaster-affected areas; |
|
|
|
|
the impact on our employees, customers, patients, manufacturers, suppliers, vendors,
and other companies we do business with and the resulting impact on the results of
operations associated with the possible mutation of the avian form of influenza from
birds or other animal species to humans, current human morbidity, and mortality levels
persist following such potential mutation; |
|
|
|
|
the mix of products that we sell during any time period; |
|
|
|
|
lower than expected demand for our products; |
|
|
|
|
our responses to price competition; |
|
|
|
|
expenditures as a result of legal actions, including the defense of our patents and
other intellectual property; |
|
|
|
|
market acceptance of our products; |
|
|
|
|
the impairment and write-down of goodwill or other intangible assets; |
|
|
|
|
implementation of new or revised accounting or tax rules or policies; |
|
|
|
|
disposition of primary products, technologies and other rights; |
24
|
|
|
termination or expiration of, or the outcome of disputes relating to,
trademarks, patents, license agreements and other rights; |
|
|
|
|
increases in insurance rates for existing products and the cost of insurance for new
products; |
|
|
|
|
general economic and industry conditions, including changes in interest rates
affecting returns on cash balances and investments that affect customer demand, and our
ability to recover quickly from such economic and industry conditions; |
|
|
|
|
changes in seasonality of demand for our products;
|
|
|
|
|
our level of research and development activities; |
|
|
|
|
new accounting standards and/or changes to existing accounting standards that would
have a material effect on our consolidated financial position, results of operations or
classification of cash flows; |
|
|
|
|
costs and outcomes of any tax audits or any litigation involving intellectual
property, customers or other issues; |
|
|
|
|
failure by us or our contractors to comply with all applicable FDA and other
regulatory requirements; |
|
|
|
|
the imposition of a REMS program requirement on any of our products; |
|
|
|
|
adverse decisions by FDA advisory committees related to any of our products; and |
|
|
|
|
timing of payments and/or revenue recognition related to licensing agreements and/or
strategic collaborations. |
As a result, we believe that period-to-period comparisons of our results of operations are not
necessarily meaningful, and these comparisons should not be relied upon as an indication of future
performance. The above factors may cause our operating results to fluctuate and adversely affect
our financial condition and results of operations.
We face significant competition within our industry.
The pharmaceutical and facial aesthetics industries are highly competitive. Competition in our
industry occurs on a variety of fronts, including:
|
|
|
developing and bringing new products to market before others; |
|
|
|
|
developing new technologies to improve existing products; |
|
|
|
|
developing new products to provide the same benefits as existing products at less
cost; and |
|
|
|
|
developing new products to provide benefits superior to those of existing products. |
The intensely competitive environment requires an ongoing, extensive search for technological
innovations and the ability to market products effectively. Consequently, we must continue to
develop and introduce products in a timely and cost-efficient manner to effectively compete in the
marketplace and maintain our revenue and gross margins.
Our competitors vary depending upon product categories. Many of our competitors are large,
well-established companies in the fields of pharmaceuticals, chemicals, cosmetics and health care.
Among our largest competitors are Allergan, Galderma, Johnson & Johnson, Sanofi-Aventis,
GlaxoSmithKline, plc (Stiefel Laboratories), Warner Chilcott and others.
Many of these companies have greater resources than we do to devote to marketing, sales,
research and development and acquisitions. As a result, they have a greater ability to undertake
more extensive research and development, marketing and pricing policy programs. It is possible
that our competitors may develop new or improved products to treat the same conditions as our
products or make technological advances reducing their cost of production so that they may engage
in price competition through aggressive pricing policies to secure a greater market share to our
detriment. These competitors also may develop products that make our current or future products
obsolete. Any of these events could significantly harm our business, financial condition and
results of operations, including reducing our market share, gross margins, and cash flows.
We sell and distribute prescription brands, medical devices and over-the-counter products.
Each of these products competes with products produced by others to treat the same conditions.
Several of our prescription products compete with generic pharmaceuticals, which claim to offer
equivalent benefit at a lower cost. In some
25
cases, insurers and other health care payment organizations try to encourage the use of these
less expensive generic brands through their prescription benefits coverage and reimbursement
policies. These organizations may make the generic alternative more attractive to the patient by
providing different amounts of reimbursement so that the net cost of the generic product to the
patient is less than the net cost of our prescription brand product. Aggressive pricing policies
by our generic product competitors and the prescription benefits policies of third-party payors
could cause us to lose market share or force us to reduce our gross margins in response.
There are several dermal filler products under development and/or in the FDA pipeline for
approval which claim to offer equivalent or greater facial aesthetic benefits to
RESTYLANE® and PERLANE® branded products and if approved, the companies
producing such products could charge less to doctors for their products.
Our investments in other companies and our collaborations with companies could adversely affect our
results of operations and financial condition.
We have made substantial investments in, and entered into significant collaborations with,
other companies. We may use these and other methods to develop or commercialize products in the
future. These arrangements typically involve other pharmaceutical companies as partners that may
be competitors of ours in certain markets. In many instances, we will not control these companies
or collaborations, and cannot assure you that these ventures will be profitable or that we will not
lose any or all of our invested capital. If these investments and collaborations are unsuccessful,
our results of operations could materially suffer.
Further, certain of our collaborations with other companies provide companies with purchase or
buyout rights. For example, our wholly-owned subsidiary, Ucyclyd Pharma, Inc. (Ucyclyd) entered
into a Collaboration Agreement with Hyperion Therapeutics, Inc. (Hyperion) under which Hyperion
has certain purchase and buyout rights with respect to the Ucyclyd development products, as well as
Ucyclyds existing on-market products, AMMONUL® and BUPHENYL®. If such other
companies, including Hyperion, decide to exercise such rights, our results of operations may be
adversely affected.
Our profitability is impacted by our continued participation in governmental pharmaceutical pricing
programs.
In order for our products to receive reimbursement by state Medicaid programs and the Medicare
Part B program, we must participate in the Medicaid drug rebate program. Participation in the
program requires us to provide a rebate for each unit of our products that is reimbursed by
Medicaid. The Affordable Care Act increased the minimum rebate percentage for all drugs, modified
the rebate formula for certain drugs that are line extensions of existing drugs, and expanded the
rebate obligation, which previously had applied only to utilization under fee-for-service
arrangements, to also apply to drug utilization under capitated Medicaid managed care arrangements.
Rebate amounts for our products are determined by a statutory formula that is based on prices
defined by statute: average manufacturer price (AMP), which we must calculate for all products
that are covered outpatient drugs under the Medicaid program, and best price, which we must
calculate only for those of our covered outpatient drugs that are innovator products. The
Affordable Care Act and other legislation enacted in 2010 revised the definition of AMP, effective
October 1, 2010, and capped the rebate amount for innovator products at 100% of AMP. We are
required to report AMP and best price for each of our covered outpatient drugs to the government on
a regular basis. Under the Affordable Care Act, AMP now also will be used to calculate the federal
upper limits (FULs) on pharmacy reimbursement amounts under the Medicaid program. These FULs are
used to determine ceilings placed on the amounts that state Medicaid programs can pay for certain
prescription drugs using federal dollars. Under the Affordable Care Act, FULs shall be no less
than 175% of the weighted average (determined on the basis of utilization) of the most recently
reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drug
products that are available for purchase by retail community pharmacies on a nationwide basis. We
expect that the Centers for Medicare and Medicaid Services (CMS) will issue regulatory proposals
for the implementation of these aspects of the Affordable Care Act during 2011. We cannot predict
the full impact of these changes on our business nor can we predict whether there will be
additional federal legislative or regulatory proposals to modify current Medicaid rebate rules.
These and other cost containment measures and health care reforms could adversely affect our
business.
To receive reimbursement under state Medicaid programs and the Medicare Part B program for our
products, we also are required by federal law to provide discounts under other pharmaceutical
pricing programs. For example, we are required to enter into a Federal Supply Schedule (FSS)
contract with the Department of Veterans Affairs (VA) under which we must make our covered drugs
available to the Big Four federal agencies the VA,
26
the Department of Defense (DoD), the Public Health Service, and the Coast Guard at
pricing that is capped pursuant to a statutory Federal ceiling price (FCP) formula set forth in
the Veterans Health Care Act of 1992 (VHCA). The FCP is based on a weighted average wholesaler
price known as the non-federal average manufacturer price, which manufacturers are required to
report on a quarterly and annual basis to the VA. FSS contracts are federal procurement contracts
that include standard government terms and conditions and separate pricing for each product. In
addition to the Big Four agencies, all other federal agencies and some non-federal entities are
authorized to access FSS contracts. FSS contractors are permitted to charge FSS purchasers other
than the Big Four agencies negotiated pricing for covered drugs that is not capped by the VHCA
formula; instead, such pricing is negotiated based on a mandatory disclosure of the contractors
commercial most favored customer pricing. Medicis chooses to offer one single FCP-based FSS
contract price for each product to the Big Four agencies as well as to all other FSS purchasers.
All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract
price reductions under certain circumstances where pricing to an agreed tracking customer is
reduced.
To receive reimbursement under state Medicaid programs and the Medicare Part B program for our
products, we also are required by federal law to provide discounted purchase prices under the
Public Health Service Drug Pricing Program to certain categories of entities defined by statute.
The formula for determining the discounted purchase price is defined by statute and is based on the
AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate
program, discussed above. The Affordable Care Acts changes to the Medicaid rebate formula and the
definition of AMP also could impact the discounted purchase prices that we are obligated to provide
under this program. In addition, under the Affordable Care Act, additional categories of entities
are eligible for these discounts, potentially increasing the volume of sales for which we must pay
discounts. These discounts currently apply to outpatient utilization by eligible covered entities,
but could be required as to certain inpatient utilization of certain participating covered entities
under legislation that could be enacted in the near future. We cannot predict the full impact of
these changes on our business, nor can we predict whether there will be additional federal
legislative or regulatory proposals to modify this program or current Medicaid rebate rules which
then could impact this program as well.
In addition to the changes to these rebate and discount programs, the Affordable Care Act
requires manufacturers of branded prescription drugs to pay an annual fee to the federal government
beginning in 2011. Each manufacturers fee will be calculated based on the dollar value of its
sales to certain federal programs and the aggregate dollar value of all branded prescription drug
sales by covered manufacturers. A manufacturers fee will be its prorated share of the industrys
total fee obligation (approximately $2.5 billion in 2011 and set to increase in following years),
based on the ratio of its sales to the total sales by covered entities. We cannot predict our
share of this fee because it is determined in part on other entities sales to the relevant
programs.
Our profitability may be impacted by our ongoing review of our prior reports under certain Federal
pharmaceutical pricing programs.
Under the terms of our Medicaid drug rebate program agreement and our VA FSS contract and
related pricing agreements required under the VHCA, we are required to accurately report our
pharmaceutical pricing data, which is based, in part, on accurate classifications of our customers
classes of trade. On May 1, 2007, and on May 15, 2007, we notified the U.S. Department of Health
and Human Services and the VA, respectively, that we may have misclassified certain of our
customers classes of trade, which could affect the prices previously reported under the Medicaid
drug rebate program and/or prices on our VA FSS contract. We have reviewed this issue and have
identified certain customer class of trade misclassifications.
Based on this finding, we undertook a review and recalculation of our Non-Federal Average
Manufacturer Prices (Non-FAMPs) and related FCPs, AMPs, and Best Prices (BPs) for a period
going back at least (3) years from the expected completion date of the recalculation to determine
the impact, if any, that reclassification of customers to appropriate classes of trade might have
on these reported prices. In doing the recalculation, we generally reviewed the methodologies for
computing the reported prices, the classification of products under the various programs, and any
other potentially significant issues identified in the course of the review. In April 2009, we
completed the 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. 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
identified certain actions that were needed in relation to the reviewed data. We expect that the
actions, when implemented, would result in an increase to our rebate liability under the
27
Program in the amount of approximately $3.8 million for the sixteen-quarter period reviewed.
We have disclosed the results of the review and revised rebate liability to CMS, which administers
the Program, and have received permission, where necessary, to 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, which CMS approved in December 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, and $0.7 million for the 2008 and 2009 liability, which was recognized as a reduction of
net revenues during the three months ended March 31, 2010.
Upon submission of the revised pricing figures under the Medicaid program, we determined that
additional amounts were owed under the PHS Drug Pricing Program of approximately $415,700 for the
period spanning from the first quarter of 2006 through the second quarter of 2010 based on the
restated AMP and BP figures filed with CMS for the period January 1, 2006 though June 30, 2010. Of
this amount, $188,700 and $227,000 was accrued for during 2009 and 2010, respectively, and was
recognized as a reduction of net revenues.
In addition, we conducted a review and recalculation of our Non-FAMPs and FCPs for a period
spanning the duration of our applicable FSS contract to determine what, if any, impact
reclassification of customers to appropriate classes of trade and any other issues identified in
the course of the review might have on these reported prices. In doing the recalculation, we
assigned all customers to an appropriate class of trade, implemented a revised calculation
methodology, and addressed all other issues identified in the course of the review. Our review
also involved assessment of compliance with the FSS Price Reductions Clause for the products on FSS
contract.
On September 15, 2008, we submitted a report to the VA detailing the recalculations and the
impact figures associated with overcharges under the current FSS contract. The submission showed
liability in the amount of $121,646, resulting from overcharges under our FSS contract through July
31, 2008. On December 18, 2008, we submitted a supplement to the September 15, 2008 submission,
which, based on certain issues uncovered subsequent to the September 15, 2008 submission, showed an
additional $61,459 in overcharges. The VA requested that Medicis make payment for FSS overcharges
for the period through December 31, 2008 in the amount of $307,205 pursuant to a bill of collection
dated January 5, 2011. Medicis made payment under the bill of collection on January 27, 2011.
The Company is reviewing FSS sales transactions from January 1, 2009 through the conclusion of
its prior FSS contract to identify any potential additional overcharges under the contract. To the
extent that additional overcharges are identified, Medicis will calculate the FSS price impact and
report accordingly to the VA. Medicis has received additional chargeback data from the wholesalers
and is in the process of validating the data and performing additional impact calculations.
Medicis expects to submit revised impact figures to the VA in Q1 2011.
On March 17, 2009, the Department of Defense (DoD) TRICARE Management Activity (TMA)
issued a final rule (2009 Final Rule) pursuant to Section 703 of the National Defense
Authorization Act for Fiscal Year 2008 (NDAA) to establish a program under which it seeks
FCP-based rebates from drug manufacturers on TRICARE retail utilization. Under the 2009 Final
Rule, DoD claimed an entitlement to rebates on TRICARE Retail Pharmacy utilization from January 28,
2008 forward, unless TMA grants a waiver or compromise of amounts due from utilization in quarters
that have passed prior to execution of a voluntary agreement with DoD. Pursuant to the 2009 Final
Rule, rebates are computed by subtracting the applicable FCP from the corresponding Annual
Non-FAMP.
DoD asserted in the 2009 Final Rule the right to apply offsets and/or proceed under the Debt
Collection Act, in the event that a company does not pay rebates or request a waiver of rebate
liability in a timely fashion. DoD also required voluntary rebate agreement proposals to be
submitted by manufacturers on or before June 1, 2009, under which manufacturers would be obligated
to pay rebates on TRICARE retail utilization. Medicis submitted a proposed voluntary pricing
agreement in a timely manner. The agreement offered to provide FCP-based rebates on utilization
occurring on or after the effective date of the agreement. The agreement was signed and executed
by the DoD and Medicis, with an effective date of June 29, 2009. Medicis also submitted a waiver,
pursuant to the terms of the 2009 Final Rule, for amounts due prior to execution of that agreement.
The calculated estimated liability for 2008 TRICARE retail utilization is $1,560,878 and was
accrued for in the Companys financial statements as of the quarter ending March 31, 2009.
Additionally, TRICARE retail utilization for Q1 2009 has been received and the estimated liability
for Q1 2009 of $756,043 was accrued for in the Companys financial statements as of the quarter
ending March 31, 2009. As of September 30, 2009, TRICARE
28
retail utilization data for Q2 2009 was received and the liability calculated to the government for
the time period of April 1, 2009 through June 28, 2009 is $565,316, and this amount is accrued for
in the Companys financial statements as of the quarter ending June 30, 2009. As of the quarter
ending September 30, 2009, the Company added an additional $98,816 to the accrual for the time
period of April 1, 2009 through June 28, 2009.
DoD has not responded to the Companys waiver requests. Pursuant to the terms of the 2009
Final Rule, during the pendency of the waiver requests, Medicis is not required to pay rebates
subject to the requests and is considered to be in compliance with the 2009 Final Rule with respect
to the requirement to pay such amounts. In the event DoD does not grant the Companys request in
full, Medicis has reserved the right to challenge DoDs asserted right to rebates on pre-voluntary
agreement TRICARE retail utilization. Should DoD reject the Companys waiver request in full,
under the 2009 Final Rule, DoD would seek payment of $2,316,921 for the period including 2008 and
Q1 2009, plus payment of $565,316 for Q2 2009 under the TRICARE retail program.
On October 15, 2010, DoD issued a revised final rule (2010 Final Rule) implementing the
Section 703 TRICARE retail rebate program. 75 Fed. Reg. 63,383 (Oct. 15, 2010). The 2010 Final
Rule is nearly identical in substance to the 2009 Final Rule and readopts DoDs approach of
requesting voluntary agreements obligating manufacturers to pay rebates on TRICARE retail
utilization. Reissuance of the final rule resulted from a lawsuit filed by the Coalition for
Common Sense in Government Procurement (Coalition) in the U.S. District Court for the District of
Columbia, which successfully challenged the validity of DoDs assertion in the 2009 Final Rule that
Section 703 mandated a manufacturer rebate program to allow DoD to access FCPs. Coal. for Common
Sense in Govt Procurement v. United States, 671 F. Supp. 2d 48 (D.D.C. 2009).
We will be unable to meet our anticipated development and commercialization timelines if clinical
trials for our products are unsuccessful, delayed, or additional information is required by the
FDA.
The production and marketing of our products and our ongoing research and development,
pre-clinical testing and clinical trials activities are subject to extensive regulation and review
by numerous governmental authorities. Before obtaining regulatory approvals for the commercial
sale of any products, we and/or our partners must demonstrate through pre-clinical testing and
clinical trials that our products are safe and effective for use in humans. Conducting clinical
trials is a lengthy, time-consuming and expensive process that may be subject to unexpected delays.
For example, on July 1, 2010, we received a letter from the FDA with respect to our 510(k)
application to market our LIPOSONIXTM system in the U.S., which indicated that the data
presented in the 510(k) application was not sufficient to support a finding of substantial
equivalence. We believe we have additional data and analyses to support a finding of substantial
equivalence; however, there can be no assurance that the FDA will approve our 510(k) application to
market our LIPOSONIXTM system in the U.S. or that there will not be any further delays
or additional requests for information by the FDA.
In addition to testing and approval procedures, extensive regulations also govern marketing,
manufacturing, distribution, labeling and record-keeping procedures.
Completion of clinical trials may take several years or more. Our commencement and rate of
completion of clinical trials may be delayed by many factors, including:
|
|
|
lack of efficacy during the clinical trials; |
|
|
|
|
unforeseen safety issues; |
|
|
|
|
severe or harmful side effects; |
|
|
|
|
failure to obtain necessary proprietary rights; |
|
|
|
|
shortage or lack of supply sufficient to complete studies; |
|
|
|
|
the decision to modify the product; |
|
|
|
|
lack of economical pathway to manufacture and commercialize product; |
|
|
|
|
cost-effectiveness of continued product development; |
|
|
|
|
slower than expected patient recruitment; |
|
|
|
|
failure of Medicis, investigators, or other contractors to strictly adhere to
federal regulations governing the conduct and data collection procedures involved in
clinical trials; |
|
|
|
|
development of issues that might delay or impede performance by a contractor; |
|
|
|
|
errors in clinical documentation or at the clinical locations; |
|
|
|
|
non-acceptance by the FDA of our NDAs, ANDAs or BLAs; |
29
|
|
|
government or regulatory delays; and |
|
|
|
|
unanticipated requests from the FDA for new or additional information. |
The results from pre-clinical testing and early clinical trials are often not predictive of
results obtained in later clinical trials. A number of new products have shown promising results
in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to
obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In
addition, regulatory delays or rejections may be encountered as a result of many factors, including
perceived defects in the design of the clinical trials and changes in regulatory policy during the
period of product development. Any delays in, or termination of, our clinical trials could
materially and adversely affect our development and commercialization timelines, which could
adversely affect our financial condition, results of operations and cash flows.
Compliance with the requirements of federal and state laws pertaining to the privacy and
security of health information may be time consuming, difficult and costly, and if we are unable to
or fail to comply with such laws, our financial condition, results of operations and cash flows may
be adversely affected.
We are subject to various privacy and security regulations, including but not limited to the
Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information
Technology for Economic and Clinical Health Act of 2009 (as amended, HIPAA). HIPAA mandates,
among other things, the adoption of uniform standards for the electronic exchange of information in
common health care transactions (e.g., health care claims information and plan eligibility,
referral certification and authorization, claims status, plan enrollment, coordination of benefits
and related information), as well as standards relating to the privacy and security of individually
identifiable health information, which require the adoption of administrative, physical and
technical safeguards to protect such information. In addition, many states have enacted comparable
laws addressing the privacy and security of health information, some of which are more stringent
than HIPAA. Failure to comply with these laws can result in the imposition of significant civil and
criminal penalties. The costs of compliance with these laws and the potential liability associated
with the failure to comply with these laws could adversely affect our financial condition, results
of operations and cash flows.
Downturns in general economic conditions may adversely affect our financial condition, results of
operations and cash flows.
Our business, and in particular our facial aesthetic and branded prescription products, have
been and are expected to continue to be adversely affected by downturns in general economic
conditions. Economic conditions such as employment levels, business conditions, interest rates,
energy and fuel costs, consumer confidence and tax rates could change consumer purchasing habits or
reduce personal discretionary spending. A reduction in consumer spending may have an adverse
impact on our financial condition, results of operations and cash flows. In addition, our ability
to meet our expected financial performance is dependent upon our ability to rapidly recover from
downturns in general economic conditions.
Recent global market and economic conditions have been unprecedented and challenging with
tighter credit conditions and recession in most major economies continuing into 2011. Continued
concerns about the systemic impact of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing and mortgage
markets have contributed to increased market volatility and diminished expectations for western and
emerging economies. These conditions, combined with volatile oil prices, declining business and
consumer confidence and increased unemployment, have contributed to volatility of unprecedented
levels.
As a result of these market conditions, the cost and availability of credit has been and may
continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern
about the stability of the markets generally and the strength of counterparties specifically has
led many lenders and institutional investors to reduce, and in some cases, cease to provide credit
to businesses and consumers. These factors have led to a decrease in spending by businesses and
consumers alike, and a corresponding decrease in global infrastructure spending. Continued
turbulence in the U.S. and international markets and economies and prolonged declines in business
consumer spending may adversely affect our liquidity and financial condition, and the liquidity and
financial condition of our customers, including our ability to refinance maturing liabilities and
access the capital markets to meet liquidity needs.
30
The current condition of the credit markets may not allow us to secure financing for potential
future activities on satisfactory terms, or at all.
Our existing cash and short-term investments are available for dividends, 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. 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. As a result of the volatility and disruption of the capital and
credit markets since the latter part of 2008, the markets have exerted downward pressure on the
availability of liquidity and credit capacity; therefore, we may not be able to secure additional
financing for future activities on satisfactory terms, or at all, which may adversely affect our
financial condition and results of operations.
Negative conditions in the credit markets may impair the liquidity of a portion of our short-term
and long-term investments.
Our short-term and long-term investments consist of corporate and various government agency
and municipal debt securities and auction rate floating securities. As of December 31, 2010, our
investments included $21.5 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. The negative conditions in the credit markets in recent years
have prevented some investors from liquidating their holdings, including their holdings of auction
rate floating securities. Since early 2008, there has been insufficient demand at auction for
auction rate floating 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. We may not be able to liquidate the securities until a future auction on these
investments is successful. We could be required to record impairment losses in the future,
depending on market conditions.
As we expand our international business operations, we may be subject to risks associated with
doing business internationally.
As we engage in and expand our operations internationally, our business will be subject to
certain risks inherent in international business, many of which are beyond our control. These
risks include, among other things:
|
|
|
adverse changes in tariff and trade protection measures; |
|
|
|
|
reductions in the reimbursement amounts we receive for our products from foreign
governments and foreign insurance providers; |
|
|
|
|
unexpected changes in foreign regulatory requirements, including quality standards
and other certification requirements; |
|
|
|
|
potentially negative consequences from changes in or interpretations of tax laws; |
|
|
|
|
differing labor regulations; |
|
|
|
|
changing economic conditions in countries where our products are sold or
manufactured or in other countries; |
|
|
|
|
differing local product preferences and product requirements; |
|
|
|
|
exchange rate risks; |
|
|
|
|
restrictions on the repatriation of funds; |
|
|
|
|
political unrest and hostilities; |
|
|
|
|
product liability, intellectual property and other claims; |
|
|
|
|
new export license requirements; |
|
|
|
|
differing degrees of protection for intellectual property; and |
|
|
|
|
difficulties in coordinating and managing foreign operations, including ensuring
that foreign operations comply with foreign laws as well as U.S. laws applicable to
U.S. companies with foreign operations, such as export laws and the U.S. Foreign
Corrupt Practices Act, or FCPA. |
Any of these factors, or any other international factors, could have a material adverse effect
on our business, financial condition and results of operations. We cannot assure you that we may
be able to successfully manage these risks or avoid their effects.
31
We may be subject to risks arising from currency exchange rates, which could increase our costs and
may cause our profitability to decline.
As we expand our international business operations, we may collect and pay a substantial
portion of our sales and expenditures in currencies other than the U.S. dollar. Therefore,
fluctuations in foreign currency exchange rates may affect our operating results. We cannot assure
you that future exchange rate movements, inflation or other related factors will not have a
material adverse effect on our sales or operating expenses.
If Q-Med is unable to protect its intellectual property and proprietary rights with respect to our
dermal filler products, our business could suffer.
The exclusivity period of the license granted to us by Q-Med for RESTYLANE®,
RESTYLANE-L®, PERLANE®, PERLANE-L®, RESTYLANE FINE
LINESTM and RESTYLANE SUBQTM will terminate on the later of (i) the
expiration of the last patent covering the products (estimated to be 2017) or (ii) upon the
licensed know-how becoming publicly known. If the validity or enforceability of our patents is
successfully challenged, the cost to us could be significant and our business may be harmed. For
example, if any such challenges are successful, Q-Med may be unable to supply products to us. As a
result, we may be unable to market, distribute and commercialize the products or it may no longer
be profitable for us to do so.
We depend upon our key personnel and our ability to attract, train, and retain employees.
Our success depends significantly on the continued individual and collective contributions of
our senior management team, and Jonah Shacknai, our Chairman and Chief Executive Officer, in
particular. While we have entered into employment agreements with many members of our senior
management team, including Mr. Shacknai, the loss of the services of any member of our senior
management for any reason or the inability to hire and retain experienced management personnel
could adversely affect our ability to execute our business plan and harm our operating results. In
addition, our future success depends on our ability to hire, train and retain skilled employees.
Competition for these employees is intense.
We have a significant amount of intangible assets, which may never generate the returns we expect.
Our identifiable intangible assets, which include trademarks and trade names, license
agreements and patents acquired in acquisitions, were $195.3 million at December 31, 2010,
representing approximately 14.6% of our total assets of $1.34 billion. Goodwill, which relates to
the excess of cost over the fair value of the net assets of the businesses acquired, was $92.4
million at December 31, 2010, representing approximately 6.9% of our total assets. Goodwill and
identifiable intangible assets are recorded at fair value on the date of acquisition. Under
Accounting Standards Codification (ASC) No. 350 IntangiblesGoodwill and Other, goodwill is
reviewed at least annually for impairment and definite-lived intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that their carrying value may not
be recoverable. Future impairment may result from, among other things, deterioration in the
performance of the acquired business or product line, adverse market conditions and changes in the
competitive landscape, adverse changes in applicable laws or regulations, including changes that
restrict the activities of the acquired business or product line, changes in accounting rules and
regulations, and a variety of other circumstances. The amount of any impairment is recorded as a
charge to the statement of operations. We may never realize the full value of our intangible
assets, and any determination requiring the write-off of a significant portion of intangible assets
may have an adverse effect on our financial condition and results of operations. See Managements
Discussion and Analysis of Financial Condition and Results of Operations.
We may acquire technologies, products and companies in the future and these acquisitions could
disrupt our business and harm our financial condition and results of operations. In addition, we
may not obtain the benefits that the acquisitions were intended to create and this may cause us to
undertake certain strategic alternatives and changes, which may include the discontinuation of
certain aspects of our business and/or the divestiture of certain of our product lines.
As part of our business strategy, we regularly consider and, as appropriate, make acquisitions
(whether by acquisition, license or otherwise) of technologies, products and companies that we
believe are complementary to our business. Acquisitions typically entail many risks and could
result in difficulties in integrating the operations, personnel, technologies, products and
companies acquired, and may result in significant charges to earnings. If we
32
are unable to successfully integrate our acquisitions with our existing business, or we
otherwise make an acquisition that does not result in the benefits that we anticipated, our
business, results of operations, financial condition and cash flows could be materially and
adversely affected, which would adversely affect our ability to develop and introduce new products
and the market price of our stock. In addition, in connection with acquisitions, we could
experience disruption in our business or employee base, or key employees of companies that we
acquire may seek employment elsewhere, including with our competitors. Furthermore, the products
of companies we acquire may overlap with our products or those of our customers, creating conflicts
with existing relationships or with other commitments that are detrimental to the combined
businesses.
In the event that we are unable to obtain the benefits that our acquisitions were intended to
create, we may be required to consider strategic alternatives and changes, including the
discontinuation of certain aspects of our business and/or the divestiture of certain product lines,
which may subject us to a number of risks, including causing strains on our ongoing operations by
distracting our management and by causing us to incur substantial exit costs, losses and
liabilities. For example, as a result of our strategic planning process and the current regulatory
and commercial capital equipment environment, we have decided to explore strategic alternatives as
it relates to our LipoSonix business, which we acquired in July 2008, including but not limited to,
the sale of the stand-alone business. We have engaged Deutsche Bank to assist us in our
exploration of strategic alternatives for LipoSonix. Furthermore, as a result of our decision to
pursue strategic alternatives with respect to our LipoSonix business, the Company has decided to
classify the LipoSonix business as a discontinued operation for financial statement reporting
purposes beginning in the first quarter of 2011.
Further, there is no guarantee that we will be able to successfully undertake such strategic
alternatives and changes. The inability to do so will create a number of risks, including the
diversion of managements attention, a negative impact on our customer relationships and the
potential costs associated with retaining the targeted divestiture. Although, we will pursue
strategic alternatives relating to our LipoSonix business, we cannot guarantee that we will be able
to successfully complete any of the strategic alternatives that we choose to pursue, which may have
a material, negative impact on our results of operations. Our inability to sell LipoSonix or to
successfully complete any other potential strategic alternative may cause us to suffer a
significant loss on our investment in LipoSonix.
We may discontinue existing product lines, which may adversely impact our business and results of
operations.
We continually evaluate the performance of our product lines, and may determine that it is in
the best interest of the Company to discontinue certain of our
product lines. For example, we
have determined that we will be discontinuing TRIAZ® and PLEXION® in early
2011. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the
future, the appropriate product lines to discontinue or that our decision to discontinue various products
lines is prudent if market conditions change. In addition, there are no assurances that the
discontinuance of product lines will reduce our operating expenses or will not cause us to incur
material charges associated with such a decision. Furthermore, the discontinuance of existing
product lines entails various risks, including, in the event that we decide to sell the
discontinued product, the risk that we will not be able to find a purchaser for a product line or
that the purchase price obtained will not be equal to at least the book value of the net assets for
the product line. Other risks include managing the expectations of, and maintaining good relations
with, our customers who previously purchased products from our discontinued product lines, which
could prevent us from selling other products to them in the future. Moreover, we may incur other
significant liabilities and costs associated with our discontinuance of product lines.
We rely on third parties to conduct business operations outside of the U.S., and we may be
adversely affected if they act in violation of the U.S. Foreign Corrupt Practices Act or other
anti-bribery laws.
The FCPA and similar anti-bribery laws in other jurisdictions prohibit companies and their
agents from making improper payments to government officials for the purpose of obtaining or
retaining business. These laws are complex and often difficult to interpret and apply, and in
certain cases, local business practices may conflict with strict adherence to anti-bribery laws.
Our policies and contractual arrangements are designed to maintain compliance with these
anti-bribery laws. We perform, on a periodic basis, an extensive background check to verify
several aspects of compliance, including but not limited to, national and international black
lists. We also provide training to relevant employees and agents regarding compliance with
anti-bribery laws. We cannot guarantee that our policies and procedures, contractual obligations,
background checks and training programs will prevent reckless or criminal acts committed by our
employees or agents. Violations may result in criminal and civil penalties,
33
including fines, imprisonment, loss of our export licenses, suspension of our ability to do
business with the federal government, denial of government reimbursement for our products, and
exclusion from participation in government healthcare programs. Allegations or evidence that we or
our agents have violated these laws could disrupt our business and subject us to criminal or civil
enforcement actions. Such action could have a material adverse effect on our business.
Our success depends on our ability to manage our growth.
We have experienced a period of rapid growth from both acquisitions and internal expansion of
our operations. This growth has placed significant demands on our personnel and financial
resources. We must continue to improve our operational, financial and management information
controls and systems and effectively motivate, train and manage our employees to properly manage
this growth. If we do not manage this growth effectively, maintain the quality of our products
despite the demands on our resources and retain key personnel, our business could be harmed.
We rely on others to manufacture our products.
Currently, we rely on third-party manufacturers for much of our product manufacturing needs.
All third-party manufacturers are required by law to comply with the FDAs regulations, including
the cGMP regulations (for drugs and biologics) and the QSR (for medical devices), as applicable.
These regulations set forth standards for both quality assurance and quality control. Third-party
manufacturers also must maintain records and other documentation as required by applicable laws and
regulations. In addition to a legal obligation to comply, our third-party manufacturers are
contractually obligated to comply with all applicable laws and regulations. However, we cannot
guarantee that third-party manufacturers will ensure compliance with all applicable laws and
regulations. Failure of a third-party manufacturer to maintain compliance with applicable laws and
regulations could result in decreased sales of our products and decreased revenues. Failure of a
third-party manufacturer to maintain compliance with applicable laws and regulations also could
result in reputational harm to us and potentially subject us to sanctions, including:
|
|
|
delays, warning letters, and fines; |
|
|
|
|
product recalls or seizures; |
|
|
|
|
injunctions on sales; |
|
|
|
|
refusal of the FDA to review pending applications; |
|
|
|
|
total or partial suspension of production; |
|
|
|
|
withdrawal of prior marketing approvals or clearances; and |
|
|
|
|
civil penalties and criminal prosecutions. |
Typically, our manufacturing contracts are short term. We are dependent upon renewing
agreements with our existing manufacturers or finding replacement manufacturers to satisfy our
requirements. As a result, we cannot be certain that manufacturing sources will continue to be
available or that we can continue to outsource the manufacturing of our products on reasonable or
acceptable terms.
The underlying cost to us for manufacturing our products is established in our agreements with
these outside manufacturers. Because of the short-term nature of these agreements, our expenses
for manufacturing are not fixed and could change from contract to contract. If the cost of
production increases, our gross margins could be negatively affected.
In addition, we rely on outside manufacturers to provide us with an adequate and reliable
supply of our products on a timely basis and in accordance with good manufacturing standards and
applicable product specifications. As a result, we are subject to and have little or no control
over delays and quality control lapses that our third-party manufacturers and suppliers may suffer.
For example, in early May 2008, we became aware that our third-party manufacturer and supplier of
SOLODYN® mistakenly filled at least one bottle labeled as SOLODYN® with a
different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall
of the two affected lots. We were able, however, to recoup some of our losses from this voluntary
recall during 2009 as a result of an indemnification claim against the manufacturer.
Loss of a supplier or any difficulties that arise in the supply chain could significantly
affect our inventories and supply of products available for sale. We do not have alternative
sources of supply for all of our products. If a
34
primary supplier of any of our primary products is unable to fulfill our requirements for any
reason, it could reduce our sales, margins and market share, as well as harm our overall business
and financial results. If we are unable to supply sufficient amounts of our products on a timely
basis, our revenues and market share could decrease and, correspondingly, our profitability could
decrease.
Under several exclusive supply agreements, with certain exceptions, we must purchase most of
our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier
relationships were terminated, we would be forced to find a replacement manufacturer or supplier.
Manufacturing facilities must be approved by the FDA before they are used to manufacture our
products. The validation of a new facility and the approval of that manufacturer for a new product
may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA
validation of a replacement manufacturing facility could cause an interruption in the supply of our
products. The new facility also may be subject to follow-up inspections. Although we have
business interruption insurance to assist in covering the loss of income for products where we do
not have a secondary manufacturer, which may mitigate the harm to us from the interruption of the
manufacturing of our largest selling products caused by certain events, the loss of a manufacturer
could still cause a reduction in our sales, margins and market share, as well as harm our overall
business and financial results.
We and our third-party manufacturers rely on a limited number of suppliers of the raw materials of
our products. A disruption in supply of raw material would be disruptive to our inventory supply.
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are available from only one source and others
may become available from only one source. We try to maintain inventory levels that are no greater
than necessary to meet our current projections, which could have the effect of exacerbating supply
problems. Any interruption in the supply of finished products could hinder our ability to timely
distribute finished products. If we are unable to obtain adequate product supplies to satisfy our
customers orders, we may lose those orders and our customers may cancel other orders and stock and
sell competing products. This, in turn, could cause a loss of our market share and reduce our
revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of
raw materials to our manufacturers could have a significant effect on their ability to supply us
with our products, which would adversely affect our financial condition and results of operations.
We could experience difficulties in obtaining supplies of RESTYLANE®,
RESTYLANE-L®, PERLANE®, PERLANE-L®, RESTYLANE FINE
LINESTM and RESTYLANE SUBQTM.
The manufacturing process to create bulk non-animal stabilized hyaluronic acid necessary to
produce RESTYLANE®, RESTYLANE-L®, PERLANE®, PERLANE-L®,
RESTYLANE FINE LINESTM and RESTYLANE SUBQTM products is technically complex
and requires significant lead-time. Any failure by us to accurately forecast demand for finished
products could result in an interruption in the supply of RESTYLANE®,
RESTYLANE-L®, PERLANE®, PERLANE-L®, RESTYLANE FINE
LINESTM and RESTYLANE SUBQTM products and a resulting decrease in sales of
the products.
We depend exclusively on Q-Med for our supply of RESTYLANE®,
RESTYLANE-L®, PERLANE®, PERLANE-L®, RESTYLANE FINE
LINESTM and RESTYLANE SUBQTM products. There are currently no alternative
suppliers of these products. Q-Med has committed to supply RESTYLANE® to us under a
long-term license that is subject to customary conditions and our delivery of specified milestone
payments. Q-Med manufactures RESTYLANE®, RESTYLANE-L®, PERLANE®,
PERLANE-L®, RESTYLANE FINE LINESTM and RESTYLANE SUBQTM at its
facility in Uppsala, Sweden. We cannot be certain that Q-Med will be able to meet our current or
future supply requirements. Any impairment of Q-Meds manufacturing capacities could significantly
affect our inventories and our supply of products available for sale, which would materially and
adversely affect our results of operations.
Supply interruptions may disrupt our inventory levels and the availability of our products.
Numerous factors could cause interruptions in the supply of our finished products, including:
|
|
|
timing, scheduling and prioritization of production by our contract manufacturers; |
|
|
|
|
labor interruptions; |
|
|
|
|
changes in our sources for manufacturing; |
35
|
|
|
the timing and delivery of domestic and international shipments; |
|
|
|
|
our failure to locate and obtain replacement manufacturers as needed on a timely basis; |
|
|
|
|
conditions affecting the cost and availability of raw materials; and |
|
|
|
|
hurricanes and other natural disasters. |
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 products. Overestimates of demand may result in excessive inventory production and
underestimates may result in an inadequate supply of our products in channels of distribution.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately
75-80% of our gross revenues are typically derived from two major drug wholesale concerns. We have
recently entered into 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 supplied by our major wholesalers. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of substantially all of our
products.
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 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 in
product inventory in the distribution channel. Any decision made by management to reduce wholesale
inventory levels will decrease our product revenue.
Fluctuations in demand for our products create inventory maintenance uncertainties.
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. 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 provisions. 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 selectively outsource certain non-sales and non-marketing services, and cannot assure you that
we will be able to obtain adequate supplies of such services on acceptable terms.
To enable us to focus on our core marketing and sales activities, we selectively outsource
certain non-sales and non-marketing functions, such as laboratory research, manufacturing and
warehousing. As we expand our activities, we expect to expend additional financial resources in
these areas. We typically do not enter into long-term manufacturing contracts with third-party
manufacturers. Whether or not such contracts exist, we cannot assure
36
you that we will be able to obtain adequate supplies of such services or products in a timely
fashion, on acceptable terms, or at all.
Importation of products from Canada and other countries into the United States may lower the prices
we receive for our products.
Our products are subject to competition from lower priced versions of our products and
competing products from Canada and other countries where government price controls or other market
dynamics result in lower prices. The ability of patients and other customers to obtain these lower
priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in
Canada and elsewhere targeted to American purchasers, the increase in United States-based
businesses affiliated with Canadian pharmacies marketing to American purchasers, and other factors.
Most of these foreign imports are illegal under current United States law. However, the volume of
imports continues to rise due to the limited enforcement resources of the FDA and the United States
Customs Service, and there is increased political pressure to permit the imports as a mechanism for
expanding access to lower priced medicines.
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. This law contains provisions that may change United States import laws
and expand consumers ability to import lower priced versions of our and competing products from
Canada, where there are government price controls. These changes to United States import laws will
not take effect unless and until the Secretary of Health and Human Services certifies that the
changes will lead to substantial savings for consumers and will not create a public health safety
issue. The former Secretary of Health and Human Services did not make such a certification.
However, it is possible that the current Secretary or a subsequent Secretary could make the
certification in the future. As directed by Congress, a task force on drug importation recently
conducted a comprehensive study regarding the circumstances under which drug importation could be
safely conducted and the consequences of importation on the health, medical costs and development
of new medicines for United States consumers. The task force issued its report in December 2004,
finding that there are significant safety and economic issues that must be addressed before
importation of prescription drugs is permitted, and the current Secretary has not yet announced any
plans to make the required certification. In addition, federal legislative proposals have been made
to implement the changes to the United States import laws without any certification, and to broaden
permissible imports in other ways. Even if the changes to the United States import laws do not
take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to
increase due to market and political forces, and the limited enforcement resources of the FDA, the
United States Customs Service and other government agencies.
The importation of foreign products adversely affects our profitability in the United States.
This impact could become more significant in the future, and the impact could be even greater if
there is a further change in the law or if state or local governments take further steps to
facilitate the importation of products from abroad.
If we become subject to product liability claims, our earnings and financial condition could
suffer.
We are exposed to risks of product liability claims from allegations that our products
resulted in adverse effects to the patient or others. These risks exist even with respect to those
products that are approved for commercial sale by the FDA and manufactured in facilities licensed
and regulated by the FDA.
In addition to our desire to reduce the scope of our potential exposure to these types of
claims, many of our customers require us to maintain product liability insurance as a condition of
conducting business with us. We currently carry product liability insurance on a claims-made
basis. Nevertheless, this insurance may not be sufficient to cover all claims made against us.
Insurance coverage is expensive and may be difficult to obtain. As a result, we cannot be certain
that our current coverage will continue to be available in the future on reasonable terms, if at
all. If we are liable for any product liability claims in excess of our coverage or outside of our
coverage, the cost and expense of such liability could cause our earnings and financial condition
to suffer.
If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
Physicians and potential patients may have a number of concerns about the safety of our
products, whether or not such concerns have a basis in generally accepted science or peer-reviewed
scientific research. Negative
37
publicity, whether accurate or inaccurate, concerning our products could reduce market or
governmental acceptance of our products and could result in decreased product demand or product
withdrawal. In addition, significant negative publicity could result in an increased number of
product liability claims, whether or not these claims are supported by applicable law.
Rising insurance costs could negatively impact profitability.
The cost of insurance, including workers compensation, product liability and general liability
insurance, has been relatively stable in recent years but may increase in the future. In response,
we may increase deductibles and/or decrease certain coverages to mitigate these costs. These
increases, and our increased risk due to increased deductibles and reduced coverages, could have a
negative impact on our results of operations, financial condition and cash flows.
DYSPORT®,
RESTYLANE® and
PERLANE® are consumer products and as
such, are susceptible to changes in popular trends and applicable laws, which could adversely
affect sales or product margins of DYSPORT®,
RESTYLANE®
and
PERLANE®.
DYSPORT®, RESTYLANE® and PERLANE® are consumer products. If
we fail to anticipate, identify or react to competitive products or if consumer preferences in the
cosmetic marketplace shift to other treatments for the treatment of glabellar lines and moderate to
severe facial wrinkles and folds, respectively, we may experience a decline in demand for
DYSPORT®, RESTYLANE® and PERLANE®. In addition, the popular media
has at times in the past produced, and may continue in the future to produce, negative reports
regarding the efficacy, safety or side effects of facial aesthetic products. Consumer perceptions
of DYSPORT®, RESTYLANE® and PERLANE® may be negatively impacted by
these reports and other reasons.
Demand for DYSPORT®, RESTYLANE® and PERLANE® may be
materially adversely affected by changing economic conditions. Generally, the costs of cosmetic
procedures are borne by individuals without reimbursement from their medical insurance providers or
government programs. Individuals may be less willing to incur the costs of these procedures in weak
or uncertain economic environments, and demand for DYSPORT®, RESTYLANE® and
PERLANE® could be adversely affected.
The restatement of our consolidated financial statements has subjected us to a number of additional
risks and uncertainties, including increased costs for accounting and legal fees and the increased
possibility of legal proceedings.
As discussed in our Form 10-K/A for the year ended December 31, 2007 filed with the SEC on
November 10, 2008, and in Note 2 to our consolidated financial statements therein, we determined
that our consolidated financial statements for the annual, transition and quarterly periods in
fiscal years 2003 through 2007 and the first and second quarters of 2008 should be restated due to
an error in our interpretation and application of Statement of Financial Accounting Standards No.
48, Revenue Recognition When Right of Return Exists (SFAS 48), as it applies to a component of
our sales return reserve calculations. SFAS 48 is now part of ASC 605, Revenue Recognition (ASC
605). As a result of the restatement, we have become subject to a number of additional risks and
uncertainties, including:
|
|
|
We incurred substantial unanticipated costs for accounting and legal fees in
connection with the restatement. Although the restatement is complete, we expect to
continue to incur accounting and legal costs as noted below. |
|
|
|
|
As a result of the restatement, we have been named in a putative shareholder class
action complaint, as discussed in Item 3 of Part I of this report, Legal Proceedings
and Note 12, Commitments and Contingencies. The plaintiffs in this consolidated
lawsuit may make additional claims, expand existing claims and/or expand the time
periods covered by the complaints. Other plaintiffs may bring additional actions with
other claims, based on the restatement. If such events occur, we may incur substantial
defense costs regardless of the outcome of these actions and insurance and
indemnification may not be sufficient to cover the losses we may incur. Likewise, such
events might cause a diversion of our managements time and attention. If we do not
prevail in this action or other potential actions, we could be required to pay
substantial damages or settlement costs, which could adversely affect our business,
financial condition, results of operations and liquidity. |
38
|
|
|
On January 21, 2009, we received a letter from a stockholder demanding that our
Board of Directors take certain actions, including potentially legal action, in
connection with the restatement of our consolidated financial statements in 2008, and
threatening to pursue a derivative claim if our Board of Directors does not comply with
the stockholders demands. We may receive similar letters from other stockholders. Our
Board of Directors reviewed the letter during the course of 2009 and established a
special committee of the Board, comprised of directors who are independent and
disinterested with respect to the letter, (i) to assess whether there is any merit to
the allegations contained in the letter, (ii) if the special committee were to conclude
that there may be merit to any of the allegations contained in the letter, to further
assess whether it is in our best interest 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 engaged outside counsel to conduct an inquiry. The special
committee completed its investigation, and on or about February 16, 2010, the Board of
Directors, pursuant to the report and recommendation of the special committee, resolved
to decline the derivative demand. On February 26, 2010, Company counsel sent a
declination letter to opposing counsel. On or about October 21, 2010, the stockholder
filed a derivative complaint against the Company and its directors and certain officers
in the Superior Court of the State of Arizona in and for the County of Maricopa,
alleging that such individuals breached their fiduciary duties to the Company in
connection with the restatement. By agreement of the parties, the
stockholder lawsuit has been stayed at present. The ultimate outcome of this and any other related
actions could have a material adverse effect on our business, financial condition,
results of operations, cash flows and the trading price for our securities. |
|
|
|
On or about October 20, 2010, a second alleged stockholder of the Company filed a
derivative complaint against the Company and its directors and certain officers in the
Superior Court of the State of Arizona in and for the County of Maricopa. The
complaint alleges, among other things, that such individuals breached their fiduciary
duties to the Company in connection with the restatement, and that a demand upon the
Board of Directors to institute an action in the Companys name would be futile and
that the stockholder is therefore excused under Delaware law from making such a demand
prior to filing the complaint. By agreement of the parties, the
stockholder lawsuit has been stayed at present. The ultimate outcome of this and any other related
actions could have a material adverse effect on our business, financial condition,
results of operations, cash flows and the trading price for our securities. |
In 2008, management identified a material weakness in our internal control over financial reporting
with respect to our accounting for sales return reserves. Although as of December 31, 2008
management determined that the material weakness identified in 2008 had been remediated, management
may identify material weaknesses in the future that could adversely affect investor confidence,
impair the value of our common stock and increase our cost of raising capital.
In connection with the restatement of our consolidated financial statements in 2008,
management identified a material weakness in our internal control over financial reporting with
respect to our interpretation and application of SFAS 48 (now part of ASC 605) as it applies to the
calculation of sales return reserves. Management took steps to remediate the material weakness in
our internal control over financial reporting and, as of December 31, 2008, management determined
that the material weakness identified in 2008 had been remediated. There can be no assurance,
however, that additional material weaknesses will not be identified in the future.
Any failure to remedy additional deficiencies in our internal control over financial reporting
that may be discovered in the future could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial statements. Any such
failure could, in turn, affect the future ability of our management to certify that our internal
control over our financial reporting is effective and, moreover, affect the results of our
independent registered public accounting firms attestation report regarding our managements
assessment. Inferior internal control over financial reporting could also subject us to the
scrutiny of the SEC and other regulatory bodies and could cause investors to lose confidence in our
reported financial information, which could have an adverse effect on the trading price of our
common stock.
In addition, if we or our independent registered public accounting firm identify additional
deficiencies in our internal control over financial reporting, the disclosure of that fact, even if
quickly remedied, could reduce the markets confidence in our financial statements and harm our
share price. Furthermore, additional deficiencies could result in future non-compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. Such non-compliance
39
could subject us to a variety of administrative sanctions, including the suspension or
delisting of our ordinary shares from the NYSE and review by the NYSE, the SEC, or other regulatory
authorities.
We may not be able to repurchase the Old Notes when required.
We have $169.2 million principal amount of outstanding 2.5% Contingent Convertible Senior
Notes due 2032 (the Old Notes). 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.
The source of funds for any repurchase required as a result of any such event will be our
available cash or cash generated from operating activities or other sources, including borrowings,
sales of assets, sales of equity or funds provided by a new controlling entity. We cannot assure
you, however, that sufficient funds will be available at the time of any such event to make any
required repurchases of the Notes tendered. If sufficient funds are not available to repurchase
the Old Notes, we may be forced to incur other indebtedness or otherwise reallocate our financial
resources. Furthermore, the use of available cash to fund the repurchase of the Old Notes may
impair our ability to obtain additional financing in the future.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.
We are subject to income taxes in both the U.S. and other foreign jurisdictions. Our
effective tax rate could be adversely affected by changes in the mix of earnings in countries with
different statutory tax rates, changes in the valuation of deferred tax assets and liabilities,
changes in or interpretations of tax laws including pending tax law changes (such as the research
and development credit and the deductibility of executive
compensation)
changes in the application of state tax laws,
changes in our
manufacturing activities and changes in our future levels of research and development spending. In
addition, we are subject to the periodic examination of our income tax returns by the Internal
Revenue Service and other tax authorities, including state tax
authorities. We regularly assess the likelihood of outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these periodic examinations will not have an
adverse effect on our provision for income taxes and estimated income tax liabilities.
Risks Related to Our Industry
The growth of managed care organizations, other third-party reimbursement policies, state
regulatory agencies and retailer fulfillment policies may harm our pricing, which may reduce our
market share and margins.
Our operating results and business success depend in large part on the availability of
adequate third-party payor reimbursement to patients for our prescription-brand products. These
third-party payors include governmental entities such as Medicaid, private health insurers and
managed care organizations. Because of the size of the patient population covered by managed care
organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve
many of these organizations has become important to our business.
The trend toward managed healthcare in the United States and the growth of managed care
organizations could significantly influence the purchase of pharmaceutical products, resulting in
lower prices and a reduction in product demand. Managed care organizations and other third-party
payors try to negotiate the pricing of medical services and products to control their costs.
Managed care organizations and pharmacy benefit managers typically develop formularies to reduce
their cost for medications. Formularies can be based on the prices and therapeutic benefits of the
available products. Due to their lower costs, generic products are often favored. The breadth of
the products covered by formularies varies considerably from one managed care organization to
another, and many formularies include alternative and competitive products for treatment of
particular medical conditions. Exclusion of a product from a formulary can lead to its sharply
reduced usage in the managed care organization patient population. Payment or reimbursement of
only a portion of the cost of our prescription products could make our products less attractive,
from a net-cost perspective, to patients, suppliers and prescribing physicians. We cannot be
certain that the reimbursement policies of these entities will be adequate for our pharmaceutical
products to compete on a price basis. If our products are not included within an adequate number of
formularies or adequate reimbursement levels are not provided, or if those policies increasingly
favor generic products, our market share and gross margins could be harmed, as could our business,
financial condition, results of operations and cash flows.
In addition, healthcare reform could affect our ability to sell our products and may have a
material adverse effect on our business, results of operations, financial condition and cash flows.
In particular, the Affordable Care Act substantially changes the way healthcare is financed by
both governmental and private insurers, subjects
40
biologic products to potential competition by lower-cost biosimilars, and significantly
impacts the U.S. pharmaceutical and medical device industries. Among other things, the Affordable
Care Act:
|
|
|
Establishes annual, non-deductible fees on any entity that manufactures or imports
certain branded prescription drugs and biologics, beginning 2011; |
|
|
|
|
Establishes a deductible excise tax on any entity that manufactures or imports certain
medical devices offered for sale in the United States, beginning 2013; |
|
|
|
|
Increases minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate
Program, retroactive to January 1, 2010, to 23.1 percent and 13 percent of the AMP for
branded and generic drugs, respectively; |
|
|
|
|
Redefines a number of terms used in determining Medicaid drug rebate liability,
including average manufacturer price and retail community pharmacy, effective October 2010; |
|
|
|
|
Extends manufacturers Medicaid rebate liability to covered drugs dispensed to enrollees
in certain Medicaid managed care organizations, effective March 23, 2010; |
|
|
|
|
Expands eligibility criteria for Medicaid programs by, among other things, permitting
states to offer Medicaid coverage to additional individuals beginning April 2010 and by
adding new mandatory eligibility categories for certain individuals with income at or below
133 percent of the Federal Poverty Level beginning 2014, thereby potentially increasing
manufacturers Medicaid rebate liability; |
|
|
|
|
Establishes a new Patient-Centered Outcomes Research Institute to oversee, identify
priorities in, and conduct comparative clinical effectiveness research; |
|
|
|
|
Requires manufacturers to participate in a coverage gap discount program, under which
they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable
brand drugs to eligible beneficiaries during their coverage gap period (also known as the
doughnut hole), as a condition for the manufacturers outpatient drugs to be covered
under Medicare Part D, beginning 2011; |
|
|
|
|
Increases the number of entities eligible for the Section 340B discounts for
outpatient drugs provided to hospitals meeting the qualification criteria under Section
340B of the Public Health Service Act of 1944, effective January 2010; and |
|
|
|
|
Establishes an abbreviated legal pathway to approve biosimilars (also referred to as
follow-on biologics). |
Title VII of the Affordable Care Act, the Biologics Price Competition and Innovation Act of
2009, or BPCIA, creates a new licensure framework for follow-on biologic products. Under the BPCIA,
a manufacturer may submit an application for licensure of a biologic product that is biosimilar
to or interchangeable with a referenced, branded biologic product. Prior to the BPCIA, there
was no approval pathway for such a follow-on product. Innovator biologics are granted 12 years of
data exclusivity, with a potential six-month pediatric extension. After the period of data
exclusivity expires, the FDA could approve biosimilar versions of innovator biologic products. The
regulatory implementation of these provisions is ongoing and is expected to take several years.
Such implementation could ultimately subject our biologic product, DYSPORT®, to
competition by biosimilars.
Some of our products are not of a type generally eligible for reimbursement. It is possible
that products manufactured by others could address the same effects as our products and be subject
to reimbursement. If this were the case, some of our products may be unable to compete on a price
basis. In addition, decisions by state regulatory agencies, including state pharmacy boards,
and/or retail pharmacies may require substitution of generic for branded products, may prefer
competitors products over our own, and may impair our pricing and thereby constrain our market
share and growth.
Managed care initiatives to control costs have influenced primary-care physicians to refer
fewer patients to dermatologists and other specialists. Further reductions in these referrals
could reduce the size of our potential market, and harm our business, financial condition, results
of operations and cash flows.
We are subject to extensive governmental regulation.
Pharmaceutical companies are subject to significant regulation by a number of national, state
and local governments and agencies. The FDA administers requirements covering testing,
manufacturing, safety, effectiveness, labeling, storage, record keeping, approval, sampling,
advertising and promotion of our products. Several states have also instituted laws and
regulations covering some of these same areas. In addition, the FTC and state and local
authorities regulate the advertising of over-the-counter drugs and cosmetics. Failure to comply
with applicable regulatory requirements could, among other things, result in:
41
|
|
|
fines; |
|
|
|
|
changes to advertising; |
|
|
|
|
suspensions of regulatory approvals of products; |
|
|
|
|
product withdrawals and recalls; |
|
|
|
|
delays in product distribution, marketing and sale; and |
|
|
|
|
civil or criminal sanctions. |
For example, in early May 2008, we became aware that our third-party manufacturer and supplier
of SOLODYN® mistakenly filled at least one bottle labeled as SOLODYN® with a
different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall
of the two affected lots, each of which was shipped subsequent to March 31, 2008, and we may be
subject to claims, fines or other penalties.
Our prescription and over-the-counter products receive FDA review regarding their safety and
effectiveness. However, the FDA is permitted to revisit and change its prior determinations. We
cannot be sure that the FDA will not change its position with regard to the safety or effectiveness
of our products. If the FDAs position changes, we may be required to change our labeling or
formulations or cease to manufacture and market the challenged products. Even prior to any formal
regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our
products if concerns about their safety or effectiveness develop.
Before marketing any drug that is considered a new drug by the FDA, the FDA must provide its
approval of the product. All products which are considered drugs which are not new drugs and
that generally are recognized by the FDA as safe and effective for use do not require the FDAs
approval. We believe that some of our products, as they are promoted and intended for use, are
exempt from treatment as new drugs and are not subject to approval by the FDA. The FDA, however,
could take a contrary position, and we could be required to seek FDA approval of those products and
the marketing of those products. We could also be required to withdraw those products from the
market.
Sales representative activities and other business activities may also be subject to the
Voluntary Compliance Guidance issued for pharmaceutical manufacturers by the OIG of the Department
of Health and Human Services, as well as various state laws and regulations. We have established a
comprehensive compliance program, extensive written policies, and robust training programs for our
sales force and other relevant employees, which we believe are appropriate and consistent with
industry best practices. The OIG, other federal law enforcement entities, and/or state law
enforcement entities, however, could take a contrary position, and we could be required to modify
our sales representative activities or other business activities.
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act will subject us to
substantial additional federal regulation, and we cannot predict the effect of such regulation on
our business, financial condition, results of operations or cash flows.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act (the Dodd-Frank Act)
was enacted. There are significant corporate governance and executive compensation-related
provisions in the Dodd-Frank Act. Our efforts to comply with these requirements have resulted in,
and are likely to continue to result in, an increase in expenses and a diversion of managements
time from other business activities. Given the uncertainty associated with the manner in which the
provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through
regulations, the full extent of the impact the Dodd-Frank Act will have on our operations is
unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, or otherwise adversely affect our
business, financial condition, results of operations and cash flows.
42
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the Staff
of the SEC that were issued 180 days or more preceding the fiscal year end of 2010 and that remain
unresolved.
Item 2. Properties
During July 2006, we executed a lease agreement for new headquarter office space to
accommodate our expected long-term growth. The first phase is for approximately 150,000 square
feet with the right to expand. We occupied the new headquarter office space in Scottsdale,
Arizona, during the second quarter of 2008. We obtained possession of the leased premises and,
therefore, began accruing rent expense during the first quarter of 2008. The term of the lease is
twelve years. The average annual expense under the amended lease agreement is approximately $3.9
million. During the first quarter of 2008, we received approximately $6.7 million in tenant
improvement incentives from the landlord. This amount has been capitalized into leasehold
improvements and is being depreciated on a straight-line basis over the lesser of the useful life
or the term of the lease. The tenant improvement incentives are also included in other long-term
liabilities as deferred rent, and will be recognized as a reduction of rent expense on a
straight-line basis over the term of the lease. In 2008, upon vacating our previous headquarters
facility, we recorded a charge for the estimated remaining net cost for the lease, net of potential
sublease income, of $4.8 million. See Item 7 of Part II of this report, Managements Discussion
and Analysis of Financial Condition and Results of Operations Contingent Convertible Senior Notes
and Other Long-Term Commitments.
During October 2006, we executed a lease agreement for additional headquarter office space,
which is located approximately one mile from our current headquarter office space in Scottsdale,
Arizona to accommodate our current needs and future growth. The agreement provided for the lease
of approximately 21,000 square feet of office space. In May 2007, we began occupancy of the
additional headquarter office space. In August 2010, we amended the lease to reduce the square
footage of the leased office space to approximately 13,000 square feet and extend the term of the
lease to May 2015.
LipoSonix, now known as Medicis Technologies Corporation, presently leases approximately
24,700 square feet of office, laboratory and manufacturing space in Bothell, Washington, under a
lease agreement that expires in October 2012.
Medicis Aesthetics Canada Ltd., a wholly owned subsidiary, presently leases approximately
3,600 square feet of office space in Toronto, Ontario, Canada, under a lease agreement, as
extended, that expires in December 2011.
Rent expense was approximately $3.4 million, $3.6 million and $9.4 million for 2010, 2009 and
2008, respectively. Rent expense for 2008 includes a $4.8 million charge for the estimated
remaining net cost for our previous headquarters facility lease.
Item 3. Legal Proceedings
Mylan/Matrix SOLODYN® Litigation and Settlement
On January 13, 2009, we filed suit against Mylan Inc., Matrix Laboratories Limited and Matrix
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 our U.S.
Patent No. 5,908,838 (the 838 Patent) related to our acne medication SOLODYN® by
submitting to the U.S. Food and Drug Administration (FDA) an Abbreviated New Drug Application
(ANDA) for generic versions of SOLODYN® in 45mg, 90mg, and 135mg strengths. The
relief we requested included a request for a permanent injunction preventing Defendants from
infringing the 838 Patent by selling generic versions of SOLODYN®. The expiration date
for the 838 Patent is in 2018. On March 30, 2009, the Delaware Court dismissed the claims between
us and Matrix Laboratories Inc. without prejudice, pursuant to a stipulation between us and Matrix
Laboratories Inc.
On May 7, 2010, we received notice from Mylan Inc. that its majority owned subsidiary Matrix
Laboratories Limited (Matrix) had filed an ANDA containing a Paragraph IV Patent Certification
with the FDA for generic versions of SOLODYN® in 65mg and 115mg strengths. The
Paragraph IV Patent Certification alleges that our 838 Patent is invalid and/or will not be
infringed by Matrixs manufacture, use or sale of the products for
43
which the ANDA was submitted. On June 14, 2010, we filed suit against Mylan Inc. and Matrix
in the United States District Court for the District of Delaware seeking an adjudication that
Matrix had infringed one or more claims of our 838 Patent by submitting to the FDA its ANDA for
generic versions of SOLODYN® in 65mg and 115mg strengths. The relief we requested
included a request for a permanent injunction preventing Matrix from infringing the 838 Patent by
selling generic versions of SOLODYN®. As a result of the filing of the suit, we believe
that the ANDA could not be approved by the FDA until after the expiration of a 30-month stay period
or a court decision that the 838 Patent is invalid or not infringed.
On July 8, 2010, we amended our complaint against Mylan Inc. and Matrix in the United States
District Court for the District of Delaware relating to Matrixs filing of its ANDA for generic
versions of SOLODYN® in 45mg, 90mg and 135mg strengths. We amended the complaint to
assert new claims 19, 21, 23, 25 and 27-34 included in the Reexamination Certificate, as described
in the section below entitled Reexamination of 838 Patent, for the 838
Patent.
On July 22, 2010, we entered into a Settlement Agreement and a License Agreement (the Mylan
License Agreement) with Mylan Inc. and certain of its affiliates, as applicable, including Matrix
and Mylan Pharmaceuticals Inc. (collectively, Mylan). Pursuant to the agreements, the companies
agreed to terminate all legal disputes among them relating to SOLODYN®. In addition,
Mylan confirmed that our patents relating to SOLODYN® are valid and enforceable, and
cover Mylans activities relating to Mylans generic versions of SOLODYN® under its
ANDAs described above. Mylan also acknowledged that any prior sales of its generic versions of
SOLODYN® were not authorized by us, and agreed to be permanently enjoined from any
further distribution of generic versions of SOLODYN® except pursuant to the Mylan
License Agreement as described below. We agreed to release Mylan from liability arising from any
prior sales of its generic versions of SOLODYN® that were not authorized by us. Under
the Mylan License Agreement, we granted to Mylan a license to make and sell its generic versions of
SOLODYN® in 45mg, 90mg and 135mg strengths under the SOLODYN® intellectual
property rights belonging to us commencing in November 2011, or earlier under certain conditions.
We also granted to Mylan a license to make and sell generic versions of SOLODYN® in 65mg
and 115mg strengths under our SOLODYN® intellectual property rights upon certain
conditions, but not upon any specified date in the future. The Mylan License Agreement provides
that Mylan will be required to pay us royalties based on sales of Mylans generic versions of
SOLODYN® pursuant to the foregoing licenses. On July 23, 2010, the United States
District Court for the District of Delaware entered a permanent injunction against any infringement
of the 838 patent.
Sandoz SOLODYN® Litigation and Settlement
On January 13, 2009, we filed suit against Sandoz, Inc. (Sandoz) in the United States
District Court for the District of Delaware seeking an adjudication that Sandoz has infringed one
or more claims of the 838 Patent related to our acne medication SOLODYN® by submitting
to the FDA an ANDA for generic versions of SOLODYN® in 45mg, 90mg, and 135mg strengths.
The relief we requested included a request for a permanent injunction preventing Sandoz from
infringing the 838 Patent by selling generic versions of SOLODYN®. On August 18, 2009,
we entered into a Settlement Agreement with Sandoz whereby all legal disputes between us and Sandoz
relating to SOLODYN® were terminated and whereby Sandoz agreed that our 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 Sandoz.
On January 28, 2010, we received a Paragraph IV Patent Certification from Sandoz, advising
that Sandoz had filed a supplement or amendment to its earlier filed ANDA assigned ANDA number
91-422 with the FDA for generic versions of SOLODYN® in 65mg and 115mg strengths.
Sandoz has not advised us as to the timing or status of the FDAs review of its filing, or whether
Sandoz has complied with FDA requirements for proving bioequivalence. Sandozs Paragraph IV Patent
Certification alleges that the 838 Patent will not be infringed by Sandozs manufacture, use, sale
and/or importation of the products for which the supplement or amendment was submitted because it
has been granted a patent license by us for the 838 Patent.
On December 27, 2010 and December 29, 2010, we received Paragraph IV Patent Certifications
from Sandoz advising that Sandoz had filed supplements or amendments to its earlier filed ANDA
assigned ANDA number 91-422 with the FDA for generic versions of SOLODYN® in 55mg
strength, and in 80mg and 105mg strengths, respectively. Sandoz has not advised us as to the
timing or status of the FDAs review of its filings, or whether Sandoz has complied with FDA
requirements for proving bioequivalence. Sandozs Paragraph IV Patent
44
Certifications allege that the 838 Patent and our U.S. Patent No. 7,790,705 (the 705 Patent),
which was issued to us by the U.S. Patent and Trademark Office (USPTO) on September 7, 2010 and
expires in 2025 or later, will not be infringed by Sandozs manufacture, importation, use, sale
and/or offer for sale of the products for which the supplements or amendments were submitted
because Sandoz has a licensing agreement with us.
Teva-Barr SOLODYN® Litigation
On November 20, 2009, we received a Paragraph IV Patent Certification from Barr Laboratories,
Inc. (Barr), advising that Barr had filed a supplement to an earlier filed ANDA assigned ANDA
number 65-485 with the FDA for generic versions of SOLODYN® in 65mg and 115mg strengths.
Barr has not advised us as to the timing or status of the FDAs review of its filing, or whether
Barr has complied with FDA requirements for proving bioequivalence. Barrs Paragraph IV Patent
Certification alleges that our 838 Patent is invalid, unenforceable and/or will not be infringed
by Barrs manufacture, use, sale and/or importation of the products for which the supplement was
submitted. On December 28, 2009, we filed suit against Barr and Teva Pharmaceuticals USA, Inc.,
(collectively Teva) in the United States District Court for the District of Maryland seeking an
adjudication that Teva has infringed one or more claims of the 838 Patent by submitting to the FDA
the supplement to its ANDA for generic versions of SOLODYN® in 65mg and 115mg
strengths. The relief we requested includes a request for a permanent injunction preventing Teva
from infringing the 838 Patent by selling generic versions of SOLODYN® in
65mg and 115mg strengths. As a result of the filing of the suit, we believe that the supplement to
the ANDA cannot be approved by the FDA until after the expiration of the 30-month stay period or a
court decision that the patent is invalid or not infringed.
On
July 9, 2010, we amended our complaint against Teva in the United States District Court for
the District of Maryland relating to Barrs filing of its ANDA for generic versions of
SOLODYN® in 65mg and 115mg strengths. We amended the complaint to assert new claims 19,
21, 23, 25 and 27-34 included in the Reexamination Certificate, as described in the section below
entitled Reexamination of 838 Patent. The complaint seeks an adjudication that Barr has
infringed one or more claims of the 838 Patent, including the new claims, by submitting the ANDA,
and amendments or supplements thereto, to the FDA.
On October 18, 2010, we amended our complaint against Teva in the United States District Court
for the District of Maryland relating to Barrs filing of its ANDA for generic versions of
SOLODYN® in 65mg and 115mg strengths. We amended the complaint to allege that Teva has
infringed one or more claims of the 705 Patent by submitting its ANDA, and amendments or
supplements thereto, to the FDA to obtain approval for the commercial manufacture, use, offer for
sale, sale, or distribution in and/or importation into the United States of its generic versions of
SOLODYN® before the expiration of the 705 Patent.
On February 9, 2011, we received a Paragraph IV Patent Certification from Barr advising that
Barr has filed a supplement or amendment to its earlier filed ANDA with the FDA for generic
versions of SOLODYN® in 55mg, 80mg and 105mg strengths.
The Paragraph IV Patent Certification alleges that
the 838 Patent and the 705 Patent are invalid, unenforceable and/or will not be infringed by
Barrs manufacture, use, offer for sale and/or sale of the products for which the supplement or
amendment was submitted. Barrs submission amends an ANDA already subject to a 30-month stay.
As such, we believe that the supplement or amendment cannot be approved by the FDA until after the
expiration of the 30-month period or a court decision that the patents are invalid or not
infringed.
On
February 24, 2011, we entered into a Settlement Agreement
(Teva Settlement Agreement) with Teva. Under the terms of the Teva Settlement Agreement,
we agreed to grant to Teva a future license to make and sell our generic versions of
SOLODYN® in 65mg and 115mg strengths under the SOLODYN® intellectual property rights
belonging to us, with the license grant effective in February 2018, or earlier under
certain conditions. We also agreed to grant to Teva a future license to make and sell
generic versions of
SOLODYN®
in 55mg, 80mg and 105mg strengths under our
SOLODYN® intellectual property rights, with the license grant effective in February 2019, or
earlier under certain conditions. The Teva Settlement Agreement provides that Teva will be
required to pay us royalties based on sales of Tevas generic SOLODYN® products
pursuant to the foregoing licenses.
Pursuant
to the Teva Settlement Agreement, the companies agreed to terminate all legal disputes
between them relating to
SOLODYN®.
In addition, Teva confirmed that
our patents relating to SOLODYN® are valid and enforceable, and cover Tevas activities
relating to Tevas generic SOLODYN® products under ANDA No. 65-485 and any amendments
and supplements thereto. Teva also agreed to be permanently enjoined from any distribution
of generic
SOLODYN® products in the U.S. except as described above. The Maryland court
subsequently entered a permanent injunction against any infringement
by Teva.
Ranbaxy SOLODYN® Litigation and Settlement
On May 6, 2009, we received a Paragraph IV Patent Certification from Ranbaxy Laboratories
Limited (Ranbaxy Limited) advising that Ranbaxy Limited had filed an ANDA with the FDA for a
generic version of SOLODYN® in 135mg strength. Ranbaxy Limiteds Paragraph IV Patent
Certification alleged that Ranbaxy Limiteds manufacture, use, sale or offer for sale of the
product for which the ANDA was submitted would not infringe any valid claim of the 838 Patent. On
June 11, 2009, we filed suit against Ranbaxy Limited and Ranbaxy Inc. (collectively, 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 its ANDA to the FDA. The relief
we requested included a request for a permanent injunction preventing Ranbaxy from infringing the
838 Patent by selling a generic version of SOLODYN®.
45
On January 5, 2010, we received a Paragraph IV Patent Certification from Ranbaxy Limited
advising that Ranbaxy Limited had filed a supplement or amendment to its earlier filed ANDA
assigned ANDA number 91-118 with the FDA for generic versions of SOLODYN® in
45mg and 90mg strengths. Ranbaxy Limiteds Paragraph IV Patent Certification alleges that our 838
Patent is invalid, unenforceable, and/or will not be infringed by Ranbaxy Limiteds manufacture,
importation, use, sale and/or offer for sale of the products for which the supplement or amendment
was submitted. Ranbaxy Limiteds Paragraph IV Patent Certification also alleges that our U.S.
Patent Nos. 7,541,347 (the 347 Patent) and 7,544,373 (the 373 Patent) are not infringed by
Ranbaxy Limiteds manufacture, importation, use, sale and/or offer for sale of the products for
which the supplement or amendment was submitted. Ranbaxy Limiteds submission as to the 45mg and
90mg strengths amended an ANDA already subject to a 30-month stay. As such, we believe that the
supplement or amendment could not be approved by the FDA until after the expiration of the 30-month
period or in the event of a court decision holding that the patents are invalid or not infringed.
On February 16, 2010, we filed suit against Ranbaxy in the United States District Court for the
District of Delaware seeking an adjudication that Ranbaxy infringed one or more claims of the
patents by submitting the supplement or amendment to the ANDA for generic versions of
SOLODYN® in 45mg and 90mg strengths. The relief we requested included a request for a
permanent injunction preventing Ranbaxy from infringing the 838 patent by selling generic versions
of SOLODYN®.
On April 15, 2010, we received a Paragraph IV Patent Certification from Ranbaxy Limited
advising that Ranbaxy Limited had filed a second supplement or amendment to its earlier filed ANDA
assigned ANDA number 91-118 with the FDA for generic versions of SOLODYN® in 65mg and
115mg strengths. Ranbaxy Limiteds Paragraph IV Patent Certification alleges that our 838 Patent
is invalid, unenforceable, and/or will not be infringed by Ranbaxy Limiteds manufacture,
importation, use, sale and/or offer for sale of the products for which the supplement or amendment
was submitted. Ranbaxy Limiteds submission as to the 65mg and 115mg strengths amended an ANDA
already subject to a 30-month stay. As such, we believe that the supplement or amendment could not
be approved by the FDA until after the expiration of the 30-month period or in the event of a court
decision holding that the patent is invalid or not infringed.
On May 4, 2010, we entered into a License and Settlement Agreement (the Ranbaxy Settlement
Agreement) with Ranbaxy. Pursuant to the Ranbaxy Settlement Agreement, we and Ranbaxy agreed to
terminate all legal disputes between us relating to SOLODYN®. In addition, Ranbaxy
confirmed that our patents relating to SOLODYN® are valid and enforceable, and cover
Ranbaxys activities relating to Ranbaxys generic SOLODYN® products under ANDA number
91-118. Ranbaxy also agreed to be permanently enjoined from any distribution of generic versions of
SOLODYN® except pursuant to the terms of the Ranbaxy Settlement Agreement. Under the
Ranbaxy Settlement Agreement, we granted to Ranbaxy a license to make and sell its generic versions
of SOLODYN® in 45mg, 90mg and 135mg strengths under the SOLODYN® intellectual
property rights belonging to us commencing in November 2011, or earlier under certain conditions.
We also granted to Ranbaxy a license to make and sell generic versions of SOLODYN® in
65mg and 115mg strengths under our SOLODYN® intellectual property rights upon certain
conditions but not upon any specified date in the future. The Ranbaxy Settlement Agreement provides
that Ranbaxy will be required to pay us royalties based on sales of Ranbaxys generic versions of
SOLODYN® pursuant to the foregoing licenses. In addition, the Ranbaxy Settlement
Agreement provides for our grant to Ranbaxy of a license to make and sell a branded proprietary
dermatology product currently under development by Ranbaxy, which is not therapeutically equivalent
to any of our currently marketed dermatology products, under certain intellectual property rights
belonging to us, commencing the later of August 2011 or upon the sale of such product by Ranbaxy
following approval by the FDA. Ranbaxy will be required to pay us a royalty based on sales of such
product pursuant to the license.
On October 27, 2010, and on December 13, 2010, we received Paragraph IV Patent Certifications
from Ranbaxy Limited advising that Ranbaxy Limited had filed additional supplements or amendments
to its earlier filed ANDA assigned ANDA number 91-118 with the FDA for generic versions of
SOLODYN® in 80mg strength, and in 55mg and 105mg strengths, respectively. Ranbaxy
Limited has not advised us as to the timing or status of the FDAs review of its filings, or
whether Ranbaxy Limited has complied with FDA requirements for proving bioequivalence. Ranbaxy
Limiteds Paragraph IV Patent Certifications allege that the 838 Patent and the 705 Patent will
not be infringed by Ranbaxy Limiteds manufacture, importation, use, sale and/or offer for sale of
the products for which the supplements or amendments were submitted because Ranbaxy Limited has a
licensing agreement with us.
46
Lupin SOLODYN® Litigation
On October 8, 2009, we received a Paragraph IV Patent Certification from Lupin Ltd. (Lupin)
advising that Lupin had filed an ANDA with the FDA for generic versions of SOLODYN® in
45mg, 90mg, and 135mg strengths. Lupin did not advise us as to the timing or status of the FDAs
review of its filing, or whether it has complied with FDA requirements for proving bioequivalence.
Lupins Paragraph IV Patent Certification alleges that our 838 Patent is invalid. Lupins
Paragraph IV Patent Certification also alleges that the 347 Patent and 373 Patent are not
infringed by Lupins manufacture, importation, use, sale and/or offer for sale of the products for
which its ANDA was submitted. On November 17, 2009, we filed suit against Lupin in the United
States District Court for the District of Maryland seeking an adjudication that Lupin has infringed
one or more claims of the 838 Patent by submitting to the FDA its ANDA for generic versions of
SOLODYN® in 45mg, 90mg and 135mg strengths. The relief we requested includes a request
for a permanent injunction preventing Lupin from infringing the 838 Patent by selling generic
versions of SOLODYN®. As a result of the filing of the suit, we believe that the ANDA
cannot be approved by the FDA until after the expiration of a 30-month stay period or a court
decision that the patent is invalid or not infringed.
On November 24, 2009, we received a Paragraph IV Patent Certification from Lupin, advising
that Lupin had filed a supplement or amendment to its earlier filed ANDA assigned ANDA number
91-424 with the FDA for a generic version of SOLODYN® in 65mg strength. Lupin has not
advised us as to the timing or status of the FDAs review of its filing, or whether Lupin has
complied with FDA requirements for proving bioequivalence. Lupins Paragraph IV Patent
Certification alleges that our 838 Patent is invalid. Lupins Paragraph IV Patent Certification
also alleges that our 347 Patent or 373 Patent is not infringed by Lupins manufacture,
importation, use, sale and/or offer for sale of the products for which the supplement or amendment
was submitted. Lupins submission amends an ANDA already subject to a 30-month stay. As such, we
believe that the supplement or amendment cannot be approved by the FDA until after the expiration
of the 30-month period or a court decision that the patent is invalid or not infringed.
On December 23, 2009, we received a Paragraph IV Patent Certification from Lupin advising that
Lupin had filed a supplement or amendment to its earlier filed ANDA assigned ANDA number 91-424
with the FDA for a generic version of SOLODYN® in 115mg strength. Lupin has not advised
us as to the timing or status of the FDAs review of its filing, or whether Lupin has complied with
FDA requirements for proving bioequivalence. Lupins Paragraph IV Patent Certification alleges that
the 838 Patent is invalid. Lupins Paragraph IV Patent Certification also alleges that the 347
Patent and 373 Patent are not infringed by Lupins manufacture, importation, use, sale and/or
offer for sale of the products for which the supplement or amendment was submitted. Lupins
submission amends an ANDA already subject to a 30-month stay. As such, we believe that the
supplement or amendment cannot be approved by the FDA until after the expiration of the 30-month
period or a court decision that the patent is invalid or not infringed. On December 28, 2009, we
amended our complaint against Lupin seeking an adjudication that Lupin has infringed one or more
claims of the 838 Patent by submitting its supplement or amendment to its ANDA for a generic
version of SOLODYN® in 65mg strength. On February 2, 2010, we amended our complaint
against Lupin seeking an adjudication that Lupin has infringed one or more claims of the 838
Patent by submitting its supplement or amendment to its earlier filed ANDA for a generic version of
SOLODYN® in 115mg strength.
On July 1, 2010, we amended our complaint against Lupin in the United States District Court
for the District of Maryland relating to Lupins filing of its ANDA, and amendments or supplements
thereto, for generic versions of SOLODYN® in 45mg, 65mg, 90mg, 115mg and 135mg
strengths. We amended the complaint to assert new claims 19, 21, 23, 25 and 27-34 included in the
Reexamination Certificate, as described in the section below entitled Reexamination of 838
Patent. The complaint seeks an adjudication that Lupin has infringed one or more claims of the
838 Patent, including the new claims, by submitting the ANDA, and amendments or supplements
thereto, to the FDA.
On September 17, 2010, we received an additional Paragraph IV Patent Certification from Lupin
advising that Lupin had filed a supplement or amendment to its earlier filed ANDA assigned ANDA
number 91-424 with the FDA for generic versions of SOLODYN® in 45mg, 65mg, 90mg, 115mg
and 135mg strengths. Lupins Paragraph IV Patent Certification alleges that the 705 Patent, which
was issued to us by the USPTO on September 7, 2010, will not be infringed by Lupins manufacture,
use, sale and/or importation of the products for which the supplement or amendment was submitted.
Lupins submission amends an ANDA already subject to a 30-month stay. As such, we believe that the
supplement or amendment cannot be approved by the FDA until after the expiration of the 30-month
period or a court decision that the patent is invalid or not infringed.
47
On October 18, 2010, we amended our complaint against Lupin in the United States District
Court for the District of Maryland relating to Lupins filing of its ANDA, and amendments or
supplements thereto for generic versions of SOLODYN® in 45mg, 65mg, 90mg, 115mg and
135mg strengths. We amended the complaint to allege that Lupin has infringed one or more claims of
the 705 Patent by submitting its ANDA, and amendments or supplements thereto, to the FDA to obtain
approval for the commercial manufacture, use, offer for sale, sale, or distribution in and/or
importation into the United States of its generic versions of SOLODYN® before the
expiration of the 705 Patent.
On December 3, 2010, we received a Paragraph IV Patent Certification from Lupin advising that
Lupin had filed a supplement or amendment to its earlier filed ANDA assigned ANDA number 91-424
with the FDA for generic versions of SOLODYN® in 55mg and 80mg strengths. Lupin has not
advised us as to the timing or status of the FDAs review of its filing, or whether Lupin has
complied with FDA requirements for proving bioequivalence. Lupins Paragraph IV Patent
Certification alleges that the 838 Patent is invalid. Lupins Paragraph IV Patent Certification
also alleges that the 705 Patent will not be infringed by Lupins manufacture, use, sale and/or
importation of the products for which the supplement or amendment was submitted. Lupins
submission amends an ANDA already subject to a 30-month stay. As such, we believe that the
supplement or amendment cannot be approved by the FDA until after the expiration of the 30-month
period or a court decision that the patents are invalid or not infringed. On January 10, 2011, we
amended our complaint against Lupin seeking an adjudication that Lupin has infringed one or more
claims of the 838 Patent and the 705 Patent by filing the supplement or amendment to its earlier
filed ANDA assigned ANDA number 91-424 for generic versions of SOLODYN® in 55mg and 80mg
strengths.
On January 24, 2011, we received a Paragraph IV Patent Certification from Lupin advising that
Lupin had filed a supplement or amendment to its earlier filed ANDA assigned ANDA number 91-424
with the FDA for a generic version of SOLODYN® in 105mg strength. Lupin has not advised
us as to the timing or status of the FDAs review of its filing, or whether Lupin has complied with
FDA requirements for proving bioequivalence. Lupins Paragraph IV Patent Certification alleges that
the 838 Patent is invalid. Lupins Paragraph IV Patent Certification also alleges that the 705
Patent will not be infringed by Lupins manufacture, use, sale and/or importation of the products
for which the supplement or amendment was submitted. We are evaluating the details of Lupins
certification letter and considering our options. Lupins submission amends an ANDA already
subject to a 30-month stay. As such, we believe that the supplement or amendment cannot be
approved by the FDA until after the expiration of the 30-month period or a court decision that the
patents are invalid or not infringed.
Reexamination of 838 Patent
A third party requested that the 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, canceling certain claims and adding amended claims. On November 10, 2009,
the USPTO issued a second non-final office action in the reexamination of the 838 Patent. On
January 8, 2010, we filed our response to the non-final office action with the USPTO. On March 17,
2010, we received a Notice of Intent to Issue a Reexamination Certificate issued by the USPTO in
connection with the USPTOs reexamination of the 838 Patent. On June 1, 2010, we received the Ex
Parte Reexamination Certificate (the Reexamination Certificate) from the USPTO. The
Reexamination Certificate is directed to patentable claims 3, 4, 12, and 13, as well as new claims
19-34. The USPTO determined that the claims are patentable, including over all the cited prior
art. Certain claims are the subject of the patent infringement lawsuits described herein.
Aurobindo SOLODYN® Litigation
On October 26, 2010, we received a Paragraph IV Patent Certification from Aurobindo Pharma
Limited (Aurobindo Pharma) advising that Aurobindo Pharma had filed an ANDA with the FDA for
generic versions of SOLODYN® in 45mg, 65mg, 90mg, 115mg and 135mg strengths. Aurobindo
Pharma has not advised us as to the timing or status of the FDAs review of its filing, or whether
it has complied with FDA requirements for proving bioequivalence. Aurobindo Pharmas Paragraph IV
Patent Certification alleges that the 838 Patent is invalid. Aurobindo Pharmas Paragraph IV
Patent Certification also alleges that the 347 Patent, 373 Patent and 705 Patent are not
infringed by Aurobindo Pharmas manufacture, importation, use, sale and/or offer for sale of the
products for which the ANDA was submitted.
48
On December 3, 2010, we filed suit against Aurobindo Pharma and Aurobindo Pharma USA, Inc.
(together, Aurobindo) in the United States District Court for the District of Delaware. On
December 6, 2010, we also filed suit against Aurobindo in the United States District Court for the
District of New Jersey. The suits seek an adjudication that Aurobindo has infringed one or more
claims of the 838 Patent and the 705 Patent by submitting to the FDA an ANDA for generic versions
of SOLODYN® in 45mg, 65mg, 90mg, 115mg and 135mg strengths. The relief we requested
includes a request for a permanent injunction preventing Aurobindo from infringing the asserted
claims of the 838 Patent and the 705 Patent by engaging in the manufacture, use, importation,
offer to sell, sale or distribution of generic versions of SOLODYN® before the
expiration of the patents.
Taro VANOS® Litigation and Settlement
On March 17, 2010, we received a Paragraph IV Patent Certification from Taro Pharmaceuticals
U.S.A., Inc. (Taro U.S.A.) advising that Taro U.S.A. had filed an ANDA with the FDA for a generic
version of VANOS® (fluocinonide) Cream 0.1%. Taro U.S.A.s Paragraph IV Patent
Certification alleges that our U.S. Patent Nos. 6,765,001 (the 001 Patent) and 7,220,424 (the
424 Patent) would not be infringed by Taro U.S.A.s manufacture, use, sale and/or importation of
the product for which the ANDA was submitted, and that claim 3 of the 424 Patent is invalid. On
April 28, 2010, we filed suit against Taro U.S.A. and Taro Pharmaceuticals Industries, Ltd.
(collectively, Taro) in the United States District Court for the District of Delaware and the
United States District Court for the Southern District of New York seeking an adjudication that
Taro had infringed one or more claims of the 001 Patent, the 424 Patent and our U.S. Patent No.
7,217,422 (the 422 Patent) by submitting the ANDA to the FDA. The relief requested by us
included a request for a permanent injunction preventing Taro from infringing the patents by
selling a generic version of VANOS® prior to the expiration of the asserted patents. On
September 21, 2010, we entered into a License and Settlement Agreement (the Taro Settlement
Agreement) with Taro. In connection with the Taro Settlement Agreement, we and Taro agreed to
terminate all legal disputes between us relating to VANOS®. In addition, Taro confirmed
that certain of our patents relating to VANOS® are valid and enforceable, and cover
Taros activities relating to its generic products under its ANDA described above. Further,
subject to the terms and conditions contained in the Taro Settlement Agreement, we granted Taro,
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. Upon commercialization by
Taro of generic versions of VANOS® products, Taro will pay us a royalty based on sales
of such generic products.
Nycomed VANOS® Litigation
On April 7, 2010, we received a Paragraph IV Patent Certification from Nycomed US Inc.
advising that Nycomed US Inc. had filed an ANDA with the FDA for a generic version of
VANOS®. Nycomed US Inc. has not advised us as to the timing or status of the FDAs
review of its filing, or whether it has complied with FDA requirements for proving bioequivalence.
Nycomed US Inc.s Paragraph IV Patent Certification alleges that our 001 Patent and 424 Patent
will not be infringed by Nycomed US Inc.s manufacture, use, sale, offer for sale or importation of
the product for which the ANDA was submitted. On May 19, 2010, we filed suit against Nycomed US
Inc. and Nycomed GmbH (together, Nycomed) in the United States District Court for the Southern
District of New York and the United States District Court for the District of Delaware seeking an
adjudication that Nycomed has infringed one or more claims of our 001 Patent, 424 Patent and 422
Patent by submitting the ANDA to the FDA. The relief we requested includes a request for a
permanent injunction preventing Nycomed from infringing the patents by selling a generic version of
VANOS® prior to the expiration of the asserted patents. On August 3, 2010, Nycomed
responded in the New York action by filing an answer, affirmative defenses, and counterclaims
alleging that the patents-in-suit are invalid, unenforceable, and will not be infringed by
Nycomeds proposed generic version of VANOS®, and a motion to dismiss certain claims
related to the patents-in-suit. On August 3, 2010, Nycomed responded in the Delaware action by
filing a motion to transfer the Delaware action to New York and a motion to dismiss certain claims
related to the patents-in-suit. We responded to Nycomeds motions and pleadings on December 15,
2010. On December 23, 2010, Nycomed filed an amended answer and counterclaims in the New York
action alleging only invalidity and noninfringement of the patents-in-suit. On January 14, 2011,
we filed an answer to Nycomeds amended counterclaims in the New York action denying that any of
the asserted patents are invalid or not infringed. On January 19, 2011 and January 24, 2011, the
New York court endorsed the parties stipulations withdrawing all pending motions. On January 19,
2011, the Delaware court endorsed the parties stipulation withdrawing Nycomeds pending motion to
dismiss and ordering Nycomed to answer or otherwise respond to the complaint. On February 2, 2011,
Nycomed filed an answer with affirmative defenses alleging that
49
the patents are invalid, unenforceable, and will not be infringed by Nycomeds proposed
generic version of VANOS®.
On December 15, 2010, we filed a complaint for patent infringement against Nycomed in the
United States District Court for the District of Delaware seeking an adjudication that Nycomeds
filing of its ANDA with the FDA infringed one or more claims of our U.S. Patent No. 7,794,738.
Nycomed has waived formal service of the complaint. On February 15, 2011, Nycomed filed a motion
to dismiss the complaint.
Stiefel VELTIN Litigation
On July 28, 2010, we filed suit against Stiefel Laboratories, Inc., a subsidiary of
GlaxoSmithKline plc (Stiefel), in the United States District Court for the Western District of
Texas San Antonio Division seeking a declaratory judgment that the manufacture and sale of
Stiefels acne product VELTIN Gel, which was approved by the FDA in 2010, will infringe one or
more claims of our U.S. Patent No. RE41,134 (the 134 Patent) covering our product
ZIANA® Gel, a prescription topical gel indicated for the treatment of acne that was
approved by the FDA in November 2006. The 134 Patent is listed in the FDAs Approved Drug
Products with Therapeutic Equivalence Evaluations (Orange Book) and expires in February 2015. We
have rights to the 134 Patent pursuant to an exclusive license agreement with the owner of the
patent. The relief we requested in the lawsuit includes a request for a permanent injunction
preventing Stiefel from infringing the 134 Patent by engaging in the commercial manufacture, use,
importation, offer to sell, or sale of any therapeutic composition or method of use covered by the
134 Patent, including such activities relating to VELTIN, and from inducing or contributing to
any such activities. On October 8, 2010, we and the owner of the 134 Patent filed a motion for a
temporary restraining order and preliminary injunction seeking to enjoin sales of VELTIN. The
court denied the request for a temporary order, and the motion for preliminary injunction remains
pending.
Acella TRIAZ® Litigation
On August 19, 2010, we filed suit against Acella Pharmaceuticals, Inc. (Acella) in the
United States District Court for the District of Arizona based on Acellas manufacture and offer
for sale of benzoyl peroxide foaming cloths which we believe infringe one or more claims of our
U.S. Patent No. 7,776,355 (the 355 Patent) covering certain of our products, including
TRIAZ® (benzoyl peroxide) 3%, 6% and 9% Foaming Cloths indicated for the topical
treatment of acne vulgaris. The 355 Patent was issued to us by the USPTO on August 17, 2010 and
expires in June 2026. The relief we requested in the lawsuit includes a request for a permanent
injunction preventing Acella from infringing the 355 Patent by engaging in the manufacture, use,
importation, offer to sell, or sale of any products covered by the 355 Patent, including Acellas
benzoyl peroxide foaming cloths, and from inducing or contributing to any such activities. Acella
filed with the USPTO a request for ex parte reexamination of the 355 Patent, and filed with the
court a request that the litigation be stayed for the duration of the reexamination. Both the
request for reexamination and the request for a stay were initially denied. Acella resubmitted its
request for reexamination to the USPTO, which was granted on December 15, 2010. Acella again
requested that the case be stayed pending reexamination, and we opposed such request. We filed a
motion for preliminary injunction with the court on December 10, 2010. The hearing on the preliminary injunction motion was to be combined
with a Markman Hearing that was also scheduled for February 23, 2011. At a Markman Hearing, a court determines the scope of the patents claims. The court held only the Markman Hearing on February 23, 2011 and deferred the hearing on the preliminary injunction motion until March 29, 2011.
The Markman Hearing took place as scheduled, and the court took those issues under advisement. A ruling on those
issues is expected in advance of the hearing on the preliminary injunction motion.
Seton TRIAZ® Settlement
On August 12, 2010, we sent a cease and desist letter to Seton Pharmaceuticals, LLC regarding
Setons preparation for sale of benzoyl peroxide foaming cloths and advising Seton of its possible
infringement of the 355 Patent and our U.S. Patent No. 5,648,389 as a result of Setons
activities. The foregoing patents cover our product TRIAZ® (benzoyl peroxide) 3%, 6%
and 9% Foaming Cloths indicated for the topical treatment of acne vulgaris. On August 27, 2010, we
and Seton entered into a settlement agreement whereby Seton admitted that its products infringed
the patents, and it obtained the right to market a limited quantity of Setons products. To the
best of our knowledge, Seton has already terminated sales of its 3% and 9% products.
The information set forth under Legal Matters in Note 12 in the notes to the consolidated
financial statements under Item 15 of Part IV of this report, Exhibits, Financial Statement
Schedules, is incorporated herein by reference.
The pending proceedings described in this section and in Legal
Matters in Note 12 in
the notes to the consolidated financial statements under Item 15 of Part IV of this
report, Exhibits, Financial Statement Schedules, involve complex questions of fact and
law and will require the expenditure of significant funds and the diversion of other
resources to prosecute and defend. The results of legal proceedings are inherently
uncertain, and material adverse outcomes are possible. The resolution of intellectual
property litigation may require us to pay damages for past infringement or to obtain a
license under the other partys intellectual property rights that could require one-time
license fees or ongoing royalties, which could adversely impact our product gross
margins in future periods, or could prevent us from manufacturing or selling some of our
products or limit or restrict the type of work that employees involved in such litigation may
perform for us. From time to time we may enter into confidential discussions regarding
the potential settlement of pending litigation or other proceedings; however, there can
be no assurance that any such discussions will occur or will result in a settlement. The
settlement of any pending litigation or other proceeding could require us to incur
substantial settlement payments and costs. In addition, the settlement of any intellectual
property proceeding may require us to grant a license to certain of our intellectual property
rights to the other party under a cross-license
agreement. If any of those events were to occur, our business,
financial condition and results of operations could be materially and
adversely affected.
For an additional discussion of certain risks
associated with legal proceedings, see Risk Factors in Item 1A of this Report.
50
Item 4. Reserved
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Description of Registrants Securities, Price Range of Common Stock and Dividends Declared
Our Class A common stock trades on the New York Stock Exchange under the symbol MRX. The
following table sets forth the high and low sale prices for our Class A common stock on the New
York Stock Exchange for the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS |
|
|
|
HIGH |
|
|
LOW |
|
|
DECLARED |
|
|
YEAR ENDED DECEMBER 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
28.10 |
|
|
$ |
21.15 |
|
|
$ |
0.06 |
|
Second Quarter |
|
|
26.55 |
|
|
|
21.02 |
|
|
|
0.06 |
|
Third Quarter |
|
|
30.29 |
|
|
|
21.28 |
|
|
|
0.06 |
|
Fourth Quarter |
|
|
30.94 |
|
|
|
26.21 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
15.59 |
|
|
$ |
7.85 |
|
|
$ |
0.04 |
|
Second Quarter |
|
|
16.74 |
|
|
|
11.61 |
|
|
|
0.04 |
|
Third Quarter |
|
|
22.40 |
|
|
|
14.70 |
|
|
|
0.04 |
|
Fourth Quarter |
|
|
27.82 |
|
|
|
20.48 |
|
|
|
0.04 |
|
On February 22, 2011, the last reported sale price on the New York Stock Exchange for Medicis
Class A common stock was $27.10 per share. As of such date, there were approximately 171 holders
of record of Class A common stock.
Dividend Policy
We do not have a dividend policy. Prior to July 2003, we had not paid a cash dividend on our
common stock. Since July 2003, we have paid quarterly cash dividends aggregating approximately
$59.8 million on our common stock. In addition, on December 15, 2010, we announced that our Board
of Directors had declared a cash dividend of $0.06 per issued and outstanding share of our Class A
common stock payable on January 31, 2011 to our stockholders of record at the close of business on
January 3, 2011. 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.
Our 1.5% Contingent Convertible Senior Notes due 2033 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. As of December 31,
2010, $181,000 of our 1.5% Contingent Convertible Senior Notes was outstanding.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
The following table provides information as of December 31, 2010, about compensation plans
under which shares of our common stock may be issued to employees, consultants or non-employee
directors of our Board of
51
Directors upon exercise of options, warrants or rights under all of our existing equity
compensation plans. Our existing equity compensation plans include our 2006 Incentive Plan, our
2004, 1998, 1996, 1995 and 1992 Stock Option Plans, in which all of our employees and non-employee
directors are eligible to participate, and our 2002 Stock Option Plan, in which our employees are
eligible to participate but our non-employee directors and officers may not participate.
Restricted stock grants may only be made from our 2006 and 2004 Plans. No further shares are
available for issuance under the 2001 Senior Executive Restricted Stock Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
future issuance under |
|
|
|
|
|
|
|
to be issued upon |
|
|
exercise price |
|
|
equity compensation |
|
|
|
|
|
|
|
exercise of |
|
|
of outstanding |
|
|
plans (excluding |
|
|
|
|
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
securities reflected in |
|
|
|
|
|
|
|
warrants and rights |
|
|
and rights |
|
|
column a) |
|
Plan Category |
|
Date |
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
Plans approved by
stockholders (1) |
|
|
12/31/2010 |
|
|
|
4,166,723 |
|
|
$ |
29.07 |
|
|
|
4,570,807 |
|
Plans not approved
by stockholders (2) |
|
|
12/31/2010 |
|
|
|
2,324,630 |
|
|
$ |
31.70 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
6,491,353 |
|
|
$ |
30.01 |
|
|
|
4,570,807 |
|
|
|
|
(1) |
|
Represents options outstanding and shares available for future issuance under
the 2006 Incentive Plan. Also includes options outstanding under the 2004, 1998, 1996, 1995
and 1992 Stock Option Plans, which have been terminated as to future grants. |
|
(2) |
|
Represents the 2002 Stock Option Plan, which was implemented by our Board
of Directors in November 2002. The 2002 Plan was terminated on May 23, 2006 as part of the
stockholders approval of the 2006 Incentive Plan, and no options can be granted from the 2002
Plan after May 23, 2006. Options previously granted from this plan remain outstanding and
continue to be governed by the rules of the plan. The 2002 Plan was a non-stockholder
approved plan under which non-qualified incentive options have been granted to our employees
and key consultants who are neither our executive officers nor our directors at the time of
grant. The Board of Directors authorized 6,000,000 shares of common stock for issuance under
the 2002 Plan. The option price of the options is the fair market value, defined as the
closing quoted selling price of the common stock on the date of the grant. No option granted
under the 2002 Plan has a term in excess of ten years, and each will be subject to earlier
termination within a specified period following the optionees cessation of service with us.
As of December 31, 2010, the weighted average term to expiration of these options is 2.9
years. All of these options are fully vested as of December 31, 2010. |
As of February 22, 2011, there were 6,463,248 shares subject to issuance upon exercise of
outstanding options or awards under all of our equity compensation plans, at a weighted average
exercise price of $30.00, and with a weighted average remaining life of 2.4 years. In addition, as
of February 22, 2011, there were 1,766,749 unvested shares of restricted stock outstanding under
all of our equity compensation plans. As of February 22, 2011, there were 4,605,793 shares
available for future issuance under those plans.
52
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the year ended
December 31, 2010, 2009, 2008, 2007 and 2006. The data for the year ended December 31, 2010, 2009,
2008, 2007 and 2006 is derived from our audited consolidated financial statements and accompanying
notes. The comparability of the periods presented is impacted by certain product rights and
business acquisitions and dispositions. Gross profit does not include amortization of our
intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
Dec. 31, 2010 |
|
|
Dec. 31, 2009 |
|
|
Dec. 31, 2008 |
|
|
Dec. 31, 2007 |
|
|
Dec. 31, 2006 |
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
691,602 |
|
|
$ |
561,761 |
|
|
$ |
500,977 |
|
|
$ |
441,868 |
|
|
$ |
377,548 |
|
Net contract revenues |
|
|
8,366 |
|
|
|
10,154 |
|
|
|
16,773 |
|
|
|
15,526 |
|
|
|
15,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
699,968 |
|
|
|
571,915 |
|
|
|
517,750 |
|
|
|
457,394 |
|
|
|
393,165 |
|
Gross profit (a) |
|
|
629,987 |
|
|
|
515,082 |
|
|
|
479,036 |
|
|
|
401,284 |
|
|
|
347,059 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
323,074 |
(b) |
|
|
282,218 |
(d) |
|
|
279,307 |
(g) |
|
|
242,633 |
(k) |
|
|
202,457 |
(m) |
Research and development |
|
|
58,282 |
(c) |
|
|
72,497 |
(e) |
|
|
100,377 |
(h) |
|
|
39,428 |
(l) |
|
|
161,837 |
(n) |
Depreciation and amortization |
|
|
29,344 |
|
|
|
29,047 |
|
|
|
27,698 |
|
|
|
24,548 |
|
|
|
23,048 |
|
In-process research and development |
|
|
|
|
|
|
|
|
|
|
30,500 |
(i) |
|
|
|
|
|
|
|
|
Impairment of long-lived assets |
|
|
12,084 |
|
|
|
|
|
|
|
|
|
|
|
4,067 |
|
|
|
52,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
422,784 |
|
|
|
383,762 |
|
|
|
437,882 |
|
|
|
310,676 |
|
|
|
439,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
207,203 |
|
|
|
131,320 |
|
|
|
41,154 |
|
|
|
90,608 |
|
|
|
(92,869 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment expense (income), net |
|
|
118 |
|
|
|
(3,403 |
) |
|
|
(16,722 |
) |
|
|
(28,372 |
) |
|
|
(20,147 |
) |
Other expense (income), net |
|
|
257 |
|
|
|
(867) |
(f) |
|
|
15,470 |
(j) |
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
83,493 |
|
|
|
59,639 |
|
|
|
32,130 |
|
|
|
48,544 |
|
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
123,335 |
|
|
$ |
75,951 |
|
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
2.05 |
|
|
$ |
1.29 |
|
|
$ |
0.18 |
|
|
$ |
1.25 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
1.89 |
|
|
$ |
1.21 |
|
|
$ |
0.18 |
|
|
$ |
1.07 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.24 |
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
58,430 |
|
|
|
57,252 |
|
|
|
56,567 |
|
|
|
55,988 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding |
|
|
64,601 |
|
|
|
63,172 |
|
|
|
56,567 |
|
|
|
71,179 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts exclude $21.7 million, $22.4 million, $21.5 million, $21.6 million, and $20.0
million of amortization expense related to acquired intangible assets for the year ended
December 31, 2010, 2009, 2008, 2007 and 2006, respectively. |
|
(b) |
|
Includes approximately $16.3 million of compensation expense related to stock options,
restricted stock and stock appreciation rights. |
|
(c) |
|
Includes $15.0 million paid to a privately-held U.S. biotechnology company related to a
development agreement, $3.9 million paid to a Medicis partner related to a license agreement
and approximately $1.3 million of compensation expense related to stock options, restricted
stock and stock appreciation rights. |
|
(d) |
|
Includes approximately $18.1 million of compensation expense related to stock options,
restricted stock and stock appreciation rights. |
|
(e) |
|
Includes $12.0 million paid to Impax related to a development agreement, $10.0 million paid
to Revance related to a license agreement, $5.0 million paid to Glenmark related to a
development agreement, $5.0 |
53
|
|
|
|
|
million paid to Perrigo related to a development agreement and approximately $1.1 million of
compensation expense related to stock options, restricted stock and stock appreciation
rights. |
|
(f) |
|
Includes a $2.9 million reduction in the carrying value of our investment in Revance as a
result of a reduction in the net realizable value of the investment using the hypothetical
liquidation at book value approach and a $2.2 million gain on the sale of Medicis Pediatrics
to BioMarin. |
|
(g) |
|
Includes approximately $16.3 million of compensation expense related to stock options and
restricted stock and $4.8 million of lease exit costs related to our previous headquarters
facility. |
|
(h) |
|
Includes $40.0 million paid to Impax related to a development agreement and $25.0 million
paid to Ipsen upon the FDAs acceptance of Ipsens BLA for DYSPORT® and
approximately $0.3 million of compensation expense related to stock options and restricted
stock. |
|
(i) |
|
In-process research and development expense of $30.5 million is related to our acquisition of
LipoSonix. |
|
(j) |
|
Represents a $9.1 million reduction in the carrying value of our investment in Revance as a
result of a reduction in the net realizable value of the investment using the hypothetical
liquidation at book value approach as of December 31, 2008, and a $6.4 million
other-than-temporary impairment loss recognized related to our auction-rate securities
investments. |
|
(k) |
|
Includes approximately $21.0 million of compensation expense related to stock options and
restricted stock, $2.2 million of professional fees related to a strategic collaboration with
Hyperion Therapeutics, Inc. and $1.3 million of professional fees related to a strategic
collaboration agreement with Revance. |
|
(l) |
|
Includes approximately $8.0 million related to our option to acquire Revance or to license
Revances topical product currently under development and approximately $0.1 million of
compensation expense related to stock options and restricted stock. |
|
(m) |
|
Includes approximately $24.5 million of compensation expense related to stock options and
restricted stock, $10.2 million related to a loss contingency for a legal matter and $1.8
million related to a settlement of a dispute related to our merger with Ascent. |
|
(n) |
|
Includes approximately $125.2 million paid to Ipsen related to the DYSPORT®
development and distribution agreement and approximately $1.6 million of compensation expense
related to stock options and restricted stock. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term
investments |
|
$ |
704,182 |
|
|
$ |
528,280 |
|
|
$ |
343,885 |
(a) |
|
$ |
794,680 |
|
|
$ |
554,261 |
(b) |
Working capital |
|
|
627,182 |
|
|
|
434,639 |
|
|
|
307,635 |
|
|
|
422,971 |
|
|
|
323,070 |
|
Long-term investments |
|
|
21,480 |
|
|
|
25,524 |
|
|
|
55,333 |
|
|
|
17,072 |
|
|
|
130,290 |
|
Total assets |
|
|
1,341,824 |
|
|
|
1,172,198 |
|
|
|
973,434 |
|
|
|
1,213,411 |
|
|
|
1,122,720 |
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,910 |
|
|
|
169,155 |
|
Long-term debt |
|
|
169,326 |
|
|
|
169,326 |
|
|
|
169,326 |
|
|
|
169,145 |
|
|
|
283,910 |
|
Stockholders equity |
|
|
827,522 |
|
|
|
695,259 |
|
|
|
603,694 |
|
|
|
583,301 |
|
|
|
475,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
Dec. 31, 2010 |
|
|
Dec. 31, 2009 |
|
|
Dec. 31, 2008 |
|
|
Dec. 31, 2007 |
|
|
Dec. 31, 2006 |
|
|
|
(in thousands) |
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
$ |
178,407 |
(c) |
|
$ |
177,885 |
(d) |
|
$ |
45,770 |
(e) |
|
$ |
158,944 |
(f) |
|
$ |
(40,963) |
(g) |
Net cash (used in) provided by
investing activities |
|
|
(172,293 |
) |
|
|
(62,226 |
) |
|
|
220,091 |
(h) |
|
|
(269,486) |
(i) |
|
|
(216,915 |
) |
Net cash provided by (used in)
financing activites |
|
|
3,574 |
|
|
|
6,953 |
|
|
|
(287,314) |
(j) |
|
|
14,470 |
|
|
|
14,278 |
|
|
|
|
(a) |
|
Decrease in cash, cash equivalents and short-term investments from December 31, 2007 to
December 31, 2008 primarily due to the repurchase of $283.7 million of our 1.5% Contingent
Convertible Senior Notes, our $150.0 million acquisition of LipoSonix, $40.0 million paid
to Impax related to a development |
54
|
|
|
|
|
agreement, $25.0 million paid to Ipsen upon the FDAs acceptance of Ipsens BLA for
DYSPORT®, and payments totaling $87.8 million for income taxes during 2008. |
|
(b) |
|
Decrease in cash, cash equivalents and short-term investments from December 31, 2005 to
December 31, 2006 primarily due to payments totaling $125.2 million made to Ipsen related
to a development and distribution agreement for the development of DYSPORT®,
payment of the $27.4 million contingent payment related to the merger with Ascent, and
payments totaling $35.7 million for income taxes during 2006. In addition, approximately
$130.3 million of our available-for-sale investments have been treated as long-term assets
as of December 31, 2006, based on their expected maturities. |
|
(c) |
|
Net cash provided by operating activities for the year ended December 31, 2010 is net
of $15.0 million paid to a privately-held U.S. biotechnology company related to a
development agreement and $3.9 million paid to a Medicis partner related to a development
agreement. |
|
(d) |
|
Net cash provided by operating activities for the year ended December 31, 2009 is net
of $12.0 million paid to Impax related to a development agreement, $10.0 million paid to
Revance related to a license agreement, $5.0 million paid to Glenmark related to a
development agreement and $5.0 million paid to Perrigo related to a development agreement. |
|
(e) |
|
Net cash provided by operating activities for the year ended December 31, 2008 is net
of $40.0 million paid to Impax related to a development agreement and $25.0 million paid to
Ipsen upon the FDAs acceptance of Ipsens BLA for DYSPORT®. |
|
(f) |
|
Net cash provided by operating activities for the year ended December 31, 2007 is net
of $8.0 million of the $20.0 million payment to Revance, representing the residual value of
the option to acquire Revance or to license Revances topical product currently under
development, included in research and development expense. |
|
(g) |
|
Net cash used in operating activities for the year ended December 31, 2006 included
payments totaling $125.2 million made to Ipsen related to a development and distribution
agreement for the development of DYSPORT®. |
|
(h) |
|
Net cash provided by investing activities for the year ended December 31, 2008 included
$150.0 million of cash used for our acquisition of LipoSonix. |
|
(i) |
|
Net cash used in investing activities for the year ended December 31, 2007 included a
$12.0 million investment in Revance, representing the fair value of the investment in
Revance at the time of the investment. |
|
(j) |
|
Net cash used in financing activities for the year ended December 31, 2008 included the
repurchase of $283.7 million of our 1.5% Contingent Convertible Senior Notes. |
55
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) summarizes the significant factors affecting our results of operations,
liquidity, capital resources and contractual obligations, as well as discusses our critical
accounting policies and estimates. You should read the following discussion and analysis together
with our consolidated financial statements, including the related notes, which are included in this
Form 10-K. Certain information contained in the discussion and analysis set forth below and
elsewhere in this report, including information with respect to our plans and strategy for our
business and related financing, includes forward-looking statements that involve risks and
uncertainties. See Risk Factors in Item 1A of this Form 10-K for a discussion of important
factors that could cause actual results to differ materially from the results described in or
implied by the forward-looking statements in this report. Our MD&A is composed of four major
sections; Executive Summary, Results of Operations, Liquidity and Capital Resources and Critical
Accounting Policies and Estimates.
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 and aesthetic 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, non-invasive body sculpting
technology 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 DYSPORT®,
LOPROX®, PERLANE®, RESTYLANE® and VANOS®. Our
non-dermatological product lines include AMMONUL®, BUPHENYL® (sodium
phenylbutyrate) Powder and Tablets, and the LIPOSONIXTM system. Our non-dermatological
field also includes contract revenues associated with licensing agreements and authorized generic
agreements.
Financial Information About Segments
We operate in one 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 consolidated financial statements included in Item 8 hereof.
Key Aspects of Our Business
We derive a majority of our revenue from our primary products: DYSPORT®,
PERLANE®, RESTYLANE®, SOLODYN®, VANOS® and
ZIANA®. We believe that sales of our primary products will constitute a significant
portion of our revenue for 2011.
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 the leading plastic surgeons in the U.S. We rely on third parties to
manufacture our products (except for the LIPOSONIXTM system).
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
56
forecasts that are the basis for our 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 an
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
75-80% 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 provisions. As a result of certain amendments
made to our distribution services agreement with McKesson, our exclusive U.S. distributor of our
aesthetics products DYSPORT®, PERLANE® and RESTYLANE®, we began
recognizing revenue on these products upon the shipment from McKesson to physicians beginning in
the second quarter of 2009. 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 that 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 wholesale and drugstore
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 chain drugstore 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. In addition, we consistently assess our product mix
and portfolio to promote a high level of profitability and revenues and to ensure that our products
are responsive to consumer tastes and changes to regulatory classifications. As a result, we are
considering actions to rationalize certain of our current product offerings in the next year.
Recent Developments
As described in more detail below, the following significant events and transactions occurred
during 2010, and affected our results of operations, our cash flows and our financial condition:
|
|
FDA approval of RESTYLANE-L® and PERLANE-L®; |
|
|
|
Increase of our quarterly dividend from $0.04 per share to $0.06 per share; |
|
|
|
Notice of Allowance received from the USPTO for patent applications related to SOLODYN®; |
|
|
|
Issuance of a new patent related to SOLODYN®; |
|
|
|
Reexamination Certificate received from the USPTO related to SOLODYN®; |
57
|
|
Settlement Agreement and License Agreement with Mylan; |
|
|
|
FDA approval of new strengths of SOLODYN®; |
|
|
|
Sublicense and Development Agreement and Purchase Option with a privately-held U.S. biotechnology company; and |
|
|
|
Impairment of long-lived assets. |
FDA approval of RESTYLANE-L®
and PERLANE-L®
On January 29, 2010, the FDA approved our dermal fillers RESTYLANE-L® and
PERLANE-L®, which include the addition of 0.3% lidocaine. RESTYLANE-L® is
approved for implantation into the mid to deep dermis, and PERLANE-L® is approved for
implantation into the deep dermis to superficial subcutis, both for the correction of moderate to
severe facial wrinkles and folds, such as nasolabial folds. We began shipping
RESTYLANE-L® and PERLANE-L® during February 2010.
Increase of our quarterly dividend from $0.04 per share to $0.06 per share
On March 10, 2010, we announced that our Board of Directors had declared a cash dividend of
$0.06 per issued and outstanding share of our Class A common stock, payable on April 30, 2010, to
stockholders of record at the close of business on April 1, 2010. This represented a 50% increase
compared to our previous cash dividend of $0.04 per issued and outstanding share of our Class A
common stock. Subsequent cash dividends announced during 2010 in June, September and December were
also at the rate of $0.06 per issued and outstanding share of our Class A common stock.
Notice of Allowance received from the USPTO for patent applications related to SOLODYN®
On April 2, 2010, we received a second Notice of Allowance from the USPTO for our U.S. patent
application No. 11/166,817, entitled Method For The Treatment Of Acne (the 817 Application).
The USPTO initially issued a Notice of Allowance for the 817 Application in October 2009; however,
we filed a Request for Continued Examination with the USPTO in the 817 Application in November
2009 so that the USPTO could consider references filed in the Reexamination of our U.S. Patent No.
5,908,838. The newly allowed claims under the 817 Application cover methods of using a
controlled-release oral dosage form of minocycline to treat acne, including the use of our product
SOLODYN® (minocycline HCl, USP) Extended Release Tablets in all eight currently
available dosage forms.
Issuance of a new patent related to SOLODYN®
On September 8, 2010, the USPTO issued U.S. Patent No. 7,790,705 related to the use of
SOLODYN®. The new patent, entitled Minocycline Oral Dosage Forms for the Treatment of
Acne, relates to the use of dosage forms of SOLODYN® which provide approximately 1
mg/kg dosing based on the body weight of the person, and expires in 2025 or later. Certain claims
of patent are the subject of patent infringement lawsuits filed by the Company.
Reexamination Certificate received from the USPTO related to SOLODYN®
On June 1, 2010, we received a Reexamination Certificate issued by the USPTO in connection
with the USPTOs reexamination of U.S. Patent No. 5,908,838 related to our acne medication
SOLODYN®. The Reexamination Certificate is directed to patentable claims 3, 4, 12, and
13, as well as new claims 19-34. The USPTO determined that the claims are patentable, including
over all the cited prior art. Certain claims of the patent are the subject of patent infringement
lawsuits filed by the Company.
Settlement Agreement and License Agreement with Mylan
On July 22, 2010, we entered into a Settlement Agreement and a License Agreement with Mylan
Inc. and certain of its affiliates, as applicable, including Matrix Laboratories Ltd. and Mylan
Pharmaceuticals Inc. (collectively, Mylan) whereby we and Mylan agreed to terminate all legal
disputes between us relating to SOLODYN®. In addition, Mylan confirmed that our patents
relating to SOLODYN® are valid and enforceable and cover Mylans activities relating to
its generic versions of SOLODYN® under Abbreviated New Drug Application (ANDA) No.
90-911 and ANDA No. 20-1467. Mylan also acknowledged that any prior sales of its generic
58
versions of SOLODYN® were not authorized by us and further agreed to be permanently
enjoined from any further distribution of generic versions of SOLODYN®.
Under the License Agreement, we granted to Mylan a license to make and sell its generic
versions of SOLODYN® in 45mg, 90mg and 135mg strengths under the SOLODYN®
intellectual property rights belonging to us commencing in November 2011, or earlier under certain
conditions. We also granted to Mylan a license to make and sell generic versions of
SOLODYN® in 65mg and 115mg strengths under our SOLODYN® intellectual property
rights upon certain conditions, but not upon any specified date in the future. The License
Agreement provides that Mylan will be required to pay us royalties based on sales of Mylans
generic versions of SOLODYN® pursuant to the foregoing licenses.
FDA approval of new strengths of SOLODYN®
On August 30, 2010, we announced that the FDA had approved additional strengths of
SOLODYN® in 55mg, 80mg and 105mg 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 eight dosages:
45mg, 55mg, 65mg, 80mg, 90mg, 105mg, 115mg and 135mg. Limited shipment of the newly-approved 55mg,
80mg and 105mg products to wholesalers began during September 2010.
Sublicense and Development Agreement and Purchase Option with a privately-held U.S. biotechnology
company
On September 10, 2010, we entered into a sublicense and development agreement with a
privately-held U.S. biotechnology company to develop an agent for specific dermatological
conditions in the Americas and Europe and a purchase option to acquire the privately-held U.S.
biotechnology company.
Under the terms of the agreements, we paid the privately-held U.S. biotechnology company $5.0
million in connection with the execution of the agreement, and will pay additional potential
milestone payments totaling approximately $100.5 million upon successful completion of certain
clinical, regulatory and commercial milestones. During the three months ended December 31, 2010, a
development milestone was achieved, and we made a $10.0 million payment to the privately-held U.S.
biotechnology company pursuant to the development agreement. The initial $5.0 million payment and
the $10.0 million milestone payment were recognized as research and development expense during the
year ended December 31, 2010.
Impairment of long-lived assets
We assess the potential impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable. Factors that
we consider in deciding when to perform an impairment review include significant under-performance
of a product line in relation to expectations, significant negative industry or economic trends and
significant changes or planned changes in our use of the assets. Recoverability of assets that
will continue to be used in our operations is measured by comparing the carrying amount of the
asset grouping to our estimate of the related total future net cash flows. If an asset carrying
value is not recoverable through the related cash flows, the asset is considered to be impaired.
The impairment is measured by the difference between the asset groupings carrying amount and its
present value of anticipated cash flows, based on the best information available, including market
prices or discounted cash flow analysis. If the assets determined to be impaired are to be held
and used, we recognize an impairment loss through a charge to operating results to the extent the
present value of anticipated net cash flows attributable to the asset are less than the assets
carrying value. When it is determined that the useful life of assets are shorter than originally
estimated, and there are sufficient cash flows to support the carrying value of the assets, we will
accelerate the rate of amortization charges in order to fully amortize the assets over their new
shorter useful lives.
59
During the year ended December 31, 2010, long-lived assets related to certain of our products
were determined to be impaired based on our analysis of the long-lived assets carrying value and
projected future cash flows. As a result of the impairment analysis, we recorded a write-down of
approximately $12.1 million related to these long-lived assets. This write-down included the
following (in thousands):
|
|
|
|
|
Intangible assets related to LipoSonixTM |
|
$ |
7,725 |
|
Property and equipment related to LipoSonixTM |
|
|
2,066 |
|
Intangible asset related to non-primary products |
|
|
2,293 |
|
|
|
|
|
|
|
$ |
12,084 |
|
|
|
|
|
Factors affecting the future cash flows of the LipoSonixTM long-lived assets
include the current regulatory and commercial capital equipment environment, which have included
delays in the regulatory approval process and competitive products entering the market. The $7.7
million write-down of intangible assets related to LipoSonixTM represented the full
carrying value of the intangible assets as of December 31, 2010. Quarterly amortization expense
related to these intangible assets prior to the write-down was $167,500. The $2.1 million
write-down of property and equipment related to LipoSonix represented the full carrying value of
the assets as of December 31, 2010. Quarterly depreciation expense related to these assets prior
to the write-down was $138,300.
Factors affecting the future cash flows of the intangible asset related to certain non-primary
products include the planned discontinuation of the products, which are not significant components
of our operations. In addition, as a result of the impairment analysis, the remaining amortizable
life of the intangible asset was reduced to five months. The intangible asset became fully
amortized on February 28, 2011.
Subsequent Events
On February 9, 2011, we entered into a research and development agreement with Anacor for the
discovery and development of boron-based small molecule compounds directed against a target for the
potential treatment of acne. Under the terms of the agreement, we paid Anacor $7.0 million in
connection with the execution of the agreement, and will pay up to $153.0 million upon the
achievement of certain research, development, regulatory and commercial milestones, as well as
royalties on sales by us. Anacor will be responsible for discovering and conducting the early
development of product candidates which utilize Anacors proprietary boron chemistry platform,
while we will have an option to obtain an exclusive license for products covered by the agreement.
On
February 24, 2011, we entered into a Settlement Agreement (Teva Settlement
Agreement) with Teva. Under the terms of the Teva Settlement Agreement, we agreed to
grant to Teva a future license to make and sell our generic versions
of
SOLODYN® in 65mg and
115mg strengths under the SOLODYN® intellectual property rights belonging to us, with the
license grant effective in February 2018, or earlier under certain conditions. We also agreed to
grant to Teva a future license to make and sell generic versions of SOLODYN® in 55mg, 80mg
and 105mg strengths under our SOLODYN® intellectual property rights, with the license grant
effective in February 2019, or earlier under certain conditions. The Teva Settlement Agreement
provides that Teva will be required to pay us royalties based on sales of Tevas generic
SOLODYN® products pursuant to the foregoing licenses. Pursuant to the Teva Settlement
Agreement, the companies agreed to terminate all legal disputes between them relating to
SOLODYN®. In addition, Teva confirmed that our patents relating to SOLODYN® are valid
and enforceable, and cover Tevas activities relating to Tevas generic SOLODYN® products
under ANDA No. 65-485 and any amendments and supplements thereto. Teva also agreed to be
permanently enjoined from any distribution of generic SOLODYN® products in the U.S. except
as described above. The Maryland court subsequently entered a permanent injunction against any
infringement by Teva.
On February 25, 2011, we announced that as a result of our strategic planning process and the
current regulatory and commercial capital equipment environment, we have determined to explore
strategic alternatives for our LipoSonix business including, but not limited to, the
sale of the stand-alone business. We have engaged Deutsche Bank to assist us in our
exploration of strategic alternatives for LipoSonix. As a result of this decision, we will
classify the LipoSonix business as a discontinued operation for financial statement reporting
purposes beginning during the three months ended March 31, 2011.
60
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (d) |
|
|
90.0 |
|
|
|
90.1 |
|
|
|
92.5 |
|
Operating expenses |
|
|
60.4 |
(a) |
|
|
67.1 |
(b) |
|
|
84.6 |
(c) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
29.6 |
|
|
|
23.0 |
|
|
|
7.9 |
|
Other income (expense), net |
|
|
|
|
|
|
0.2 |
|
|
|
(3.0 |
) |
Interest and investment
(expense) income, net |
|
|
|
|
|
|
0.6 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
29.6 |
|
|
|
23.8 |
|
|
|
8.2 |
|
Income tax expense |
|
|
(11.9 |
) |
|
|
(10.4 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
17.7 |
% |
|
|
13.4 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in operating expenses is $15.0 million (2.1% of net revenues) paid to a
privately-held U.S. biotechnology company related to a product development agreement, $3.9
million (0.6% of net revenues) paid to a Medicis partner related to a product development
agreement, $9.8 million (1.4% of net revenues) related to the write-down of long-lived assets
related to LipoSonixTM, $2.3 million (0.3% of net revenues) related to the
write-down of an intangible asset related to certain non-primary products and $17.6 million
(2.5% of net revenues) of compensation expense related to stock options, restricted stock and
stock appreciation rights. |
|
(b) |
|
Included in operating expenses is $12.0 million (2.1% of net revenues) paid to Impax related
to a product development agreement, $10.0 million (1.7% of net revenues) paid to Revance
related to a product development agreement, $5.3 million (0.9% of net revenues) paid to
Glenmark related to a product development agreement and two license and settlement agreements,
$5.0 million (0.9% of net revenues) paid to Perrigo related to a product development agreement
and $19.2 million (3.4% of net revenues) of compensation expense related to stock options,
restricted stock and stock appreciation rights. |
|
(c) |
|
Included in operating expenses is $40.0 million (7.8% of net revenues) paid to Impax related
to a development agreement, $30.5 million (5.9% of net revenues) of acquired
in-process research and development expense related to our acquisition of LipoSonix, $25.0
million (4.9% of net revenues) paid to Ipsen upon the FDAs acceptance of Ipsens BLA for
DYSPORT®, $16.6 million (3.2% of net revenues) of compensation expense related to
stock options and restricted stock and $4.8 million (0.9% of net revenues) of lease exit costs
related to our previous headquarters facility. |
|
(d) |
|
Gross profit does not include amortization of the related intangibles as such expense is
included in operating expenses. |
61
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net Revenues
The following table sets forth our net revenues for the year ended December 31, 2010 and the
year ended December 31, 2009, along with the percentage of net revenues and percentage point change
for each of our product categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Net product revenues |
|
$ |
691.6 |
|
|
$ |
561.7 |
|
|
$ |
129.9 |
|
|
|
23.1 |
% |
Net contract revenues |
|
|
8.4 |
|
|
|
10.2 |
|
|
|
(1.8 |
) |
|
|
(17.6) |
% |
|
|
|
Total net revenues |
|
$ |
700.0 |
|
|
$ |
571.9 |
|
|
$ |
128.1 |
|
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Acne and acne-related dermatological products |
|
$ |
482.4 |
|
|
$ |
398.8 |
|
|
$ |
83.6 |
|
|
|
21.0 |
% |
Non-acne dermatological products |
|
|
175.0 |
|
|
|
133.6 |
|
|
|
41.4 |
|
|
|
31.0 |
% |
Non-dermatological products (including contract revenues) |
|
|
42.6 |
|
|
|
39.5 |
|
|
|
3.1 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
700.0 |
|
|
$ |
571.9 |
|
|
$ |
128.1 |
|
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Acne and acne-related dermatological products |
|
|
68.9 |
% |
|
|
69.7 |
% |
|
|
(0.8) |
% |
Non-acne dermatological products |
|
|
25.0 |
% |
|
|
23.4 |
% |
|
|
1.6 |
% |
Non-dermatological products (including contract revenues) |
|
|
6.1 |
% |
|
|
6.9 |
% |
|
|
(0.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Net revenues associated with our acne and acne-related dermatological products increased by
$83.6 million, or 21.0%, during 2010 as compared to 2009 primarily as a result of increased sales
of SOLODYN® and ZIANA®, both of which generated strong prescription growth.
Net revenues of SOLODYN® during 2009 were negatively impacted by the unauthorized
one-day launch of Tevas generic versions of SOLODYN® units that were sold into the
distribution channel prior to the consummation of a Settlement Agreement with us on March 18, 2009.
These units caused wholesalers to reduce ordering levels of SOLODYN® and caused us to
increase our reserves for sales returns and consumer rebates during the first quarter of 2009.
During the third quarter of 2010, we had initial sales of new 55mg, 80mg and 105mg strengths of
SOLODYN® after they were approved by the FDA on August 27, 2010, and during the third
quarter of 2009 we launched new 65mg and 115mg strengths of SOLODYN® after they were
approved by the FDA.
Net revenues associated with our non-acne dermatological products increased by $41.4 million,
or 31.0% during 2010 as compared to 2009, primarily due to sales of DYSPORT®, which was
launched in June 2009, and increased sales of RESTYLANE® and VANOS®,
partially offset by a decrease in sales of LOPROX®, which was negatively impacted by
generic competition. RESTYLANE-L® and PERLANE-L® were launched during
February 2010 following FDA approval on January 29, 2010. Beginning in the second quarter of 2009,
as a result of certain amendments made to our distribution services agreement with McKesson, our
exclusive U.S. distributor of our aesthetics products RESTYLANE®, PERLANE®
and DYSPORT®, we began recognizing revenue on these products
62
upon the shipment from McKesson to physicians. As a result, aesthetic product net
revenues were negatively impacted during the first quarter of 2009 in anticipation of this change
in revenue recognition.
Net revenues associated with our non-dermatological products increased by $3.1 million, or
7.8%, during 2010 as compared to 2009, primarily due to an increase in sales of
BUPHENYL®.
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 2010 and 2009 was approximately $21.7 million and $22.4 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 2010 and 2009, along with the percentage
of net revenues represented by such gross profit (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Gross profit |
|
$ |
630.0 |
|
|
$ |
515.1 |
|
|
$ |
114.9 |
|
|
|
22.3 |
% |
% of net revenues |
|
|
90.0 |
% |
|
|
90.1 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during 2010 as compared to 2009 is primarily due to the $128.1
million increase in net revenues.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for 2010 and
2009, along with the percentage of net revenues represented by selling, general and administrative
expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Selling, general and administrative |
|
$ |
323.1 |
|
|
$ |
282.2 |
|
|
$ |
40.9 |
|
|
|
14.5 |
% |
% of net revenues |
|
|
46.2 |
% |
|
|
49.3 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
16.3 |
|
|
$ |
18.1 |
|
|
$ |
(1.8 |
) |
|
|
(9.9) |
% |
Selling, general and administrative expenses increased $40.9 million, or 14.5%, during 2010 as
compared to 2009, but decreased as a percentage of net revenues from 49.3% during 2009 to 46.2%
during 2010. Included in this increase was a $16.2 million increase in personnel costs, primarily
due to an increase in the number of employees from 620 as of December 31, 2009, to 685 as of
December 31, 2010, the effect of the annual salary increase that occurred during February 2010 and
$2.9 million of severance expense related to the departure of an executive employee. Also included
in the $40.9 million increase from 2009 was a $12.9 million increase in professional and consulting
costs, a $9.0 million increase in promotion expenses, primarily related to the promotion of
DYSPORT® and an increase of $2.8 million of other selling, general and administrative
costs. The decrease of selling, general and administrative expenses as a percentage of net
revenues during 2010 as compared to 2009 was primarily due to the $128.1 million increase in net
revenues.
63
Research and Development Expenses
The following table sets forth our research and development expenses for 2010 and 2009 (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Research and development |
|
$ |
58.3 |
|
|
$ |
72.5 |
|
|
$ |
(14.2 |
) |
|
|
(19.6) |
% |
Charges included in research
and development |
|
$ |
18.9 |
|
|
$ |
32.5 |
|
|
$ |
(13.6 |
) |
|
|
(41.8) |
% |
Share-based compensation
expense included in
research and development |
|
$ |
1.3 |
|
|
$ |
1.1 |
|
|
$ |
0.2 |
|
|
|
18.2 |
% |
Included in research and development expenses for 2010 was $15.0 million (in aggregate) of
up-front and milestone payments to a privately-held U.S. biotechnology company related to a product
development agreement and $3.9 million (in aggregate) of milestone payments to a Medicis partner
related to a product development agreement. Included in research and development expenses for 2009
was a $10.0 million up-front payment to Revance related to a product development agreement, $12.0
million (in aggregate) of milestone payments to Impax related to a product development agreement, a
$5.0 million up-front payment to Glenmark related to a product development agreement, $5.0 million
(in aggregate) of up-front and milestone payments to Perrigo related to a product development
agreement and a $0.5 million milestone payment made to a U.S. company related to a product
development agreement. 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 2010 increased $0.3 million, or 1.0%, to $29.3
million from $29.0 million during 2009. An increase related to amortization of the $75.0 million
milestone payment made to Ipsen during the second quarter of 2009 upon the FDAs approval of
DYSPORT®, which was capitalized as an intangible asset, was offset by the amortization
expense related to intangible assets related to Medicis Pediatrics, Inc., which was sold to
BioMarin Pharmaceutical Inc. during the second quarter of 2009, not being incurred during 2010.
Impairment of Long-lived Assets
During the year ended December 31, 2010, long-lived assets related to certain of our products
were determined to be impaired based on our analysis of the long-lived assets carrying value and
projected future cash flows. As a result of the impairment analysis, we recorded a write-down of
approximately $12.1 million related to these long-lived assets. This write-down included the
following (in thousands):
|
|
|
|
|
Intangible assets related to LipoSonixTM |
|
$ |
7,725 |
|
Property and equipment related to LipoSonixTM |
|
|
2,066 |
|
Intangible asset related to non-primary products |
|
|
2,293 |
|
|
|
|
|
|
|
$ |
12,084 |
|
|
|
|
|
Factors affecting the future cash flows of the LipoSonixTM long-lived assets
include the current regulatory and commercial capital equipment environment, which have included
delays in the regulatory approval process and competitive products entering the market. The $7.7
million write-down of intangible assets related to LipoSonixTM represented the full
carrying value of the intangible assets as of December 31, 2010. The $2.1 million write-down of
property and equipment related to LipoSonix represented the full carrying value of the assets as of
December 31, 2010.
Factors affecting the future cash flows of the intangible asset related to certain non-primary
products include the planned discontinuation of the products, which are not significant components
of our operations.
64
Interest and Investment Income
Interest and investment income during 2010 decreased $3.5 million, or 46.0%, to $4.1 million
from $7.6 million during 2009, due to a decrease in the interest rates achieved by our invested
funds during 2010.
Interest Expense
Interest expense during each of 2010 and 2009 was $4.2 million. Our interest expense during
2010 and 2009 consisted of interest expense on our Old Notes, which accrue interest at 2.5% per
annum, and our New Notes, which accrue interest at 1.5% per annum. See Note 11, Contingent
Convertible Senior Notes in the notes to the consolidated financial statements under Item 15 of
Part IV of this report, Exhibits, Financial Statement Schedules for further discussion on the Old
Notes and New Notes.
Other Expense (Income), net
Other expense of $0.3 million recognized during 2010 represented an other-than-temporary
impairment on an asset-backed security investment.
Other income, net, of $0.9 million recognized during 2009 primarily represented a $2.2 million
gain on the sale of Medicis Pediatrics to BioMarin, which closed during June 2009 and a $1.5
million gain on the sale of certain auction rate floating securities, partially offset by 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. The $1.5 million gain on the sale of certain auction rate
floating securities was the result of a transaction whereby the broker through which we purchased
auction rate floating securities agreed to repurchase from us three auction rate floating
securities with an aggregate par value of $7.0 million, at par. The adjusted basis of these
securities was $5.5 million, in aggregate, as a result of an other-than-temporary impairment loss
of $1.5 million recorded during the year ended December 31, 2008. The realized gain of $1.5
million was recognized as other income during 2009.
Income Tax Expense
The following table sets forth our income tax expense and the resulting effective tax rate
stated as a percentage of pre-tax income for 2010 and 2009 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Income tax expense |
|
$ |
83.5 |
|
|
$ |
59.6 |
|
|
$ |
23.9 |
|
|
|
40.1 |
% |
Effective tax rate |
|
|
40.4 |
% |
|
|
44.0 |
% |
|
|
|
|
|
|
|
|
The effective rate for 2010 reflects the impact of the non-deductibility of $15.0 million (in
aggregate) of up-front and milestone payments associated with a product development agreement with
a privately-held U.S. biotechnology company. The effective tax rate for 2009 reflects a $9.0
million discrete tax expense due to the taxable gain on the sale of Medicis Pediatrics.
65
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Revenues
The following table sets forth our net revenues for the year ended December 31, 2009 and the
year ended December 31, 2008, along with the percentage of net revenues and percentage point change
for each of our product categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
Net product revenues |
|
$ |
561.7 |
|
|
$ |
501.0 |
|
|
$ |
60.7 |
|
|
|
12.1 |
% |
Net contract revenues |
|
|
10.2 |
|
|
|
16.8 |
|
|
|
(6.6 |
) |
|
|
(39.3) |
% |
|
|
|
Total net revenues |
|
$ |
571.9 |
|
|
$ |
517.8 |
|
|
$ |
54.1 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
Acne and acne-related
dermatological products |
|
$ |
398.8 |
|
|
$ |
325.0 |
|
|
$ |
73.8 |
|
|
|
22.7 |
% |
Non-acne dermatological
products |
|
|
133.6 |
|
|
|
148.0 |
|
|
|
(14.4 |
) |
|
|
(9.7) |
% |
Non-dermatological products
(including contract revenues) |
|
|
39.5 |
|
|
|
44.8 |
|
|
|
(5.3 |
) |
|
|
(11.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
571.9 |
|
|
$ |
517.8 |
|
|
$ |
54.1 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Acne and acne-related
dermatological products |
|
|
69.7 |
% |
|
|
62.8 |
% |
|
|
6.9 |
% |
Non-acne dermatological
products |
|
|
23.4 |
% |
|
|
28.6 |
% |
|
|
(5.2) |
% |
Non-dermatological products
(including contract revenues) |
|
|
6.9 |
% |
|
|
8.6 |
% |
|
|
(1.7) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
% |
|
|
|
Net revenues associated with our acne and acne-related dermatological products increased by
$73.8 million, or 22.7%, during 2009 as compared to 2008 primarily as a result of increased sales
of SOLODYN®. The increased sales of SOLODYN® were primarily generated by
strong prescription growth, partially offset by the negative impact of units of Tevas and Sandoz
respective unauthorized generic SOLODYN® products that were sold into the distribution
channel prior to the consummation of settlement agreements with us on March 18, 2009, and August
18, 2009, respectively. In addition, during the third quarter of 2009 we launched new 65mg and
115mg strengths of SOLODYN® after they were approved by the FDA.
Net revenues associated with our non-acne dermatological products decreased as a percentage of
net revenues, and decreased in net dollars by $14.4 million, or 9.7%, during 2009 as compared to
2008, primarily due to decreased sales of RESTYLANE® and PERLANE®, partially
offset by the initial sales of DYSPORT®, which was launched in June 2009. As a result
of certain modifications made to our distribution services agreement with McKesson, our exclusive
U.S. distributor of our aesthetics products DYSPORT®, PERLANE® and
RESTYLANE®, we began recognizing revenue on these products upon the shipment from
McKesson to physicians beginning in the second quarter of 2009.
Net revenues associated with our non-dermatological products decreased by $5.3 million, or
11.8%, during 2009 as compared to 2008, primarily due to a decrease in contract revenues.
66
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 2009 and 2008 was approximately $22.4 million and $21.5 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 2009 and 2008, along with the percentage
of net revenues represented by such gross profit (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
Gross profit |
|
$ |
515.1 |
|
|
$ |
479.0 |
|
|
$ |
36.1 |
|
|
|
7.5 |
% |
% of net revenues |
|
|
90.1 |
% |
|
|
92.5 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during 2009, compared to 2008, was due to the increase in our net
revenues, while the decrease in gross profit as a percentage of net revenues was primarily due to
the different mix of products sold during 2009 as compared to 2008, including the impact of the
launch of DYSPORT® during the second quarter of 2009, which has a lower gross profit
margin than most of our other products, and the decrease in contract revenues. In addition, gross
margin for 2009 included a charge of $4.8 million associated with an increase in our inventory
reserve during 2009, due to an increase in the amount of inventory projected not to be sold by
expiry dates.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for 2009 and
2008, along with the percentage of net revenues represented by selling, general and administrative
expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
Selling, general and administrative |
|
$ |
282.2 |
|
|
$ |
279.3 |
|
|
$ |
2.9 |
|
|
|
1.0 |
% |
% of net revenues |
|
|
49.3 |
% |
|
|
53.9 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative expense |
|
$ |
18.1 |
|
|
$ |
16.3 |
|
|
$ |
1.8 |
|
|
|
11.0 |
% |
The $2.9 million increase in selling, general and administrative expenses during 2009 as
compared to 2008 was attributable to approximately $10.3 million of increased personnel costs,
primarily related to an increase in the number of employees from 587 as of December 31, 2008, to
620 as of December 31, 2009, and the effect of the annual salary increase that occurred during
February 2009, and $8.5 million of increased promotion expenses, primarily due to the launch of
DYSPORT® during the second quarter of 2009, partially offset by $9.4 million of
decreased professional and consulting expenses, $4.8 million related to a lease retirement
obligation recorded during 2008 and a net reduction of $1.7 million of other selling, general and
administrative costs incurred during 2009. Professional and consulting expenses incurred during
2008 included costs related to the restatement of our 2007 Form 10-K and our Form 10-Qs for the
first and second quarters of 2008 and the implementation of our new enterprise resource planning
(ERP) system. The decrease of selling, general and administrative expenses as a percentage of net
revenues during 2009 as compared to 2008 was primarily due to the $54.1 million increase in net
revenues.
67
Research and Development Expenses
The following table sets forth our research and development expenses for 2009 and 2008 (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
Research and development |
|
$ |
72.5 |
|
|
$ |
100.4 |
|
|
$ |
(27.9 |
) |
|
|
(27.8) |
% |
Charges included in research
and development |
|
$ |
32.5 |
|
|
$ |
65.0 |
|
|
$ |
(32.5 |
) |
|
|
(50.0) |
% |
Share-based compensation
expense included in
research and development |
|
$ |
1.1 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
|
|
266.7 |
% |
Included in research and development expenses for 2009 was a $10.0 million up-front payment to
Revance related to a product development agreement, $12.0 million (in aggregate) of milestone
payments to Impax related to a product development agreement, a $5.0 million up-front payment to
Glenmark related to a product development agreement, $5.0 million (in aggregate) of up-front and
milestone payments to Perrigo related to a product development agreement and a $0.5 million
milestone payment made to a U.S. company related to a product development agreement. Included in
research and development expenses for 2008 was a $40.0 million up-front payment to Impax related to
a development agreement and a $25.0 million milestone payment to Ipsen, upon the FDAs acceptance
of Ipsens BLA for DYSPORT®, 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 2009 increased $1.3 million, or 4.9%, to $29.0
million from $27.7 million during 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 DYSPORT®, which was capitalized as an intangible asset, and depreciation
incurred related to our new headquarters facility.
In-Process Research and Development Expense
On July 1, 2008, we acquired LipoSonix, a medical device company developing non-invasive body
sculpting technology. As part of the acquisition, we recorded a $30.5 million charge for acquired
in-process research and development during the third quarter of 2008. No income tax benefit was
recognized related to this charge.
Interest and Investment Income
Interest and investment income during 2009 decreased $15.8 million, or 67.4%, to $7.6 million
from $23.4 million during 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
2009.
Interest Expense
Interest expense during 2009 decreased $2.4 million, to $4.2 million during 2009 from
$6.7 million during 2008. Our interest expense during 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 2009 as compared to 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 11, Contingent Convertible Senior Notes in the notes to the consolidated financial statements under Item 15 of Part IV of this report, Exhibits, Financial Statement
Schedules for further discussion on the Old Notes and New Notes.
68
Other (Income) Expense, net
Other income, net, of $0.9 million recognized during 2009 primarily represented a $2.2 million
gain on the sale of Medicis Pediatrics to BioMarin, which closed during June 2009 and a $1.5
million gain on the sale of certain auction rate floating securities, partially offset by 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. The $1.5 million gain on the sale of certain auction rate
floating securities was the result of a transaction whereby the broker through which we purchased
auction rate floating securities agreed to repurchase from us three auction rate floating
securities with an aggregate par value of $7.0 million, at par. The adjusted basis of these
securities was $5.5 million, in aggregate, as a result of an other-than-temporary impairment loss
of $1.5 million recorded during the year ended December 31, 2008. The realized gain of $1.5
million was recognized as other income during 2009.
Other expense of $15.5 million recognized during 2008 represented a $9.1 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
December 31, 2008, and a $6.4 million other-than-temporary impairment loss recognized related to
our auction-rate securities investments. $1.5 million of this impairment loss was recognized as a
gain during 2009 upon the sale, at par, of certain auction rate floating securities, as discussed
above.
Income Tax Expense
The following table sets forth our income tax expense and the resulting effective tax rate
stated as a percentage of pre-tax income for 2009 and 2008 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
Income tax expense |
|
$ |
59.6 |
|
|
$ |
32.1 |
|
|
$ |
27.5 |
|
|
|
85.7 |
% |
Effective tax rate |
|
|
44.0 |
% |
|
|
75.8 |
% |
|
|
|
|
|
|
|
|
The effective tax rate for 2009 reflects a $9.0 million discrete tax expense due to the
taxable gain on the sale of Medicis Pediatrics. Our effective tax rate for 2008 included the
impact of no tax benefit being recorded on the charge associated with the reduction in carrying
value of our investment in Revance or on the in-process research and development charge related to
our investment in LipoSonix. As of December 31, 2009, the cumulative $21.0 million reduction in
the carrying value of the Revance investment is currently an unrealized loss for income tax
purposes. We will not be able to determine the character of the loss until we exercise or fail to
exercise our option. A realized loss characterized as a capital loss can only be utilized to
offset capital gains. We recorded a valuation allowance against the deferred tax asset associated
with this unrealized tax loss to reduce the carrying value to $0, which is the amount that we
believe is more likely than not to be realized.
69
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the year ended December 31,
2010 and 2009, and selected balance sheet components as of December 31, 2010 and 2009 (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
178.4 |
|
|
$ |
177.9 |
|
|
$ |
0.5 |
|
|
|
0.3 |
% |
Investing activities |
|
|
(172.3 |
) |
|
|
(62.2 |
) |
|
|
(110.1 |
) |
|
|
177.0 |
% |
Financing activities |
|
|
3.6 |
|
|
|
7.0 |
|
|
|
(3.4 |
) |
|
|
(48.6) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2010 |
|
|
Dec. 31, 2009 |
|
|
$ Change |
|
|
% Change |
|
|
Cash, cash equivalents,
and short-term investments |
|
$ |
704.2 |
|
|
$ |
528.3 |
|
|
$ |
175.9 |
|
|
|
33.3 |
% |
Working capital |
|
|
627.2 |
|
|
|
434.6 |
|
|
|
192.6 |
|
|
|
44.3 |
% |
Long-term investments |
|
|
21.5 |
|
|
|
25.5 |
|
|
|
(4.0 |
) |
|
|
(15.7) |
% |
2.5% contingent convertible
senior notes due 2032 |
|
|
169.1 |
|
|
|
169.1 |
|
|
|
|
|
|
|
|
% |
1.5% contingent convertible
senior notes due 2033 |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
% |
Working Capital
Working capital as of December 31, 2010 and 2009, consisted of the following (dollar amounts
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2010 |
|
|
Dec. 31, 2009 |
|
|
$ Change |
|
|
% Change |
|
|
Cash, cash equivalents,
and short-term investments |
|
$ |
704.2 |
|
|
$ |
528.3 |
|
|
$ |
175.9 |
|
|
|
33.3 |
% |
Accounts receivable, net |
|
|
130.8 |
|
|
|
95.2 |
|
|
|
35.6 |
|
|
|
37.4 |
% |
Inventories, net |
|
|
39.8 |
|
|
|
26.0 |
|
|
|
13.8 |
|
|
|
53.1 |
% |
Deferred tax assets, net |
|
|
76.7 |
|
|
|
66.3 |
|
|
|
10.4 |
|
|
|
15.7 |
% |
Other current assets |
|
|
15.6 |
|
|
|
16.5 |
|
|
|
(0.9 |
) |
|
|
(5.5) |
% |
|
|
|
Total current assets |
|
|
967.1 |
|
|
|
732.3 |
|
|
|
234.8 |
|
|
|
32.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
42.8 |
|
|
|
44.2 |
|
|
|
(1.4 |
) |
|
|
(3.2) |
% |
Reserve for sales returns |
|
|
60.7 |
|
|
|
48.0 |
|
|
|
12.7 |
|
|
|
26.5 |
% |
Accrued consumer rebate and
loyalty programs |
|
|
101.7 |
|
|
|
73.3 |
|
|
|
28.4 |
|
|
|
38.7 |
% |
Managed care and Medicaid
reserves |
|
|
49.4 |
|
|
|
47.1 |
|
|
|
2.3 |
|
|
|
4.9 |
% |
Income taxes payable |
|
|
4.6 |
|
|
|
16.7 |
|
|
|
(12.1 |
) |
|
|
(72.5) |
% |
Other current liabilities |
|
|
80.7 |
|
|
|
68.4 |
|
|
|
12.3 |
|
|
|
18.0 |
% |
|
|
|
Total current liabilities |
|
|
339.9 |
|
|
|
297.7 |
|
|
|
42.2 |
|
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
627.2 |
|
|
$ |
434.6 |
|
|
$ |
192.6 |
|
|
|
44.3 |
% |
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $704.2 million and working capital
of $627.2 million at December 31, 2010, as compared to $528.3 million and $434.6 million,
respectively, at December 31, 2009. The increases were primarily due to the generation of $178.4
million of operating cash flow during 2010.
70
Accounts receivable, net, increased $35.6 million, or 37.4%, from $95.2 million at
December 31, 2009 to $130.8 million at December 31, 2010. The increase was primarily due to a
$37.1 million increase in gross sales during the month of December 2010 as compared to the month of
December 2009. As our standard payment terms are 30 days, orders that occur during the last month
of a quarter are typically not due for payment until after the end of the quarter. Gross sales
during the month of December 2010 were $140.4 million, or 44.7% of the total gross sales for the
fourth quarter of 2010, as compared to gross sales during the month of December 2009 of $103.3
million, or 35.9% of total gross sales for the fourth quarter of 2009. Days sales outstanding,
calculated as accounts receivable, net, as of the end of the reporting period, divided by total
gross sales for the quarter, multiplied by the number of days in the quarter, was 38 days as of
December 31, 2010 as compared to 30 days as of December 31, 2009. The increase in days sales
outstanding was primarily due to the timing of orders placed by customers during the respective
quarters. Although more of the customers purchases during the fourth quarter of 2010 occurred
during the last month of the quarter as compared to the fourth quarter of 2009, their total
purchases for the fourth quarter of 2010 were consistent with previous quarters. We sell our
products primarily to major wholesalers and retail pharmacy chains. 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 also defer the recognition of revenue for
certain sales of inventory into the distribution channel that are in excess of eight (8) weeks of
projected demand, and we defer the recognition of revenue of our aesthetics products
DYSPORT®, PERLANE® and RESTYLANE®, until our exclusive
U.S.
distributor, McKesson, ships these products to physicians. There has not been a significant
increase in inventories in the distribution channel during the year ended December 31, 2010.
Inventories, net, increased $13.8 million, or 53.1% from $26.0 million at December 31, 2009 to
$39.8 million at December 31, 2010. Raw materials inventory increased $9.9 million, from $7.5
million at December 31, 2009 to $17.4 million at December 31, 2010, primarily due to a planned
increase to a six-month manufacturing supply from a three-month supply of raw materials for
SOLODYN®, to ensure no disruption in supply based on current demand levels. Finished
goods inventory increased $5.3 million, from $21.1 million at December 31, 2009 to $26.4 million at
December 31, 2010, primarily due to the addition of inventory of RESTYLANE-L® and
PERLANE-L®, which were approved by the FDA on January 29, 2010.
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 with a staff of
approximately 40 scientists, engineers and clinicians located near Seattle, Washington.
LipoSonix, now known as Medicis Technologies Corporation, is a medical device company developing
non-invasive body sculpting technology. Its first product, the LIPOSONIXTM system, is
currently marketed and sold through distributors in Europe and Japan, and direct to practitioners
in Canada. In the U.S., the LIPOSONIXTM system is an investigational device and is not
currently cleared or approved for sale. Under the terms of the transaction, we paid $150.0 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 $150.0 million if various commercial
milestones are achieved on a worldwide basis.
As of December 31, 2010, our investments included $21.5 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
71
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 Financial
Accounting Standards Board (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, which is now
part of ASC 320, Investments Debt and Equity Securities, 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 consolidated
balance sheets during the three months ended June 30, 2009. During 2010 and 2009, we liquidated
$6.4 million and $9.6 million, respectively, of our auction rate floating securities at par.
Operating Activities
Net cash provided by operating activities during the year ended December 31, 2010 was
approximately $178.4 million, compared to cash provided by operating activities of approximately
$177.9 million during the year ended December 31, 2009. The following is a summary of the primary
components of cash provided by operating activities during the year ended December 31, 2010 and
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Payments made to a privately-held U.S. biotechnology
company related to a development agreement |
|
$ |
(15.0 |
) |
|
$ |
|
|
Payment made to a Medicis partner related to a development
agreement |
|
|
(3.9 |
) |
|
|
|
|
Payment made to Revance related to a development agreement |
|
|
|
|
|
|
(10.0 |
) |
Payments made to Impax related to a development agreement |
|
|
|
|
|
|
(12.0 |
) |
Payments made to Perrigo related to a development agreement |
|
|
|
|
|
|
(5.0 |
) |
Payment made
to Glenmark related to a development agreement and license and settlement agreements |
|
|
|
|
|
|
(5.3 |
) |
Income taxes paid |
|
|
(81.1 |
) |
|
|
(44.6 |
) |
Other cash provided by operating activities |
|
|
278.4 |
|
|
|
254.8 |
|
|
|
|
Cash provided by operating activities |
|
$ |
178.4 |
|
|
$ |
177.9 |
|
|
|
|
Investing Activities
Net cash used in investing activities during the year ended December 31, 2010, was
approximately $172.3 million, compared to net cash used in investing activities during the year
ended December 31, 2009, of $62.2 million. The change was primarily due to the net purchases and
sales of our short-term and long-term investments during the respective periods. During 2009, we
paid $75.0 million to Ipsen upon the FDAs approval of DYSPORT®, 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 year ended December 31, 2010, was $3.6
million, compared to net cash provided by financing activities of $7.0 million during the year
ended December 31, 2009. Proceeds from the exercise of stock options were $16.3 million during the
year ended December 31, 2010, compared to $16.1 million during the year ended December 31, 2009.
Dividends paid during the year ended December 31, 2010, were $13.2 million, compared to dividends
paid during the year ended December 31, 2009, of $9.4 million.
72
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 $5.1 million of long-term liabilities at
December 31, 2010, and we had $339.9 million of current liabilities at December 31, 2010. Our
other commitments and planned 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 expired
in December 2010. Under ASC 420, Exit or Disposal Cost Obligations, a liability for the costs
associated with an exit or disposal activity is recognized when the liability is incurred. 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 consolidated
statements of income. We have not recorded any other costs related to the lease for the prior
headquarters, other than accretion expense.
As of December 31, 2010, the amended lease agreement has expired and we have made all of our
required payments under the terms of the lease. The following is a summary of the activity in the
liability for lease exit costs for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
|
Amounts Charged |
|
|
Cash Payments |
|
|
Cash Received |
|
|
Liability as of |
|
|
|
December 31, 2009 |
|
|
to Expense |
|
|
Made |
|
|
from Sublease |
|
|
Dec. 31, 2010 |
|
Lease exit costs
liability |
|
$ |
2,063,677 |
|
|
$ |
74,434 |
|
|
$ |
(2,138,111 |
) |
|
$ |
|
|
|
$ |
|
|
Dividends
We do not have a dividend policy. Prior to July 2003, we had not paid a cash dividend on our
common stock. Since July 2003, we have paid quarterly cash dividends aggregating approximately
$59.8 million on our common stock. In addition, on December 15, 2010, we announced that our Board
of Directors had declared a cash dividend of $0.06 per issued and outstanding share of common stock
payable on January 31, 2011, to our stockholders of record at the close of business on January 3,
2011. 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 $21.5 million at December 31, 2010. These securities
were included in long-term investments at December 31, 2010.
73
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 ASC 820, Fair Value Measurements and Disclosure. However, due to events in credit markets
that began 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, beginning in
the first quarter of 2008, utilizing a discounted cash flow analysis. 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 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 a new accounting standard
which is now part of ASC 320, Investments Debt and Equity Securities, 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 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 provided us with the right to
put an auction rate floating security held by us back to the broker beginning on June 30, 2010. At
June 30, 2010 and December 31, 2009, we held one auction rate floating security with a par value of
$1.3 million that was subject to the settlement agreement. At inception, we elected the
irrevocable Fair Value Option treatment under ASC 825, Financial Instruments, and accordingly
adjusted the put option to fair value at each reporting date. Concurrent with the execution of the
settlement agreement, we reclassified this auction rate floating security from available-for-sale
to trading securities. This auction rate floating security was sold at par on July 1, 2010.
On July 14, 2009, the broker through which we purchased auction rate floating securities
agreed to repurchase from us three auction rate floating securities with an aggregate par value of
$7.0 million, at par. The adjusted basis of these securities was $5.5 million, in aggregate, as a
result of an other-than-temporary impairment loss of $1.5 million recorded during the year ended
December 31, 2008. The realized gain of $1.5 million was recognized in other (income) expense
during the three months ended September 30, 2009.
Off-Balance Sheet Arrangements
As of December 31, 2010, we are not involved in any off-balance sheet arrangements, as defined
in Item 303(a)(4)(ii) of SEC Regulation S-K.
74
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2010,
and the effect such obligations are expected to have on our liquidity and cash flows in future
periods. This table excludes certain other purchase obligations as discussed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
More Than |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year and |
|
|
3 Years and |
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
Less Than |
|
|
Less Than |
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
5 Years |
|
|
Long-term debt |
|
$ |
169,326 |
|
|
$ |
|
|
|
$ |
169,326 |
|
|
$ |
|
|
|
$ |
|
|
Interest on long-term debt |
|
|
90,977 |
|
|
|
4,231 |
|
|
|
8,463 |
|
|
|
8,463 |
|
|
|
69,820 |
|
Operating leases |
|
|
44,435 |
|
|
|
4,808 |
|
|
|
9,330 |
|
|
|
9,472 |
|
|
|
20,825 |
|
Uncertain
income tax positions |
|
|
799 |
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other purchase obligations
and commitments |
|
|
867 |
|
|
|
173 |
|
|
|
347 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
306,404 |
|
|
$ |
10,011 |
|
|
$ |
187,466 |
|
|
$ |
18,282 |
|
|
$ |
90,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term debt consists of our Old Notes and New Notes. We may redeem some or all of
the Old Notes and New Notes at any time on or after June 11, 2007, and June 11, 2008, respectively,
at a redemption price, payable in cash, of 100% of the principal amount, plus accrued and unpaid
interest, including contingent interest, if any. Holders of the Old Notes and New Notes may
require us to repurchase all or a portion of their Old Notes on June 4, 2012 and 2017 and New Notes
on June 4, 2013 and 2018, or upon a change in control, as defined in the indenture agreements
governing the Old Notes and New Notes, at 100% of the principal amount of the Old Notes and New
Notes, plus accrued and unpaid interest to the date of the repurchase, payable in cash. As of
December 31, 2010, $169.1 million of the Old Notes were classified in the More than 1 year and
less than 3 years category as the holders of the Old Notes may require us to repurchase all or a
portion of their Old Notes on June 4, 2012, which is more than 1 year but less than 3 years from
the December 31, 2010 balance sheet date. As of December 31, 2010, $0.2 million of New Notes were
classified in the More than 1 year and less than 3 years category as the holders of the New Notes
may require us to repurchase all or a portion of their New Notes on June 4, 2013, which is more
than 1 year but less than 3 years from the December 31, 2010 balance sheet date.
Interest on long-term debt includes interest payable on our Old Notes and New Notes, assuming
the Old Notes and New Notes will not have any redemptions or conversions into shares of our Class A
common stock until their respective maturities in 2032 and 2033, but does not include any
contingent interest. The amount of interest ultimately paid in future years could change if any of
the Old Notes or New Notes are converted or redeemed and/or if contingent interest becomes payable
if certain future criteria are met.
Other purchase obligations and commitments include payments due under research and development
and consulting contracts.
We have committed to make potential future milestone payments to third-parties as part of
certain product development and license agreements. Payments under these agreements generally
become due and payable only upon achievement of certain developmental, regulatory and/or commercial
milestones. Because the achievement and timing of these milestones are not fixed or reasonably
determinable, such contingencies have not been recorded on our consolidated balance sheets and are
not included in the above table. The total amount of potential future milestone payments related
to development and license agreements is approximately $588.2 million, including $153.0 million of
potential future milestone payments related to our research and development agreement with Anacor
that was executed on February 9, 2011.
Purchase orders for raw materials, finished goods and other goods and services are not
included in the above table. We are not able to determine the aggregate amount of such purchase
orders that represent contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table, contractual obligations
for purchase of goods or services are defined as agreements that are enforceable and legally
binding on us and that specify all significant terms, including: fixed or minimum quantities to
75
be purchased; fixed, minimum or variable price provisions; and the approximate timing of the
transaction. Our purchase orders are based on our current manufacturing needs, based on expected
demand, and are fulfilled by our vendors, in most cases, with relatively short timetables. We do
not have significant agreements for the purchase of raw materials or finished goods specifying
minimum quantities or set prices that exceed our short-term expected requirements. We also enter
into contracts for outsourced services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for cancellation without
significant penalty.
We have excluded from the table above approximately $0.6 million in
reserves for uncertain income tax positions, as we cannot make a
reasonably reliable estimate of the period in which cash settlement
with the respective taxing authority will occur, if any.
The expected timing of payment of the obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be different depending on the
time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in conformity with U.S.
generally accepted accounting principles. The preparation of the consolidated financial statements
requires us to make estimates and assumptions that affect the amounts reported in the 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, Summary of Significant Accounting Policies in the notes to the
consolidated financial statements under Item 15 of Part IV of this report, Exhibits, Financial
Statement Schedules. We believe the following critical accounting policies affect our most
significant estimates and assumptions used in the preparation of our consolidated financial
statements and are important in understanding our financial condition and results of operations.
Revenue Recognition
Revenue from our product sales is recognized pursuant to ASC 605, Revenue Recognition.
Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling
price is both fixed and determinable; and (iv) collectibility is reasonably assured. Our customers
consist primarily of large pharmaceutical wholesalers who sell directly into the retail channel.
We do not provide any material forms of price protection to our wholesale customers and permit
product returns if the product is damaged, or, depending on the customer and product, if it is
returned within six months prior to expiration or up to 12 months after expiration. Our customers
consist principally of financially viable wholesalers, and depending on the customer, revenue is
recognized based upon shipment (FOB shipping point) or receipt (FOB destination), net of
estimated provisions. As a result of certain amendments made to our distribution services
agreement with McKesson, our exclusive U.S. distributor of our aesthetics products
DYSPORT®, PERLANE® and RESTYLANE®, we began
recognizing revenue on
these products upon the shipment from McKesson to physicians beginning in the second quarter of
2009. As a general practice, we do not ship prescription product that has less than 12 months
until its expiration date. We also authorize returns for damaged products and credits for expired
products in accordance with our returned goods policy and procedures. The shelf life associated
with our products is up to 36 months depending on the product. The majority of our prescription
products have a shelf life of approximately 18-24 months.
We enter into licensing arrangements with other parties whereby we receive contract revenue
based on the terms of the agreement. The timing of revenue recognition is dependent on the level
of our continuing involvement in the manufacture and delivery of licensed products. If we have
continuing involvement, the revenue is deferred and recognized on a straight-line basis over the
period of continuing involvement. In addition, if our licensing arrangements require no continuing
involvement and payments are merely based on the passage of time, we assess such payments for
revenue recognition under the collectibility criteria of ASC 605.
76
Items Deducted From Gross Revenue
Provisions for estimated product returns, sales discounts and chargebacks are established as a
reduction of product sales revenues at the time such revenues are recognized. Provisions for
managed care and Medicaid rebates and consumer rebate and loyalty programs are established as a
reduction of product sales revenues at the later of the date at which revenue is recognized or the
date at which the sales incentive is offered. In addition, we defer revenue for certain sales of
inventory into the distribution channel that are in excess of eight (8) weeks of projected demand.
These deductions from gross revenue are established by us as our best estimate based on historical
experience adjusted to reflect known changes in the factors that impact such reserves, including
but not limited to, prescription data, industry trends, competitive developments and estimated
inventory in the distribution channel. Our estimates of inventory in the distribution channel are
based on inventory information reported to us by our major wholesale customers for which we have
inventory management agreements, historical shipment and return information from our accounting
records and data on prescriptions filled, which we purchase from IMS Health, Inc., one of the
leading providers of prescription-based information. We regularly monitor internal as well as
external data from our wholesalers, in order to assess the reasonableness of the information
obtained from external sources. We also utilize projected prescription demand for our products, as
well as, our internal information regarding our products. These deductions from gross revenue are
generally reflected either as a direct reduction to accounts receivable through an allowance, as a
reserve within current liabilities, or as an addition to accrued expenses.
We identify product returns by their manufacturing lot number. Because we manufacture in
bulk, lot sizes can be large and, as a result, sales of any individual lot may occur over several
periods. As a result, we are unable to specify if actual returns or credits relate to a sale that
occurred in the current period or a prior period, and therefore, we cannot specify how much of the
provision recorded relates to sales made in prior periods. However, we believe the process
discussed above, including the tracking of returns by lot, and the availability of other internal
and external data allows us to reasonably estimate the level of product returns, as well as
estimate the level of expected credits associated with rebates or chargebacks.
Our accounting policies for revenue recognition have a significant impact on our reported
results and rely on certain estimates that require complex and subjective judgment on the part of
our management. If the levels of product returns, inventory in the distribution channel, cash
discounts, chargebacks, managed care and Medicaid rebates and consumer rebate and loyalty programs
fluctuate significantly and/or if our estimates do not adequately reserve for these reductions of
gross product revenues, our reported net product revenues could be negatively affected.
77
The following table shows the activity of each reserve, associated with the various sales
provisions that serve to reduce our accounts receivable balance or increase our accrued expenses or
deferred revenue, for the years ended December 31, 2008, 2009 and 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed |
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Care & |
|
|
Rebate |
|
|
|
|
|
|
Reserve |
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
Medicaid |
|
|
and |
|
|
|
|
|
|
for Sales |
|
|
Deferred |
|
|
Discounts |
|
|
Chargebacks |
|
|
Rebates |
|
|
Loyalty |
|
|
|
|
|
|
Returns |
|
|
Revenue |
|
|
Reserve |
|
|
Reserve |
|
|
Reserve |
|
|
Programs |
|
|
Total |
|
|
Balance at Dec. 31,
2007 |
|
$ |
68,787 |
|
|
$ |
1,907 |
|
|
$ |
511 |
|
|
$ |
320 |
|
|
$ |
4,881 |
|
|
$ |
14,745 |
|
|
$ |
91,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
(50,042 |
) |
|
|
|
|
|
|
(12,268 |
) |
|
|
(2,001 |
) |
|
|
(17,230 |
) |
|
|
(49,462 |
) |
|
|
(131,003 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
40,866 |
|
|
|
(1,193 |
) |
|
|
13,005 |
|
|
|
2,152 |
|
|
|
29,305 |
|
|
|
63,165 |
|
|
|
147,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Dec. 31,
2008 |
|
$ |
59,611 |
|
|
$ |
714 |
|
|
$ |
1,248 |
|
|
$ |
471 |
|
|
$ |
16,956 |
|
|
$ |
28,448 |
|
|
$ |
107,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
(29,498 |
) |
|
|
|
|
|
|
(18,042 |
) |
|
|
(2,812 |
) |
|
|
(68,578 |
) |
|
|
(168,196 |
) |
|
|
(287,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
17,949 |
|
|
|
549 |
|
|
|
18,954 |
|
|
|
3,029 |
|
|
|
98,700 |
|
|
|
213,059 |
|
|
|
352,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Dec. 31,
2009 |
|
$ |
48,062 |
|
|
$ |
1,263 |
|
|
$ |
2,160 |
|
|
$ |
688 |
|
|
$ |
47,078 |
|
|
$ |
73,311 |
|
|
$ |
172,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
(24,535 |
) |
|
|
|
|
|
|
(22,728 |
) |
|
|
(4,756 |
) |
|
|
(100,229 |
) |
|
|
(280,047 |
) |
|
|
(432,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
37,165 |
|
|
|
(681 |
) |
|
|
23,398 |
|
|
|
5,219 |
|
|
|
102,526 |
|
|
|
308,414 |
|
|
|
476,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Dec. 31,
2010 |
|
$ |
60,692 |
|
|
$ |
582 |
|
|
$ |
2,830 |
|
|
$ |
1,151 |
|
|
$ |
49,375 |
|
|
$ |
101,678 |
|
|
$ |
216,308 |
|
|
|
|
Reserve for Sales Returns
We account for returns of product by establishing an allowance based on our estimate of
revenues recorded for which the related products are expected to be returned in the future. We
estimate the rate of future product returns for our established products based on our historical
experience, the relative risk of return based on expiration date, and other qualitative factors
that could impact the level of future product returns, such as competitive developments, product
discontinuations and our introduction of similar new products. Historical experience and the other
qualitative factors are assessed on a product-specific basis as part of our compilation of our
estimate of future product returns. We also estimate inventory in the distribution channel by
monitoring inventories held by our distributors, as well as prescription trends to help us assess
whether historical rates of return continue to be appropriate given current conditions. We
estimate returns of new products primarily based on our historical acceptance of our new product
introductions by our customers and product returns experience of similar products, products that
have similar characteristics at various stages of their life cycle, and other available information
pertinent to the intended use and marketing of the new product. Changes due to our competitors
price movements have not adversely affected us. We do not provide material pricing incentives to
our distributors that are intended to have them assume additional inventory levels beyond what is
customary in their ordinary course of business.
Our actual experience and the qualitative factors that we use to determine the necessary
accrual for future product returns are susceptible to change based on unforeseen events and
uncertainties. We assess the trends that could affect our estimates and make changes to the
accrual quarterly when it appears product returns may differ from our original estimates.
The provision for product returns was $17.9 million, or 1.9% of gross product sales, and $40.9
million, or 6.2% of gross product sales, for the years ended December 31, 2009 and 2008,
respectively. The reserve for product returns was $48.1 million and $59.6 million as of December
31, 2009 and 2008, respectively. The decrease
78
in the provision and the reserve was primarily related to a reduction in product returns
experienced from $50.4 million, or 7.6% of gross product sales during 2008, to $27.7 million, or
2.9% of gross product sales during 2009, and lower levels of inventory in the distribution channel
at December 31, 2009, resulting primarily from the impact of distribution services agreements with
our two largest wholesalers that we entered into during 2008.
The provision for product returns was $37.2 million, or 3.1% of gross product sales, and $17.9
million, or 1.9% of gross product sales, for the years ended December 31, 2010 and 2009,
respectively. The reserve for product returns increased $12.6 million, from $48.1 million as of
December 31, 2009 to $60.7 million as of December 31, 2010. The increase in the provision during
the comparable periods and in the reserve during the year ended December 31, 2010 was primarily
related to additional estimated required reserves for newly-launched products.
If the amount of our estimated quarterly returns increased by 10.0 percent, our sales returns
reserve at December 31, 2010, would increase by approximately $3.4 million and corresponding
revenue would decrease by the same amount. Conversely, if the amount of our estimated quarterly
returns decreased by 10.0 percent, our sales returns reserve at December 31, 2010, would decrease
by approximately $3.4 million and corresponding revenue would increase by the same amount. We
consider the sensitivity analysis of a 10.0 percent variance between estimated and actual sales
returns to be representative of the range of other outcomes that we are reasonably likely to
experience in estimating our sales returns reserves.
For newly-launched products, if the returns reserve percentage increased by one percentage
point, our sales return reserve at December 31, 2010, would increase by approximately $6.4 million
and corresponding revenue would decrease by the same amount. Conversely, if the returns reserve
percentage decreased by one percentage point, our sales returns reserve at December 31, 2010, would
have decreased by approximately $6.4 million and corresponding revenue would increase by the same
amount. We consider the sensitivity analysis of a one percentage point variance between estimated
and actual returns reserve percentage to be representative of the range of other outcomes that we
are reasonably likely to experience in estimating our sales returns reserves for newly-launched
products.
We also defer the recognition of revenue and related cost of revenue for certain sales of
inventory into the distribution channel that are in excess of eight (8) weeks of projected demand.
The distribution channels market demand requirement is estimated based on inventory information
reported to us by our major wholesale customers for which we have inventory management agreements,
who make up a significant majority of our total sales of inventory into the distribution channel.
No adjustment is made for those customers who do not provide inventory information to us. Deferred
product revenue associated with estimated excess inventory at wholesalers was approximately $0.6
million, $1.3 million and $0.7 million as of December 31, 2010, 2009 and 2008, respectively.
Sales Discounts
We offer cash discounts to our customers as an incentive for prompt payment, generally
approximately 2% of the sales price. We account for cash discounts by establishing an allowance
reducing accounts receivable by the full amount of the discounts expected to be taken by the
customers. We consider payment performance and adjust the allowance to reflect actual experience
and our current expectations about future activity.
The provision for cash discounts was $19.0 million, or 2.0% of gross product sales, and $13.0
million, or 2.0% of gross product sales, for the years ended December 31, 2009 and 2008,
respectively. The reserve for cash discounts was $2.2 million and $1.2 million as of December 31,
2009 and 2008, respectively. The increase in the provision was due to an increase in gross product
sales. The balance in the reserve for sales discounts at the end of the fiscal year is related to
the amount of accounts receivable that is outstanding at that date that is still eligible for the
cash discounts to be taken by the customers. The fluctuations in the reserve for sales discounts
between periods are normally reflective of increases or decreases in the related eligible
outstanding accounts receivable amounts at the comparable dates.
The provision for cash discounts was $23.4 million, or 2.0% of gross product sales, and $19.0
million, or 2.0% of gross product sales, for the years ended December 31, 2010 and 2009,
respectively. The reserve for cash discounts increased $0.6 million, from $2.2 million as of
December 31, 2009 to $2.8 million as of December 31, 2010. The increase in the provision during
the comparable periods was due to an increase in gross product sales. The increase in the reserve
for sales discounts during the year ended December 30, 2010 was due to the increase in
79
the related eligible outstanding accounts receivable amounts as of December 31, 2010 as
compared to December 31, 2009.
Contract Chargebacks
We have agreements for contract pricing with several entities, whereby pricing on products is
extended below wholesaler list price. These parties purchase products through wholesalers at the
lower contract price, and the wholesalers charge the difference between their acquisition cost and
the lower contract price back to us. We account for chargebacks by establishing an allowance
reducing accounts receivable based on our estimate of chargeback claims attributable to a sale. We
determine our estimate of chargebacks based on historical experience and changes to current
contract prices. We also consider our claim processing lag time, and adjust the allowance
periodically throughout each quarter to reflect actual experience. Although we record an allowance
for estimated chargebacks at the time we record the sale (typically when we ship the product), the
actual chargeback related to that sale is not processed until the entities purchase the product
from the wholesaler. We continually monitor our historical experience and current pricing trends
to ensure the liability for future chargebacks is fairly stated.
The provision for contract chargebacks was $3.0 million, or 0.3% of gross product sales, and
$2.2 million, or 0.3% of gross product sales, for the years ended December 31, 2009 and 2008,
respectively. The reserve for contract chargebacks was $0.7 million and $0.5 million as of
December 31, 2009 and 2008, respectively.
The provision for contract chargebacks was $5.2 million, or 0.4% of gross product sales, and
$3.0 million, or 0.3% of gross product sales, for the years ended December 31, 2010 and 2009,
respectively. The reserve for contract chargebacks increased $0.5 million, from $0.7 million as of
December 31, 2009 to $1.2 million as of December 31, 2010. The increase in the provision during
the comparable periods and the reserve during the year ended December 31, 2010 was due to an
increase in eligible gross product sales and in the number of pricing contracts in place during the
comparable periods.
Managed Care and Medicaid Rebates
Managed care and Medicaid rebates are contractual discounts offered to government programs and
private health plans that are eligible for such discounts at the time prescriptions are dispensed,
subject to various conditions. We record provisions for rebates based on factors such as timing
and terms of plans under contract, time to process rebates, product pricing, sales volumes, amount
of inventory in the distribution channel, and prescription trends. We continually monitor
historical payment rates and actual claim data to ensure the liability is fairly stated.
The provision for managed care and Medicaid rebates was $98.7 million, or 10.5% of gross
product sales, and $29.3 million, or 4.4% of gross product sales, for the years ended December 31,
2009 and 2008, respectively. The reserve for managed care and Medicaid rebates was $47.1 million
and $17.0 million as of December 31, 2009 and 2008, respectively. The increase in the provision
was primarily due to an increase in the number of pricing contracts in place during the comparable
periods related to SOLODYN®. The increase in the reserve is due to an increase in the
amount of rebates outstanding at the comparable dates, due to the increase in the number of
SOLODYN® pricing contracts in place.
The provision for managed care and Medicaid rebates was $102.5 million, or 8.6% of gross
product sales, and $98.7 million, or 10.5% of gross product sales, for the years ended December 31,
2010 and 2009, respectively. The reserve for managed care and Medicaid rebates increased $2.3
million, from $47.1 million as of December 31, 2009 to $49.4 million as of December 31, 2010. The
increase in the provision during the comparable periods and in the reserve during the year ended
December 31, 2010 was due to an increase in eligible gross product sales.
Consumer Rebates and Loyalty Programs
We offer consumer rebates on many of our products and we have consumer loyalty programs. We
generally account for these programs by establishing an accrual based on our estimate of the rebate
and loyalty incentives attributable to a sale. We generally base our estimates for the accrual of
these items on historical experience and other relevant factors. We adjust our accruals
periodically throughout each quarter based on actual experience and changes in other factors, if
any, to ensure the balance is fairly stated.
80
The provision for consumer rebates and loyalty programs was $213.1 million, or 22.6% of gross
product sales, and $63.2 million, or 9.6% of gross product sales, for the years ended December 31,
2009 and 2008, respectively. The reserve for consumer rebates and loyalty programs was $73.3
million and $28.4 million as of December 31, 2009 and 2008, respectively. The increase in the
provision and the reserve was primarily due to new consumer rebate programs initiated during 2009
related to our SOLODYN®, ZIANA®, DYSPORT®,
RESTYLANE®
and PERLANE® products.
The provision for consumer rebates and loyalty programs was $308.4 million, or 25.9% of gross
product sales, and $213.1 million, or 22.6% of gross product sales, for the years ended December
31, 2010 and 2009, respectively. The reserve for consumer rebates and loyalty programs increased
$28.4 million, from $73.3 million as of December 31, 2009 to $101.7 million as of December 31,
2010. The increase in the provision during the comparable periods and in the reserve during the
year ended December 31, 2010 was primarily due to the continued growth in consumer rebate programs
related to our SOLODYN®, ZIANA® RESTYLANE® and
PERLANE®
products, as well as the new DYSPORT® Challenge program that was in place during most of
2010.
If our 2010 estimates of rebate redemption rates or average rebate amounts for our consumer
rebate programs changed by 10.0 percent, our reserve for consumer rebates would be impacted by
approximately $5.0 million and corresponding revenue would be impacted by the same amount. We
consider the sensitivity analysis of a 10.0 percent variance in our estimated rebate redemption
rates and average rebate amounts to be representative of the range of other outcomes that we are
reasonably likely to experience in estimating our reserve for consumer rebates.
Use of Information from External Sources
We use information from external sources to estimate our significant items deducted from gross
revenues. Our estimates of inventory in the distribution channel are based on inventory
information reported to us by our major wholesale customers for which we have inventory management
agreements, historical shipment and return information from our accounting records and data on
prescriptions filled, which we purchase from IMS Health, Inc., one of the leading providers of
prescription-based information. We regularly monitor internal data as well as external data from
our wholesalers, in order to assess the reasonableness of the information obtained from external
sources. We also utilize projected prescription demand for our products, as well as, our internal
information regarding our products. We use the information from IMS Health, Inc. to project the
prescription demand for our products. Our estimates are subject to inherent limitations pertaining
to reliance on third-party information, as certain third-party information is itself in the form of
estimates.
Use of Estimates in Reserves
We believe that our allowances and accruals for items that are deducted from gross revenues
are reasonable and appropriate based on current facts and circumstances. It is possible, however,
that other parties applying reasonable judgment to the same facts and circumstances could develop
different allowance and accrual amounts for items that are deducted from gross revenues.
Additionally, changes in actual experience or changes in other qualitative factors could cause our
allowances and accruals to fluctuate, particularly with newly launched products. We review the
rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated
rates and amounts are significantly greater than those reflected in our recorded reserves, the
resulting adjustments to those reserves would decrease our reported net revenues; conversely, if
actual returns, rebates and chargebacks are significantly less than those reflected in our recorded
reserves, the resulting adjustments to those reserves would increase our reported net revenues. If
we changed our assumptions and estimates, our related reserves would change, which would impact the
net revenues we report.
Share-Based Compensation
In accordance with ASC 718, Compensation Stock Compensation, we are required to recognize
the fair value of share-based compensation awards as an expense. Determining the appropriate
fair-value model and calculating the fair value of share-based awards at the date of grant requires
judgment. We use the Black-Scholes option pricing model to estimate the fair value of employee
stock options. Option pricing models, including the Black-Scholes model, also require the use of
input assumptions, including expected volatility, expected life, expected dividend rate, and
expected risk-free rate of return. We use a blend of historical and implied volatility based on
options freely traded in the open market as we believe this is more reflective of market conditions
and a
81
better indicator of expected volatility than using purely historical volatility. Increasing
the weighted average volatility by 2.5 percent (from 0.33 percent to 0.355 percent) would have
increased the fair value of stock options granted in 2010 to $8.72 per share. Conversely,
decreasing the weighted average volatility by 2.5 percent (from 0.33 percent to 0.305 percent)
would have decreased the fair value of stock options granted in 2010 to $7.79 per share. The
expected life of the awards is based on historical experience of awards with similar
characteristics. Stock option awards granted during 2010 have a stated term of 7 years, and the
weighted average expected life of the awards was determined to be 7 years. Decreasing the weighted
average expected life by 0.5 years (from 7.0 years to 6.5 years) would have decreased the fair
value of stock options granted in 2010 to $8.01 per share. The risk-free interest rate assumption
is based on observed interest rates appropriate for the terms of our awards. The dividend yield
assumption is based on our history and expectation of future dividend payouts.
The fair value of our restricted stock grants is based on the fair market value of our common
stock on the date of grant.
The
fair value of stock appreciation rights (SARs) is adjusted at the end of each reporting
period based on updated valuation variables at the end of each reporting period. The fair value of
SARs is most affected by changes in the fair market value of our common stock at the end of each
reporting period.
We are required to develop an estimate of the number of share-based awards which will be
forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate may have a
significant effect on share-based compensation, as the effect of adjusting the rate for all expense
amortization is recognized in the period the forfeiture estimate is changed. If the actual
forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to
increase the estimated forfeiture rate, which will result in a decrease to the expense recognized
in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture
rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an
increase to the expense recognized in the financial statements. The effect of forfeiture
adjustments in the first quarter of 2011 was immaterial.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change
and we employ different assumptions, stock-based compensation expense may differ significantly from
what was recorded in the past. If there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. Future stock-based compensation expense and unearned stock-based
compensation will increase to the extent that we grant additional equity awards to employees or we
assume unvested equity awards in connection with acquisitions.
Our estimates of these important assumptions are based on historical data and judgment
regarding market trends and factors. If actual results are not consistent with our assumptions and
judgments used in estimating these factors, we may be required to record additional stock-based
compensation expense or income tax expense, which could be material to our results of operations.
Inventory
Inventory costs associated with products that have not yet received regulatory approval are
capitalized if we believe 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. We could be required to
expense previously capitalized costs related to pre-approval inventory if the probability of future
commercial use and future economic benefit changes due to denial or delay of regulatory approval, a
delay in commercialization, or other factors. Conversely, our gross margins could be favorably
impacted if previously expensed pre-approval inventory becomes available and is used for commercial
sale. As of December 31, 2010, there were no costs capitalized into inventory for products that
have not yet received regulatory approval.
Long-lived Assets
We assess the impairment of long-lived assets when events or changes in circumstances indicate
that the carrying value of the assets may not be recoverable. Factors that we consider in deciding
when to perform an impairment review include significant under-performance of a product line in
relation to expectations, significant
82
negative industry or economic trends, and significant changes or planned changes in our use of
the assets. Recoverability of assets that will continue to be used in our operations is measured by
comparing the carrying amount of the asset grouping to our estimate of the related total future net
cash flows. If an asset carrying value is not recoverable through the related cash flows, the
asset is considered to be impaired. The impairment is measured by the difference between the asset
groupings carrying amount and its present value of anticipated net cash flows, based on the best
information available, including market prices or discounted cash flow analysis.
When we determine that the useful lives of assets are shorter than we had originally
estimated, and there are sufficient cash flows to support the carrying value of the assets, we
accelerate the rate of amortization charges in order to fully amortize the assets over their new
shorter useful lives.
During 2010, an impairment charge of approximately $12.1 million was recognized related to our
review of long-lived assets, and the remaining useful life of an intangible asset that was deemed
to be impaired was reduced. This process requires the use of estimates and assumptions, which are
subject to a high degree of judgment. If these assumptions change in the future, we may be
required to record additional impairment charges for, and/or accelerate amortization of, long-lived
assets. During 2009 and 2008, we did not recognize an impairment charge as a result of our review
of long-lived assets.
If our 2010 estimates of future net revenues and gross profit margin for DYSPORT®
were both reduced by 10.0 percent, our intangible asset related to DYSPORT® would be
impaired by approximately $20.0 million. If only our 2010 estimates of future net revenues for
DYSPORT® were reduced by 10.0 percent, and our 2010 estimates of gross profit margin for
DYSPORT® were reduced by 9.0 percent or less, our intangible asset related to
DYSPORT® would not be impaired. Similarly, if only our 2010 estimates of gross profit
margin for
DYSPORT®
were reduced by 10.0 percent, and our 2010 estimates of future net revenues
for DYSPORT® were reduced by 9.0 percent or less, our intangible asset related to
DYSPORT® would not be impaired. We consider the sensitivity analysis of a 10.0 percent
variance in our future estimated net revenues and gross profit margin amounts to be representative
of the range of other outcomes that we are reasonably likely to experience in assessing the
potential impairment of long-lived assets.
Income Taxes
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 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. Our effective tax rate
may be subject to fluctuations during the year as new information is obtained which may affect the
assumptions we use to estimate our annual effective tax rate, including factors such as our mix of
pre-tax earnings in the various tax jurisdictions in which we operate, 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 we conduct operations. We recognize
tax benefits only if the tax position is more likely than not of being sustained. We recognize
deferred tax assets and liabilities for temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities, along with net operating losses and credit
carryforwards. We record valuation allowances against our deferred tax assets to reduce the net
carrying values to amounts that management believes is more likely than not to be realized.
Based on our historical pre-tax earnings, we believe it is more likely than not that we will
realize the benefit of substantially all of the existing net deferred tax assets at December 31,
2010. We believe the existing net deductible temporary differences will reverse during periods in
which we generate net taxable income; however, there can be no assurance that we will generate any
earnings or any specific level of continuing earnings in future years. Certain tax planning or
other strategies could be implemented, if necessary, to supplement income from operations to fully
realize recorded tax benefits.
We have an option to acquire Revance or license Revances topical product that is under
development. Through December 31, 2010, we have recorded $21.0 million of charges related to the
reduction in the carrying value of the Revance investment. The reduction in the carrying value of
the Revance investment is currently an unrealized loss for tax purposes. We will not be able to
determine the character of the loss until we exercise or fail to exercise our option. A realized
loss characterized as a capital loss can only be utilized to offset capital gains. We
83
have recorded a $7.6 million valuation allowance 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 we believe is more likely than not to be realized.
We have an option to acquire a privately-held U.S. biotechnology company. Through
December 31, 2010, we have an unrealized tax loss of $16.4 million related to this
option. If we fail to exercise our option, a capital loss will be recognized. A loss characterized as a capital loss can only be used to offset capital
gains. We have recorded a $5.9 million valuation allowance 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 we believe is more
likely than not to be
realized.
Research and Development Costs and Accounting for Strategic Collaborations
All research and development costs, including payments related to products under development
and research consulting agreements, are expensed as incurred. We may continue to make
non-refundable payments to third parties for new technologies and research and development work
that has been completed. These payments may be expensed at the time of payment depending on the
nature of the payment made.
Our policy on accounting for costs of strategic collaborations determines the timing of the
recognition of certain development costs. In addition, this policy determines whether the cost is
classified as development expense or capitalized as an asset. We are required to form judgments
with respect to the commercial status of such products in determining whether development costs
meet the criteria for immediate expense or capitalization. For example, when we acquire certain
products for which there is already an ANDA or NDA approval related directly to the product, and
there is net realizable value based on projected sales for these products, we capitalize the amount
paid as an intangible asset. In addition, if we acquire product rights which are in the
development phase and as to which we have no assurance that the third party will successfully
complete its development milestones, we expense such payments.
Legal Contingencies
We record contingent liabilities resulting from asserted and unasserted claims against us
when it is probable that a liability has been incurred and the amount of the loss is estimable. We
disclose material contingent liabilities when there is a reasonable possibility that the ultimate
loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple
factors, in some cases including judgments about the potential actions of third-party claimants and
courts. Therefore, actual losses in any future period are inherently uncertain. In addition to
the matters disclosed in Item 3. Legal Proceedings of Part I of this report, we are party to
ordinary and routine litigation incidental to our business. We do not expect the outcome of any
pending litigation to have a material adverse effect on our consolidated financial position or
results of operations. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in our assumptions or
the effectiveness of our strategies related to these proceedings.
Recent Accounting Pronouncements
In October 2009, the FASB approved for issuance Accounting Standards Update (ASU) No.
2009-13, Revenue Recognition (ASC 605) Multiple Deliverable Revenue Arrangements, a consensus
of EITF 08-01, Revenue Arrangements with Multiple Deliverables. This guidance modifies the fair
value requirements of ASC subtopic 605-25 Revenue Recognition Multiple Element Arrangements by
providing principles for allocation of consideration among its multiple-elements, allowing more
flexibility in identifying and accounting for separate deliverables under an arrangement. An
estimated selling price method is introduced for valuing the elements of a bundled arrangement if
vendor-specific objective evidence or third-party evidence of selling price is not available, and
significantly expands related disclosure requirements. This updated guidance is effective on a
prospective basis for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and
early application is permitted. The adoption of the guidance on January 1, 2011 is not expected to
have a material impact on our results of operations and financial condition.
In March 2010, the FASB approved for issuance ASU No. 2010-17, Revenue Recognition-Milestone
Method (Topic 605): Milestone Method of Revenue Recognition. The updated guidance recognizes the
milestone method as an acceptable revenue recognition method for substantive milestones in research
or development transactions, and is effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of the guidance on January 1, 2011 is not expected to have a
material impact on our results of operations and financial condition.
84
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2010, $208.9 million of our cash equivalent investments were in money market
securities that are reflected as cash equivalents, because all maturities are within 90 days.
Included in money market securities are commercial paper, Federal agency discount notes and money
market funds. Our interest rate risk with respect to these investments is limited due to the
short-term duration of these arrangements and the yields earned, which approximate current interest
rates.
Our policy for our 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 our investment guidelines and market conditions.
Our investment portfolio, consisting of fixed income securities that we hold on an
available-for-sale basis, was approximately $506.7 million as of December 31, 2010, and $344.8
million as of December 31, 2009. These securities, like all fixed income instruments, are subject
to interest rate risk and will decline in value if market interest rates increase. We have the
ability to hold our fixed income investments until maturity and, therefore, we would not expect to
recognize any material adverse impact in income or cash flows if market interest rates increase.
As of December 31, 2010, our investments included auction rate floating securities with a fair
value of $21.5 million. 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. The negative
conditions in the credit markets during 2008, 2009 and 2010 have prevented some investors from
liquidating their holdings, including their holdings of auction rate floating 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. We may not be able to
liquidate the securities until a future auction on these investments is successful. As a result of
the lack of liquidity of these investments, we recorded an other-than-temporary impairment loss of
$6.4 million during 2008 on our auction rate floating securities. During the three months ended
June 30, 2009, we adopted FSP FAS 115-2 (now part of ASC 320), and accordingly, we reclassified
$3.1 million of this other-than-temporary impairment loss, net of income taxes, from retained
earnings to other comprehensive income in our consolidated balance sheets during the three months
ended June 30, 2009.
The following table provides information about our available-for-sale securities that are
sensitive to changes in interest rates, as well are our Contingent Convertible Senior Notes, which
have fixed interest rates. We have aggregated our available-for-sale securities for presentation
purposes since they are all very similar in nature (dollar amounts in thousands):
Interest Rate Sensitivity
Principal Amount by Expected Maturity as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments mature during year ended December 31, |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Available-for-sale and
trading securities |
|
$ |
301,167 |
|
|
$ |
151,837 |
|
|
$ |
27,180 |
|
|
$ |
5,008 |
|
|
$ |
|
|
|
$ |
21,480 |
|
Weighted-average yield rate |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
0.7 |
% |
|
|
0.0 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent convertible
senior notes due 2032 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
169,145 |
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5 |
% |
Contingent convertible
senior notes due 2033 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
181 |
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
% |
We have not entered into derivative financial instruments. We have minimal operations
outside of the U.S. and, accordingly, we have not been susceptible to significant risk from changes
in foreign currencies.
During the normal course of business we could be subjected to a variety of
market risks, examples of which include, but are not limited to, interest rate movements
and foreign currency fluctuations, as we discussed above, and
85
collectability of accounts receivable.
We continuously assess these risks and have established policies and procedures to
protect against the adverse effects of these and other potential exposures.
Although we do not anticipate any material losses in these risk areas, no assurance can be made that
material losses will not be incurred in these areas in the future.
Item 8. Financial Statements and Supplementary Data
Our financial statements and related financial statement schedule and the Independent
Registered Public Accounting Firms Reports are incorporated herein by reference to the financial
statements set forth in Item 15 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 the end of the period
covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures were
effective and designed 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 error 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 December 31, 2010, 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.
Managements Report on Internal Control over Financial Reporting
The management of Medicis Pharmaceutical Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that
86
controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2010. The framework on which such evaluation was based
is contained in the report entitled Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO Report). Based on
that evaluation and the criteria set forth in the COSO Report, management concluded that our
internal control over financial reporting was effective as of December 31, 2010.
Our independent registered public accounting firm, Ernst & Young LLP, who also audited our
consolidated financial statements, audited the effectiveness of our internal control over financial
reporting. Ernst & Young LLP has issued their attestation report, which is included below.
87
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medicis Pharmaceutical Corporation
We have audited Medicis Pharmaceutical Corporations (the Company) internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Medicis Pharmaceutical Corporations management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included above under the heading
Managements Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Medicis Pharmaceutical Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the December 31, 2010 consolidated financial statements of Medicis
Pharmaceutical Corporation and subsidiaries and our report dated
March 1, 2011 expressed an
unqualified opinion thereon.
Phoenix, Arizona
March 1, 2011
88
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The Company has adopted a written code of ethics, Medicis Pharmaceutical Corporation Code of
Business Conduct and Ethics, which is applicable to all directors, officers and employees of the
Company, including the Companys principal executive officer, principal financial officer,
principal accounting officer or controller and other executive officers identified pursuant to this
Item 10 who perform similar functions (collectively, the Selected Officers). In accordance with
the rules and regulations of the SEC, a copy of the code is available on the Companys website.
The Company will disclose any changes in or waivers from its code of ethics applicable to any
Selected Officer on its website at http://www.Medicis.com or by filing a Form 8-K.
The Company has filed, as exhibits to this Annual Report on Form 10-K for the year ended
December 31, 2010, the certifications of its Chief Executive Officer and Chief Financial Officer
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
On June 1, 2010, the Company submitted to the New York Stock Exchange the Annual CEO
Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual.
The information in the section entitled Section 16(a) Beneficial Ownership Reporting
Compliance, Director Biographical Information, Board Nominees, Executive Officers and
Governance of Medicis in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information to be included in the sections entitled Executive Compensation,
Compensation of Directors, and Stock Option and Compensation Committee Report in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information to be included in the section entitled Security Ownership of Directors and
Executive Officers and Certain Beneficial Owners in the Proxy Statement and in the section
entitled Equity Compensation Plan Information in Item 5 of this Annual Report on Form 10-K is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information to be included in the section entitled Certain Relationships and Related
Transactions in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information to be included in the section entitled Independent Public Accountants in the
Proxy Statement is incorporated herein by reference.
89
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
|
|
|
|
|
|
Page |
|
(a) Documents filed as a part of this Report |
|
|
|
|
(1) Financial Statements: |
|
|
|
|
|
|
|
F-1 |
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-8 |
|
|
|
|
F-9 |
|
(2) Financial Statement Schedule: |
|
|
|
|
|
|
|
S-1 |
|
This financial statement schedule should be read in conjunction with
the consolidated financial statements. Financial statement schedules
not included in this Annual Report on Form 10-K have been omitted
because they are not applicable or the required information is shown
in the financial statements or notes thereto. |
|
|
|
|
(3) Exhibits filed as part of this Report: |
|
|
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
2.1
|
|
|
|
Agreement of Merger, dated as of December 1, 1997, by and among the Company, Medicis
Acquisition Corporation and GenDerm Corporation(11) |
|
|
|
|
|
2.2
|
|
|
|
Agreement and Plan of Merger, dated as of October 1, 2001, by and among the Company, MPC
Merger Corp. and Ascent Pediatrics, Inc.(16) |
|
|
|
|
|
2.3
|
|
|
|
Agreement and Plan of Merger, dated as of June 16, 2008, by and among the Company,
Donatello, Inc., and LipoSonix, Inc.(45) |
|
|
|
|
|
3.1
|
|
|
|
Amended and Restated Certificate of Incorporation of the Company(20) |
|
|
|
|
|
3.2
|
|
|
|
Amended and Restated By-Laws of the Company(53) |
|
|
|
|
|
4.1
|
|
|
|
Amended and Restated Rights Agreement, dated as of August 17, 2005, between the Company and
Wells Fargo Bank, N.A., as Rights Agent(23) |
|
|
|
|
|
4.2
|
|
|
|
Indenture, dated as of August 19, 2003, by and between the Company, as issuer, and Deutsche
Bank Trust Company Americas, as trustee(20) |
|
|
|
|
|
4.3
|
|
|
|
Indenture, dated as of June 4, 2002, by and between the Company, as issuer, and Deutsche
Bank Trust Company Americas, as trustee.(17) |
|
|
|
|
|
4.4
|
|
|
|
Supplemental Indenture dated as of February 1, 2005, to Indenture dated, as of August 19,
2003 between the Company, as issuer, and Deutsche Bank Trust Company Americas, as
trustee(22) |
|
|
|
|
|
4.5
|
|
|
|
Registration Rights Agreement, dated as of June 4, 2002, by and between the Company and
Deutsche Bank Securities Inc.(17) |
|
|
|
|
|
4.6
|
|
|
|
Form of specimen certificate representing Class A common stock(1) |
|
|
|
|
|
10.1
|
|
|
|
Asset Purchase Agreement, dated April 20, 2004, among the Company, Ascent Pediatrics, Inc.,
BioMarin Pharmaceutical Inc. and BioMarin Pediatrics Inc.(20) |
|
|
|
|
|
10.2
|
|
|
|
Merger Termination Agreement, dated as of December 13, 2005, by and among the Company,
Masterpiece Acquisition Corp. and Inamed Corporation(28) |
|
|
|
|
|
10.3
|
|
|
|
Securities Purchase Agreement, dated May 18, 2004, among the Company, Ascent Pediatrics, |
|
|
|
|
Inc., BioMarin Pharmaceutical Inc. and BioMarin Pediatrics Inc.(20) |
|
|
|
|
|
10.4
|
|
|
|
Termination Agreement, dated October 19, 2005, by and between the Company and Michael A.
Pietrangelo(25) |
|
|
|
|
|
10.5
|
|
|
|
License Agreement, dated May 18, 2004, among the Company, BioMarin Pharmaceutical Inc.,
BioMarin Pediatrics Inc. and Ascent Pediatrics, Inc.(20) |
|
|
|
|
|
10.6
|
|
|
|
Medicis Pharmaceutical Corporation 1995 Stock Option Plan(4) |
|
|
|
|
|
10.7(a)
|
|
|
|
Employment Agreement between the Company and Jonah Shacknai, dated July 24, 1996(8) |
90
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
10.7(b)
|
|
|
|
Amendment to Employment Agreement by and between the Company and Jonah Shacknai, dated April 1, 1999(14) |
|
|
|
|
|
10.7(c)
|
|
|
|
Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated February 21, 2001(14) |
|
|
|
|
|
10.7(d)
|
|
|
|
Third Amendment, dated December 30, 2005, to Employment Agreement between the Company and
Jonah Shacknai(29) |
|
|
|
|
|
10.7(e)
|
|
|
|
Fourth Amendment to Employment Agreement, dated December 23, 2008, by and between the
Company and Jonah Shacknai(46) |
|
|
|
|
|
10.8
|
|
|
|
Medicis Pharmaceutical Corporation 2001 Senior Executive Restricted Stock Plan(27) |
|
|
|
|
|
10.9(a)
|
|
|
|
Medicis Pharmaceutical Corporation 2002 Stock Option Plan(18) |
|
|
|
|
|
10.9(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 2002 Stock Option Plan, dated
August 1, 2005(26) |
|
|
|
|
|
10.10(a)
|
|
|
|
Medicis Pharmaceutical Corporation 2004 Stock Incentive Plan(24) |
|
|
|
|
|
10.10(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 2004 Stock Incentive Plan, dated
August 1, 2005(26) |
|
|
|
|
|
10.11(a)
|
|
|
|
Medicis Pharmaceutical Corporation 1998 Stock Option Plan(30) |
|
|
|
|
|
10.11(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 1998 Stock Option Plan, dated
August 1, 2005(26) |
|
|
|
|
|
10.11(c)
|
|
|
|
Amendment No. 2 to the Medicis Pharmaceutical Corporation 1998 Stock Option Plan, dated
September 30, 2005(26) |
|
|
|
|
|
10.12(a)
|
|
|
|
Medicis Pharmaceutical Corporation 1996 Stock Option Plan(31) |
|
|
|
|
|
10.12(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 1996 Stock Option Plan, dated
August 1, 2005(26) |
|
|
|
|
|
10.13
|
|
|
|
Waiver Letter, dated March 18, 2005 between the Company and Q-Med AB(24) |
|
|
|
|
|
10.14
|
|
|
|
Supply Agreement, dated October 21, 1992, between Schein Pharmaceutical and the
Company(2) |
|
|
|
|
|
10.15
|
|
|
|
Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein Pharmaceutical and the Company(3) |
|
|
|
|
|
10.16(a)
|
|
|
|
Credit and Security Agreement, dated August 3, 1995, between the Company and
Norwest Business Credit, Inc.(5) |
|
|
|
|
|
10.16(b)
|
|
|
|
First Amendment to Credit and Security Agreement, dated May 29, 1996,
between the Company and Norwest Bank Arizona, N.A.(8) |
|
|
|
|
|
10.16(c)
|
|
|
|
Second Amendment to Credit and Security Agreement, dated November 22, 1996,
by and between the Company and Norwest Bank Arizona, N.A. as successor-in-interest
to Norwest Business Credit, Inc.(10) |
|
|
|
|
|
10.16(d)
|
|
|
|
Third Amendment to Credit and Security Agreement, dated November 22, 1998, by
and between the Company and Norwest Bank Arizona, N.A., as successor-in-interest
to Norwest Business Credit, Inc.(12) |
|
|
|
|
|
10.16(e)
|
|
|
|
Fourth Amendment to Credit and Security Agreement, dated November 22, 2000,
by and between the Company and Wells Fargo Bank Arizona, N.A., formerly
known as Norwest Bank Arizona, N.A., as successor-in-interest to Norwest Business
Credit, Inc.(15) |
|
|
|
|
|
10.16(f)
|
|
|
|
Fifth Amendment to Credit and Security Agreement, dated November 22, 2002, by and between
the Company and Wells Fargo Bank Arizona, N.A., formerly known as Norwest Bank Arizona,
N.A., as successor-in-interest to Norwest Business Credit, Inc.(20) |
|
|
|
|
|
10.17(a)
|
|
|
|
Patent Collateral Assignment and Security Agreement, dated August 3, 1995, by
and between the Company and Norwest Business Credit, Inc.(6) |
|
|
|
|
|
10.17(b)
|
|
|
|
First Amendment to Patent Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(8) |
|
|
|
|
|
10.17(c)
|
|
|
|
Amended and Restated Patent Collateral Assignment and Security Agreement, dated
November 22, 1998, by the Company to Norwest Bank Arizona, N.A.(12) |
|
|
|
|
|
10.18(a)
|
|
|
|
Trademark, Tradename and Service Mark Collateral Assignment and Security Agreement, dated
August 3, 1995, by and between the Company and Norwest Business
Credit, Inc.(7) |
|
|
|
|
|
10.18(b)
|
|
|
|
First Amendment to Trademark, Tradename and Service Mark Collateral Assignment and Security
Agreement, dated May 29, 1996, by and between the Company and
Norwest Bank Arizona, N.A.(8) |
|
|
|
|
|
10.18(c)
|
|
|
|
Amended and Restated Trademark, Tradename, and Service Mark Collateral
Assignment and Security Agreement, dated November 22, 1998, by and between the Company and
Norwest Bank Arizona, N.A.(12) |
|
|
|
|
|
10.19
|
|
|
|
Assignment and Assumption of Loan Documents, dated May 29, 1996, by and between Norwest Business Credit, Inc. and Norwest Bank Arizona, N.A.(8) |
91
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
10.20
|
|
|
|
Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A.(8) |
|
|
|
|
|
10.21
|
|
|
|
Asset Purchase Agreement, dated November 15, 1998, by and among the Company and
Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GmbH and
Hoechst Marion Roussel, S.A.(12) |
|
|
|
|
|
10.22
|
|
|
|
License and Option Agreement, dated November 15, 1998, by and among the Company
and Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GmbH and
Hoechst Marion Roussel, S.A.(12) |
|
|
|
|
|
10.23
|
|
|
|
Loprox Lotion Supply Agreement, dated November 15, 1998, by and between the
Company and Hoechst Marion Roussel, Inc.(12) |
|
|
|
|
|
10.24
|
|
|
|
Supply Agreement, dated November 15, 1998, by and between the Company and
Hoechst Marion Roussel Deutschland GmbH(12) |
|
|
|
|
|
10.25
|
|
|
|
Asset Purchase Agreement effective January 31, 1999, by and between the Company and
Bioglan Pharma Plc(13) |
|
|
|
|
|
10.26
|
|
|
|
Stock Purchase Agreement, effective as of April 1, 1999, by and among the Company, Ucyclyd
Pharma, Inc. and Syed E. Abidi, William Brusilow, Susan E. Brusilow and
Norbert L. Wiech(13) |
|
|
|
|
|
10.27
|
|
|
|
Asset Purchase Agreement by and between the Company and Bioglan Pharma Plc,
dated June 29, 1999(13) |
|
|
|
|
|
10.28
|
|
|
|
Asset Purchase Agreement, dated as of June 29,1999, by and among The Exorex Company, LLC,
Bioglan Pharma Plc, the Company and IMX Pharmaceuticals, Inc.(13) |
|
|
|
|
|
10.29
|
|
|
|
Medicis Pharmaceutical Corporation Executive Retention Plan(13) |
|
|
|
|
|
10.30
|
|
|
|
Asset Purchase Agreement, dated as of September 14, 1999, between the Company and Warner
Chilcott, Inc.(9) |
|
|
|
|
|
10.31(a)
|
|
|
|
Share Purchase Agreement between Q-Med International B.V. and Startskottet 21914
AB (under proposed change of name to Medicis Sweden Holdings AB), dated
February 10, 2003(19) |
|
|
|
|
|
10.31(b)
|
|
|
|
Amendment No. 1 to Share Purchase Agreement between Q-Med International
B.V. and Startskottet 21914 AB (under proposed change of name to Medicis Sweden
Holdings AB), dated as of March 7, 2003(19) |
|
|
|
|
|
10.32
|
|
|
|
Supply Agreement between the Company and Q-Med AB, dated as of March 7, 2003(21) |
|
|
|
|
|
10.33
|
|
|
|
Amended and Restated Intellectual Property Agreement between Q-Med AB and HA
North American Sales AB, dated as of March 7, 2003(19) |
|
|
|
|
|
10.34
|
|
*
|
|
Supply Agreement between Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of the
Company, and Q-Med AB, dated July 15, 2004(20) |
|
|
|
|
|
10.35
|
|
*
|
|
Intellectual Property License Agreement, dated July 15, 2004, between Q-Med AB and Medicis
Aesthetics Holdings Inc.(20) |
|
|
|
|
|
10.36
|
|
+*
|
|
Letter Agreement, dated January 20, 2011, by and among the Company, HA North American Sales
AB and Q-Med AB |
|
|
|
|
|
10.37
|
|
|
|
Note Agreement, dated as of October 1, 2001, by and among Ascent Pediatrics, Inc., the
Company, Furman Selz Investors II L.P., FS Employee Investors LLC, FS Ascent Investments
LLC, FS Parallel Fund L.P., BancBoston Ventures Inc. and Flynn Partners (16) |
|
|
|
|
|
10.38
|
|
|
|
Voting Agreement, dated as of October 1, 2001, by and among the Company, MPC Merger Corp.,
FS Private Investments LLC, Furman Selz Investors II L.P., FS Employee Investors LLC, FS
Ascent Investments LLC and FS Parallel Fund L.P.(16) |
|
|
|
|
|
10.39
|
|
|
|
Exclusive Remedy Agreement, dated as of October 1, 2001, by and among the Company, Ascent
Pediatrics, Inc., FS Private Investments LLC, Furman Selz Investors II L.P., FS Employee
Investors LLC, FS Ascent Investments LLC and FS Parallel Fund L.P., BancBoston Ventures
Inc., Flynn Partners, Raymond F. Baddour, Sc.D., Robert E. Baldini, Medical Science Partners
L.P. and Emmett Clemente, Ph.D.(16) |
|
|
|
|
|
10.40
|
|
|
|
Medicis Pharmaceutical Corporation 1992 Stock Option Plan(32) |
|
|
|
|
|
10.41
|
|
|
|
Form of Non-Qualified Employee Stock Option Certificate Agreement for Medicis Pharmaceutical
Corporation 2004 Stock Incentive Plan(33) |
|
|
|
|
|
10.42
|
|
|
|
Form of Restricted Stock Award Agreement for Medicis Pharmaceutical Corporation 2004 Stock
Incentive Plan(33) |
|
|
|
|
|
10.43
|
|
|
|
Letter Agreement, dated as of March 13, 2006 among the Company, Aesthetica Ltd., Medicis
Aesthetics Holdings Inc., Ipsen S.A. and Ipsen Ltd.(34) |
|
|
|
|
|
10.44
|
|
*
|
|
Development and Distribution Agreement, dated March 17, 2006, by and between Aesthetica,
Ltd. and Ipsen, Ltd.(35) |
|
|
|
|
|
10.45
|
|
*
|
|
Trademark License Agreement, dated March 17, 2006, by and between Aesthetica, Ltd. and
Ipsen, Ltd.(35) |
92
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
10.46
|
|
*
|
|
Trademark Assignment Agreement, dated March 17, 2006, by and between Aesthetica, Ltd. and
Ipsen, Ltd.(35) |
|
|
|
|
|
10.47(a)
|
|
|
|
Medicis 2006 Incentive Award Plan(36) |
|
|
|
|
|
10.47(b)
|
|
|
|
Amendment to the Medicis 2006 Incentive Award Plan, dated July 10, 2006(38) |
|
|
|
|
|
10.47(c)
|
|
|
|
Amendment No. 2 to the Medicis 2006 Incentive Award Plan, dated April 11, 2007(42) |
|
|
|
|
|
10.47(d)
|
|
|
|
Amendment No. 3 to the Medicis 2006 Incentive Award Plan, dated April 16, 2007(41) |
|
|
|
|
|
10.47(e)
|
|
|
|
Amendment No. 4 to the Medicis 2006 Incentive Award Plan, dated March 26, 2009(48) |
|
|
|
|
|
10.47(f)
|
|
|
|
Amendment No. 5 to the Medicis 2006 Incentive Award Plan, dated May 19, 2009(49) |
|
|
|
|
|
10.47(g)
|
|
|
|
Amendment No. 6 to the Medicis 2006 Incentive Award Plan, dated February 10,
2011(56) |
|
|
|
|
|
10.47(h)
|
|
|
|
Form of Stock Option Agreement for Medicis Pharmaceutical Corporation 2006 Incentive Award
Plan(44) |
|
|
|
|
|
10.47(i)
|
|
|
|
Form of Restricted Stock Agreement for Medicis Pharmaceutical Corporation 2006 Incentive
Award Plan(44) |
|
|
|
|
|
10.48(a)
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Mark A. Prygocki(46) |
|
|
|
|
|
10.48(b)
|
|
|
|
First Amendment to Amended and Restated Employment Agreement, dated June 15, 2010, between
the Company and Mark A. Prygocki(54) |
|
|
|
|
|
10.49
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Mitchell S. Wortzman, Ph.D.(46) |
|
|
|
|
|
10.50
|
|
|
|
Employment Agreement, dated July 25, 2006, between the Company and Richard J. Havens
(37) |
|
|
|
|
|
10.51(a)
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Jason D. Hanson (46) |
|
|
|
|
|
10.51(b)
|
|
|
|
First Amendment to Amended and Restated Employment Agreement, dated June 15, 2010, by and
between the Company and Jason D. Hanson(54) |
|
|
|
|
|
10.52
|
|
*
|
|
Office Sublease by and between Apex 7720 North Dobson, L.L.C., and the Company, dated as of
July 26, 2006(39) |
|
|
|
|
|
10.53
|
|
|
|
Corporate Integrity Agreement between the Office of Inspector General of the Department of
Health and Human Services and the Company(40) |
|
|
|
|
|
10.54(a)
|
|
*
|
|
Collaboration Agreement, dated as of August 23, 2007, by and between Ucyclyd Pharma, Inc.
and Hyperion Therapeutics, Inc.(43) |
|
|
|
|
|
10.54(b)
|
|
*
|
|
Second Amendment to the Collaboration Agreement, dated June 29, 2009, between Ucyclyd
Pharma, Inc. and Hyperion Therapeutics, Inc.(50) |
|
|
|
|
|
10.55(a)
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Joseph P.
Cooper(46) |
|
|
|
|
|
10.55(b)
|
|
|
|
Settlement Agreement and Release, dated June 15, 2010, by and between the Company and Joseph
P. Cooper(54) |
|
|
|
|
|
10.56
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Vincent P.
Ippolito(46) |
|
|
|
|
|
10.57(a)
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Richard D.
Peterson(46) |
|
|
|
|
|
10.57(b)
|
|
|
|
First Amendment to Employment Agreement, dated June 15, 2010, by and between the Company and
Richard D. Peterson(54) |
|
|
|
|
|
10.58
|
|
*
|
|
Joint Development Agreement, dated as of November 26, 2008, between the Company and Impax
Laboratories, Inc.(47) |
|
|
|
|
|
10.59
|
|
*
|
|
License and Settlement Agreement, dated as of November 26, 2008, between the Company and
Impax Laboratories, Inc.(47) |
|
|
|
|
|
10.60
|
|
*
|
|
Settlement Agreement, dated March 18, 2009, between the Company and Barr Laboratories, Inc.,
a wholly owned subsidiary of Teva Pharmaceuticals USA, Inc.(48) |
|
|
|
|
|
10.61
|
|
*
|
|
License and Settlement Agreement, dated April 8, 2009, between the Company and Perrigo
Israel Pharmaceuticals Ltd. and Perrigo Company(48) |
|
|
|
|
|
10.62
|
|
*
|
|
Joint Development Agreement, dated April 8, 2009, between the Company and Perrigo Israel
Pharmaceuticals Ltd.(48) |
|
|
|
|
|
10.63
|
|
|
|
Form of Indemnification Agreement for Directors and Officers of the Company(48) |
|
|
|
|
|
10.64
|
|
|
|
Settlement Agreement and Mutual Releases, dated August 18, 2009 by and between the Company
and Sandoz, Inc.(51) |
|
|
|
|
|
10.65(a)
|
|
*
|
|
Transition Agreement, dated as of January 28, 2005, between the Company and aaiPharma
Inc.(52) |
|
|
|
|
|
10.65(b)
|
|
*
|
|
First Amendment to the Transition Agreement, dated as of August 11, 2006, between the
Company and aaiPharma Inc.(52) |
93
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
10.65(c)
|
|
*
|
|
Second Amendment to the Transition Agreement, dated as of September 8, 2006, between the
Company and aaiPharma Inc.(52) |
|
|
|
|
|
10.66
|
|
*
|
|
Master Manufacturing Agreement, dated as of March 20, 2008, by and between Medicis Global
Services Corporation and WellSpring Pharmaceutical Canada Corp.(52) |
|
|
|
|
|
10.67
|
|
*
|
|
License and Settlement Agreement, dated as of November 14, 2009, among the Company, Glenmark
Generics Ltd. and Glenmark Generics Inc., USA(52) |
|
|
|
|
|
10.68
|
|
*
|
|
Amended and Restated Settlement Agreement, dated as of November 13, 2009, between the
Company and Barr Laboratories, Inc., a wholly owned subsidiary of Teva Pharmaceutical
Industries USA, Inc.(52) |
|
|
|
|
|
10.69
|
|
*
|
|
License and Settlement Agreement, dated as of May 4, 2010, among the Company, Ranbaxy
Inc. and Ranbaxy Laboratories Limited(54) |
|
|
|
|
|
10.70
|
|
*
|
|
Settlement Agreement, dated July 22, 2010, between the Company, Mylan Inc. and Matrix
Laboratories Ltd.(55) |
|
|
|
|
|
10.71
|
|
*
|
|
License Agreement, dated July 22, 2010, between the Company, Mylan Inc., Matrix Laboratories
Ltd. and Mylan Pharmaceuticals Inc.(55) |
|
|
|
|
|
10.72
|
|
*
|
|
License and Settlement Agreement, dated September 21, 2010, between the Company, Taro
Pharmaceutical Industries Ltd. and Taro Pharmaceuticals U.S.A., Inc.(55) |
|
|
|
|
|
10.73
|
|
+*
|
|
Settlement Agreement, dated January 21, 2011, by and between the Company and Impax
Laboratories, Inc. |
|
|
|
|
|
12
|
|
+
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
|
|
21.1
|
|
+
|
|
Subsidiaries |
|
|
|
|
|
23.1
|
|
+
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
|
|
24.1
|
|
|
|
Power of Attorney See signature page |
|
|
|
|
|
31.1
|
|
+
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
31.2
|
|
+
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
32.1
|
|
+
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
32.2
|
|
+
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
101
|
|
++**
|
|
The following financial information from Medicis Pharmaceutical Corporations Annual Report
on Form 10-K for the year ended December 31, 2010, formatted in XBRL (Extensible Business
Reporting Language) includes: (i) the Consolidated Balance Sheets as of December 31, 2010
and 2009, (ii) the Consolidated Statements of Income for the years ended December 31, 2010,
2009 and 2008, (iii) the Consolidated Statements of Stockholders Equity for the years ended
December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Cash Flows for the
years ended December 31, 2010, 2009 and 2008, and (v) the Notes to the Consolidated
Financial Statements. |
|
|
|
+ |
|
Filed herewith |
|
++ |
|
Furnished 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. |
|
** |
|
Pursuant to applicable securities laws and regulations, we are deemed to have complied
with the reporting obligation relating to the submission of interactive data files in such
exhibits and are not subject to liability under any anti-fraud provisions of the federal
securities laws as long as we have made a good faith attempt to comply with the submission
requirements and promptly amend the interactive data files after becoming aware that the
interactive data files fail to comply with the submission requirements. Users of this data
are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed
and otherwise are not subject to liability. |
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of the Registrant,
File No. 33-32918, filed with the SEC on January 16, 1990 |
|
(2) |
|
Incorporated by reference to the Registration Statement on Form S-1 of the Company, File
No. 33-54276, filed with the SEC on June 11, 1993 |
|
(3) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 1993, File No. 0-18443, filed with the SEC on October 13, 1993 |
|
(4) |
|
Incorporated by reference to Exhibit C to the definitive Proxy Statement for the 1995
Meeting of Annual Shareholders, File No. 0-18443, previously filed with the SEC |
|
(5) |
|
Incorporated by reference to the Companys 1995 Form 10-K |
|
(6) |
|
Incorporated by reference to the Companys 1995 Form 10-K |
94
|
|
|
(7) |
|
Incorporated by reference to the Companys 1995 Form 10-K |
|
(8) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, File No. 0-18443, previously filed with the SEC |
|
(9) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 001-14471, previously filed with the SEC |
|
(10) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, File No. 0-18443, previously filed with the SEC |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on December 15, 1997 |
|
(12) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, File No. 001-14471, previously filed with the SEC |
|
(13) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 1999, File No. 001-14471, previously filed with the SEC |
|
(14) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001, File No. 001-14471, previously filed with the SEC |
|
(15) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 2001, File No. 001-14471, previously filed with the SEC |
|
(16) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on October 2, 2001 |
|
(17) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on June 6, 2002 |
|
(18) |
|
Incorporated by reference to the Companys Annual Report on Form
10-K for the fiscal year ended June 30, 2002, File No. 0-18443, previously filed with the SEC |
|
(19) |
|
Incorporated by reference to the Companys Current Report on Form
8-K filed with the SEC on March 10, 2003 |
|
(20) |
|
Incorporated by reference to the Companys Annual Report on Form
10-K for the fiscal year ended June 30, 2004, File No. 001-14471, previously filed with the
SEC |
|
(21) |
|
Incorporated by reference to the Companys Current Report on Form
8-K filed with the SEC on March 21, 2005 |
|
(22) |
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005, File No. 001-14471, previously filed with
the SEC |
|
(23) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on August 18, 2005 |
|
(24) |
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2005, File No. 001-14471, previously filed with
the SEC |
|
(25) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on October 20, 2005 |
|
(26) |
|
Incorporated by reference to the Companys Annual Report on
Form 10-K/A for the fiscal year ended June 30, 2005, File No. 001-14471, previously filed
with the SEC on October 28, 2005 |
|
(27) |
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005, File No. 001-14471, previously filed
with the SEC |
|
(28) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on December 13, 2005 |
|
(29) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on January 3, 2006 |
|
(30) |
|
Incorporated by reference to Appendix 1 to the Companys definitive Proxy Statement for
the 1998 Annual Meeting of Stockholders filed with the SEC on December 2, 1998 |
|
(31) |
|
Incorporated by reference to Appendix 2 to the Companys definitive Proxy Statement for
the 1996 Annual |
|
|
|
Meeting of Stockholders filed with the SEC on October 23, 1996 |
|
(32) |
|
Incorporated by reference to Exhibit B to the Companys definitive Proxy Statement for
the 1992 Annual Meeting of Stockholders previously filed with the SEC |
|
(33) |
|
Incorporated by reference to the Companys Annual Report on Form 10-K/T for the six month
transition period ended December 31, 2005, File No. 001-14471, previously filed with the SEC on March
16, 2006 |
|
(34) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on March 16, 2006 |
|
(35) |
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006, File No. 001-14471, previously filed with
the SEC |
95
|
|
|
(36) |
|
Incorporated by reference to Appendix A to the Companys Definitive Proxy Statement for
the 2006 Annual Meeting of Stockholders filed with the SEC on April 13, 2006 |
|
(37) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on July 31, 2006 |
|
(38) |
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006, File No. 001-14471, previously filed with the SEC |
|
(39) |
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006, File No. 001-14471, previously filed
with the SEC |
|
(40) |
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the SEC on April 30, 2007 |
|
(41) |
|
Incorporated by reference to Appendix A to the Companys Definitive Proxy Statement on
Schedule 14A filed with the SEC on April 16, 2007 |
|
(42) |
|
Incorporated by reference to the Companys Registration Statement on Form S-8 dated July 3, 2007 |
|
(43) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, File No. 001-14471, previously filed with the SEC |
|
(44) |
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the year ended December 31, 2007, File No. 001-14471, previously filed with
the SEC |
|
(45) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008, File No. 001-14471, previously filed with the SEC. |
|
(46) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on December 30, 2008 |
|
(47) |
|
Incorporated by reference to the Companys Annual Report on 10-K for the year ended
December 31, 2008, File No. 0-14471, previously filed with the SEC |
|
(48) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009, File No. 001-14471, previously filed with the SEC. |
|
(49) |
|
Incorporated by reference to Appendix A to the Companys definitive Proxy Statement for the
2009 Annual Meeting of Stockholders filed with the SEC on April 7, 2009 |
|
(50) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009, File No. 001-14471, previously filed with the SEC. |
|
(51) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2009, File No. 001-14471, previously filed with the SEC. |
|
(52) |
|
Incorporated by reference to the Companys Annual Report on 10-K for the year ended
December 31, 2009, File No. 0-14471, previously filed with the SEC |
|
(53) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on June 18, 2010 |
|
(54) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010, File No. 001-14471, previously filed with the SEC. |
|
(55) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2010, File No. 001-14471, previously filed with the SEC. |
|
(56) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC
on February 15, 2011 |
(b) The exhibits to this Form 10-K follow the Companys Financial Statement Schedule included in
this Form 10-K.
(c) The Financial Statement Schedule to this Form 10-K appears on page S-1 of this Form 10-K.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 1, 2011
|
|
|
|
|
|
MEDICIS PHARMACEUTICAL CORPORATION
|
|
|
By: |
/s/ JONAH SHACKNAI
|
|
|
|
Jonah Shacknai |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Jonah Shacknai and Richard D. Peterson, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant to the Securities
Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof. This power of attorney shall be governed by and construed with the laws of
the States of Delaware and applicable federal securities laws.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the capacities and on the
dates indicated.
|
|
|
|
|
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/ JONAH SHACKNAI
|
|
Chairman of the Board of Directors
|
|
March 1, 2011 |
|
|
and
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ RICHARD D. PETERSON
Richard D. Peterson |
|
Executive Vice President, Chief Financial
Officer, and Treasurer
|
|
March 1, 2011 |
|
(Principal
Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/ ARTHUR G. ALTSCHUL, JR.
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ SPENCER DAVIDSON
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ STUART DIAMOND
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ PETER S. KNIGHT, ESQ.
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL A. PIETRANGELO
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ PHILIP S. SCHEIN, M.D.
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
|
|
|
|
|
/s/ LOTTIE SHACKELFORD
|
|
Director
|
|
March 1, 2011 |
|
|
|
|
|
97
MEDICIS PHARMACEUTICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
PAGE |
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-8 |
|
|
|
|
F-9 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Medicis Pharmaceutical Corporation
We have audited the accompanying consolidated balance sheets of Medicis Pharmaceutical
Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the three years
in the period ended December 31, 2010. Our audits also included the financial statement schedule
listed in Item 15(a)(2). These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
and schedule based upon our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Medicis Pharmaceutical Corporation and
subsidiaries at December 31, 2010 and 2009 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Medicis Pharmaceutical Corporations internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2011 expressed an unqualified opinion thereon.
Phoenix, Arizona
March 1, 2011
F-2
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
218,990 |
|
|
$ |
209,051 |
|
Short-term investments |
|
|
485,192 |
|
|
|
319,229 |
|
Accounts receivable, less allowances: |
|
|
|
|
|
|
|
|
December 31, 2010 and 2009: $3,981
and $2,848, respectively |
|
|
130,751 |
|
|
|
95,222 |
|
Inventories, net |
|
|
39,777 |
|
|
|
25,985 |
|
Deferred tax assets, net |
|
|
76,702 |
|
|
|
66,321 |
|
Other current assets |
|
|
15,662 |
|
|
|
16,525 |
|
|
|
|
Total current assets |
|
|
967,074 |
|
|
|
732,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
24,552 |
|
|
|
25,247 |
|
Net intangible assets |
|
|
195,309 |
|
|
|
227,840 |
|
Goodwill |
|
|
92,398 |
|
|
|
93,282 |
|
Deferred tax assets, net |
|
|
37,986 |
|
|
|
64,947 |
|
Long-term investments |
|
|
21,480 |
|
|
|
25,524 |
|
Other assets |
|
|
3,025 |
|
|
|
3,025 |
|
|
|
|
|
|
$ |
1,341,824 |
|
|
$ |
1,172,198 |
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
42,817 |
|
|
$ |
44,183 |
|
Reserve for sales returns |
|
|
60,692 |
|
|
|
48,062 |
|
Accrued consumer rebate and loyalty programs |
|
|
101,678 |
|
|
|
73,311 |
|
Managed care and Medicaid reserves |
|
|
49,375 |
|
|
|
47,078 |
|
Income taxes payable |
|
|
4,628 |
|
|
|
16,679 |
|
Other current liabilities |
|
|
80,702 |
|
|
|
68,381 |
|
|
|
|
Total current liabilities |
|
|
339,892 |
|
|
|
297,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Contingent convertible senior notes |
|
|
169,326 |
|
|
|
169,326 |
|
Other liabilities |
|
|
5,084 |
|
|
|
9,919 |
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; shares
authorized: 5,000,000; no shares issued |
|
|
|
|
|
|
|
|
Class A common stock, $0.014 par value;
shares authorized: 150,000,000; issued and
outstanding: 71,863,191 and 70,732,409 at
December 31, 2010 and December 31, 2009,
respectively |
|
|
995 |
|
|
|
985 |
|
Class B common stock, $0.014 par value; shares
authorized: 1,000,000; issued and outstanding: none |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
715,651 |
|
|
|
690,497 |
|
Accumulated other comprehensive loss |
|
|
(2,149 |
) |
|
|
(3,814 |
) |
Accumulated earnings |
|
|
460,716 |
|
|
|
351,842 |
|
Less: Treasury stock, 12,897,610 and 12,749,261 shares
at cost at December 31, 2010 and December 31,
2009, respectively |
|
|
(347,691 |
) |
|
|
(344,251 |
) |
|
|
|
Total stockholders equity |
|
|
827,522 |
|
|
|
695,259 |
|
|
|
|
|
|
$ |
1,341,824 |
|
|
$ |
1,172,198 |
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Net product revenues |
|
$ |
691,602 |
|
|
$ |
561,761 |
|
|
$ |
500,977 |
|
Net contract revenues |
|
|
8,366 |
|
|
|
10,154 |
|
|
|
16,773 |
|
|
|
|
Net revenues |
|
|
699,968 |
|
|
|
571,915 |
|
|
|
517,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues (1) |
|
|
69,981 |
|
|
|
56,833 |
|
|
|
38,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
629,987 |
|
|
|
515,082 |
|
|
|
479,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (2) |
|
|
323,074 |
|
|
|
282,218 |
|
|
|
279,307 |
|
Research and development (3) |
|
|
58,282 |
|
|
|
72,497 |
|
|
|
100,377 |
|
Depreciation and amortization |
|
|
29,344 |
|
|
|
29,047 |
|
|
|
27,698 |
|
In-process research and development |
|
|
|
|
|
|
|
|
|
|
30,500 |
|
Impairment of long-lived assets |
|
|
12,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
207,203 |
|
|
|
131,320 |
|
|
|
41,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income |
|
|
(4,117 |
) |
|
|
(7,631 |
) |
|
|
(23,396 |
) |
Interest expense |
|
|
4,235 |
|
|
|
4,228 |
|
|
|
6,674 |
|
Other expense (income), net |
|
|
257 |
|
|
|
(867 |
) |
|
|
15,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
206,828 |
|
|
|
135,590 |
|
|
|
42,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
83,493 |
|
|
|
59,639 |
|
|
|
32,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
123,335 |
|
|
$ |
75,951 |
|
|
$ |
10,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
2.05 |
|
|
$ |
1.29 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
1.89 |
|
|
$ |
1.21 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.24 |
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in calculating: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
|
58,430 |
|
|
|
57,252 |
|
|
|
56,567 |
|
|
|
|
Diluted net income per share |
|
|
64,601 |
|
|
|
63,172 |
|
|
|
56,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) amounts exclude amortization
of intangible assets related to
acquired products |
|
$ |
21,696 |
|
|
$ |
22,378 |
|
|
$ |
21,479 |
|
(2) amounts include share-based
compensation expense |
|
$ |
16,275 |
|
|
$ |
18,122 |
|
|
$ |
16,265 |
|
(3) amounts include share-based
compensation expense |
|
$ |
1,302 |
|
|
$ |
1,053 |
|
|
$ |
332 |
|
See accompanying notes to consolidated financial statements.
F-5
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
|
Common Stock |
|
|
Common Stock |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Balance at December 31, 2007 |
|
|
69,005 |
|
|
$ |
965 |
|
|
|
|
|
|
$ |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued for deferred compensation |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares held in lieu of employee taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
281 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Tax effect of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
69,396 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of FSP FAS 115-2 (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued for deferred compensation |
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares held in lieu of employee taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,134 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
Tax effect of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
70,732 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued for deferred compensation |
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares held in lieu of employee taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
730 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Tax effect of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
71,863 |
|
|
$ |
995 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
FSP FAS 115-2 is now part of ASC 320, Investments Debt and Equity Securities. |
See accompanying notes to consolidated financial statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Treasury |
|
|
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stock |
|
|
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
$ |
641,907 |
|
|
$ |
2,221 |
|
|
$ |
281,218 |
|
|
|
(12,656 |
) |
|
$ |
(343,010 |
) |
|
$ |
583,301 |
|
|
|
|
|
|
|
|
|
|
10,276 |
|
|
|
|
|
|
|
|
|
|
|
10,276 |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,161 |
|
|
16,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,597 |
|
|
|
|
|
|
|
|
|
|
(9,210 |
) |
|
|
|
|
|
|
|
|
|
|
(9,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
(358 |
) |
|
|
(358 |
) |
|
4,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,846 |
|
|
(1,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661,703 |
|
|
|
2,106 |
|
|
|
282,284 |
|
|
|
(12,679 |
) |
|
|
(343,368 |
) |
|
|
603,694 |
|
|
|
|
|
|
|
|
|
|
75,951 |
|
|
|
|
|
|
|
|
|
|
|
75,951 |
|
|
|
|
|
|
(2,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,814 |
) |
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,126 |
|
|
|
|
|
|
(3,095 |
) |
|
|
3,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,556 |
|
|
|
|
|
|
|
|
|
|
(9,488 |
) |
|
|
|
|
|
|
|
|
|
|
(9,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70 |
) |
|
|
(883 |
) |
|
|
(883 |
) |
|
16,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,123 |
|
|
(869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,497 |
|
|
|
(3,814 |
) |
|
|
351,842 |
|
|
|
(12,749 |
) |
|
|
(344,251 |
) |
|
|
695,259 |
|
|
|
|
|
|
|
|
|
|
123,335 |
|
|
|
|
|
|
|
|
|
|
|
123,335 |
|
|
|
|
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,414 |
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
9,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,669 |
|
|
|
|
|
|
|
|
|
|
(14,461 |
) |
|
|
|
|
|
|
|
|
|
|
(14,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149 |
) |
|
|
(3,440 |
) |
|
|
(3,440 |
) |
|
16,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,322 |
|
|
(827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
715,651 |
|
|
$ |
(2,149 |
) |
|
$ |
460,716 |
|
|
|
(12,898 |
) |
|
$ |
(347,691 |
) |
|
$ |
827,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
123,335 |
|
|
$ |
75,951 |
|
|
$ |
10,276 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development |
|
|
|
|
|
|
|
|
|
|
30,500 |
|
Depreciation and amortization |
|
|
29,344 |
|
|
|
29,046 |
|
|
|
27,698 |
|
Amortization of deferred financing fees |
|
|
|
|
|
|
|
|
|
|
666 |
|
Impairment of long-lived assets |
|
|
12,084 |
|
|
|
|
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
|
|
|
|
20 |
|
(Gain) loss on sale of product rights |
|
|
|
|
|
|
(350 |
) |
|
|
398 |
|
Gain on sale of Medicis Pediatrics |
|
|
|
|
|
|
(2,915 |
) |
|
|
|
|
Impairment of available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
6,400 |
|
Charge reducing value of investment in Revance |
|
|
|
|
|
|
2,886 |
|
|
|
9,071 |
|
Loss (gain) on sale of available-for-sale investments, net |
|
|
1,169 |
|
|
|
(1,609 |
) |
|
|
(1,020 |
) |
Share-based compensation expense |
|
|
17,577 |
|
|
|
19,175 |
|
|
|
16,597 |
|
Deferred income tax (benefit) expense |
|
|
15,105 |
|
|
|
(3,408 |
) |
|
|
(42,690 |
) |
Tax expense from exercise of stock options and vesting
of restricted stock awards |
|
|
(185 |
) |
|
|
(925 |
) |
|
|
(1,643 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
(462 |
) |
|
|
(241 |
) |
|
|
(169 |
) |
Increase in provision for sales discounts and chargebacks |
|
|
1,133 |
|
|
|
1,129 |
|
|
|
888 |
|
Accretion (amortization) of premium/(discount) on investments |
|
|
3,250 |
|
|
|
3,273 |
|
|
|
(60 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(36,662 |
) |
|
|
(43,763 |
) |
|
|
(30,259 |
) |
Inventories |
|
|
(13,792 |
) |
|
|
(1,759 |
) |
|
|
6,693 |
|
Other current assets |
|
|
862 |
|
|
|
3,152 |
|
|
|
(1,176 |
) |
Accounts payable |
|
|
(1,366 |
) |
|
|
5,151 |
|
|
|
3,707 |
|
Reserve for sales returns |
|
|
12,630 |
|
|
|
(11,549 |
) |
|
|
(9,176 |
) |
Income taxes payable |
|
|
(11,168 |
) |
|
|
16,679 |
|
|
|
(7,731 |
) |
Other current liabilities |
|
|
30,388 |
|
|
|
93,981 |
|
|
|
28,417 |
|
Other liabilities |
|
|
(4,835 |
) |
|
|
(6,019 |
) |
|
|
(1,637 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
178,407 |
|
|
|
177,885 |
|
|
|
45,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(8,201 |
) |
|
|
(5,339 |
) |
|
|
(11,071 |
) |
Equity investment in an unconsolidated entity |
|
|
|
|
|
|
(616 |
) |
|
|
|
|
LipoSonix acquisition, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(149,805 |
) |
Payment of direct merger costs |
|
|
|
|
|
|
|
|
|
|
(3,637 |
) |
Payments for purchase of product rights |
|
|
|
|
|
|
(88,860 |
) |
|
|
(1,024 |
) |
Proceeds from sale of product rights |
|
|
|
|
|
|
350 |
|
|
|
|
|
Proceeds from sale of Medicis Pediatrics |
|
|
|
|
|
|
70,294 |
|
|
|
|
|
Purchase of available-for-sale investments |
|
|
(498,139 |
) |
|
|
(414,527 |
) |
|
|
(393,862 |
) |
Sale of available-for-sale investments |
|
|
205,364 |
|
|
|
131,914 |
|
|
|
417,536 |
|
Maturity of available-for-sale investments |
|
|
128,683 |
|
|
|
244,553 |
|
|
|
361,988 |
|
Decrease (increase) in other assets |
|
|
|
|
|
|
5 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(172,293 |
) |
|
|
(62,226 |
) |
|
|
220,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(13,210 |
) |
|
|
(9,411 |
) |
|
|
(8,600 |
) |
Payment of contingent convertible senior notes |
|
|
|
|
|
|
|
|
|
|
(283,729 |
) |
Proceeds from the exercise of stock options |
|
|
16,322 |
|
|
|
16,123 |
|
|
|
4,846 |
|
Excess tax benefits from share-based payment arrangements |
|
|
462 |
|
|
|
241 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
3,574 |
|
|
|
6,953 |
|
|
|
(287,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
251 |
|
|
|
(11 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
9,939 |
|
|
|
122,601 |
|
|
|
(21,596 |
) |
Cash and cash equivalents at beginning of period |
|
|
209,051 |
|
|
|
86,450 |
|
|
|
108,046 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
218,990 |
|
|
$ |
209,051 |
|
|
$ |
86,450 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
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 and aesthetic 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 16 branded products. Its primary brands
are DYSPORT®, PERLANE®, RESTYLANE®, SOLODYN®,
VANOS® and ZIANA®. Medicis entered the non-invasive body contouring 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
At December 31, 2010, cash and cash equivalents included highly liquid investments in money
market accounts consisting of government securities and high-grade commercial paper. These
investments are stated at cost, which approximates fair value. The Company considers all highly
liquid investments purchased with a remaining maturity of three months or less to be cash
equivalents.
Short-Term and Long-Term Investments
The Companys short-term and long-term investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value with the unrealized gains and losses
reported in stockholders equity. Realized gains and losses and declines in value judged to be
other-than-temporary are included in operations. On an ongoing basis, the Company evaluates its
available-for-sale securities to determine if a decline in value is other-than-temporary. A
decline in market value of any available-for-sale security below cost that is determined to be
other-than-temporary, results in an impairment in 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. Realized gains and losses and interest
and dividends on securities are included in interest and investment income. The cost of securities
sold is calculated using the specific identification method.
Inventories
The Company primarily 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 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-
F-9
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 December 31, 2010 and 2009,
there were $0 and $0.3 million, respectively, of costs capitalized into inventory for products that
had not yet received regulatory approval.
Inventories are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Raw materials |
|
$ |
17,436 |
|
|
$ |
7,472 |
|
Work-in-process |
|
|
4,531 |
|
|
|
3,660 |
|
Finished goods |
|
|
26,403 |
|
|
|
21,087 |
|
Valuation reserve |
|
|
(8,593 |
) |
|
|
(6,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
39,777 |
|
|
$ |
25,985 |
|
|
|
|
|
|
|
|
The increase in the valuation reserve during 2010, which primarily occurred during the fourth
quarter of 2010, was due to an increase in the amount of inventory that was projected to not be
sold by expiry dates, as of December 31, 2010 as compared to December 31, 2009.
Selling, general and administrative costs capitalized into inventory during 2010, 2009 and
2008 was $1.6 million, $1.4 million and $0.5 million, respectively. Selling, general and
administrative expenses included in inventory as of December 31, 2010 and 2009 was $0.9 million and
$1.2 million, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line
basis over the estimated useful lives of property and equipment (three to five years). Leasehold
improvements are amortized over the shorter of their estimated useful lives or the remaining lease
term.
Capitalized internal-use software includes direct costs associated with the acquisition or
development of computer software for internal use, including costs associated with the design,
coding and testing of the system. Costs associated with initial development, such as the
evaluation and selection of alternatives, as well as training, support and maintenance, are
expensed as incurred.
Property and equipment consist of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Furniture, fixtures and equipment |
|
$ |
21,193 |
|
|
$ |
20,334 |
|
Capitalized internal-use software |
|
|
15,935 |
|
|
|
11,431 |
|
Leasehold improvements |
|
|
14,564 |
|
|
|
14,655 |
|
|
|
|
|
|
|
|
|
|
|
51,692 |
|
|
|
46,420 |
|
Less: accumulated depreciation |
|
|
(27,140 |
) |
|
|
(21,173 |
) |
|
|
|
|
|
|
|
|
|
$ |
24,552 |
|
|
$ |
25,247 |
|
|
|
|
|
|
|
|
Total depreciation expense for property and equipment was approximately $7.4 million, $6.4
million and $6.0 million for 2010, 2009 and 2008, respectively.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated
fair value of the net identified tangible and intangible assets acquired. The Company is required
to perform an impairment assessment at least annually, and more frequently under certain
circumstances. The goodwill is subject to this
F-10
annual impairment test during the last quarter of the Companys fiscal year. If the Company
determines through the impairment process that goodwill has been impaired, the Company will record
the impairment charge in the statement of operations. For the years ended December 31, 2010, 2009
and 2008, there was no impairment charge related to goodwill. There can be no assurance that
future goodwill impairment tests will not result in a charge to earnings.
The following is a summary of changes in the Companys recorded goodwill during 2009 and 2010
(amounts in thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
156,762 |
|
Sale of Medicis Pediatrics (see Note 6) |
|
|
(63,107 |
) |
Adjustment of LipoSonix tax
attributes acquired |
|
|
(373 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
|
93,282 |
|
Adjustment of LipoSonix tax
attributes acquired |
|
|
(884 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
92,398 |
|
|
|
|
|
Prior to December 31, 2008, there were no impairments or other adjustments made to the
Companys recorded goodwill.
Intangible Assets
The Company has acquired license agreements, product rights, and other identifiable intangible
assets. The Company amortizes intangible assets on a straight-line basis over their expected
useful lives, which range between seven and 25 years. Details of total intangible assets were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Average |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Life |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Related to product line
acquisitions |
|
|
15.4 |
|
|
$ |
315,460 |
|
|
$ |
(125,260 |
) |
|
$ |
190,200 |
|
|
$ |
320,796 |
|
|
$ |
(107,278 |
) |
|
$ |
213,518 |
|
Related to business
combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,400 |
|
|
|
(1,005 |
) |
|
|
8,395 |
|
Patents and trademarks |
|
|
19.4 |
|
|
|
7,031 |
|
|
|
(1,922 |
) |
|
|
5,109 |
|
|
|
7,598 |
|
|
|
(1,671 |
) |
|
|
5,927 |
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
322,491 |
|
|
$ |
(127,182 |
) |
|
$ |
195,309 |
|
|
$ |
337,794 |
|
|
$ |
(109,954 |
) |
|
$ |
227,840 |
|
|
|
|
|
|
|
|
|
|
Total amortization expense was approximately $21.9 million, $22.7 million and $21.7
million for 2010, 2009 and 2008, respectively. Based on the intangible assets recorded at December
31, 2010, and assuming no subsequent impairment of the underlying assets, annual amortization
expense for the next five years is expected to be as follows: $21.0 million for the year ended
December 31, 2011, $23.1 million for the year ended December 31, 2012, $25.4 million for the year
ended December 31, 2013, $24.1 million for the year ended December 31, 2014, and $21.4 million for
the year ended December 31, 2015.
Impairment of Long-Lived Assets
The Company assesses the potential impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable. Factors that
the Company considers in deciding when to perform an impairment review include significant
under-performance of a product line in relation to expectations, significant negative industry or
economic trends and significant changes or planned changes in the Companys use of the assets.
Recoverability of assets that will continue to be used in the Companys operations is measured by
comparing the carrying amount of the asset grouping to the Companys estimate of the related total
future net cash flows. If an asset carrying value is not recoverable through the related cash
flows, the asset is considered to be impaired. The impairment is measured by the difference between
the asset groupings carrying amount and its present value of anticipated net cash flows, based on
the best information available, including market prices or discounted cash flow analysis. If the
assets determined to be impaired are to be held and used, the
F-11
Company recognizes an impairment loss through a charge to operating results to the extent the
present value of anticipated net cash flows attributable to the asset are less than the assets
carrying value. When it is determined that the useful lives of assets are shorter than originally
estimated, and there are sufficient cash flows to support the carrying value of the assets, the
Company will accelerate the rate of amortization charges in order to fully amortize the assets over
their new shorter useful lives.
This process requires the use of estimates and assumptions, which are subject to a high degree
of judgment. If these assumptions change in the future, the Company may be required to record
impairment charges for these assets.
During the year ended December 31, 2010, long-lived assets related to certain of the Companys
products were determined to be impaired based on the Companys analysis of the long-lived assets
carrying value and projected future cash flows. As a result of the impairment analysis, the
Company recorded a write-down of approximately $12.1 million related to these long-lived assets.
This write-down included the following (in thousands):
|
|
|
|
|
Intangible assets related to LipoSonixTM |
|
$ |
7,725 |
|
Property and equipment related to LipoSonixTM |
|
|
2,066 |
|
Intangible asset related to non-primary products |
|
|
2,293 |
|
|
|
|
|
|
|
$ |
12,084 |
|
|
|
|
|
Factors affecting the future cash flows of the LipoSonixTM long-lived assets
include the current regulatory and commercial capital equipment environment, which have included
delays in the regulatory approval process and competitive products entering the market. The $7.7
million write-down of intangible assets related to LipoSonixTM represented the full
carrying value of the intangible assets as of December 31, 2010. Quarterly amortization expense
related to these intangible assets prior to the write-down was $167,500. The $2.1 million
write-down of property and equipment related to LipoSonixTM represented the full carrying value of
the assets as of December 31, 2010. Quarterly depreciation expense related to these assets prior
to the write-down was $138,300.
Factors affecting the future cash flows of the intangible asset related to certain non-primary
products include the planned discontinuation of the products, which are not significant components
of the Companys operations. In addition, as a result of the impairment analysis, the remaining
amortizable life of the intangible asset was reduced to five months. The intangible asset became
fully amortized on February 28, 2011.
Managed Care and Medicaid Reserves
Rebates are contractual discounts offered to government agencies and private health plans that
are eligible for such discounts at the time prescriptions are dispensed, subject to various
conditions. The Company records provisions for rebates based on factors such as timing and terms
of plans under contract, time to process rebates, product pricing, sales volumes, amount of
inventory in the distribution channel, and prescription trends.
Consumer Rebate and Loyalty Programs
Consumer rebate and loyalty programs are contractual discounts and incentives offered to
consumers at the time prescriptions are dispensed, subject to various conditions. The Company
estimates its accruals for consumer rebates based on estimated redemption rates and average rebate
amounts based on historical and other relevant data. The Company estimates its accruals for loyalty
programs, which are related to the Companys aesthetic products, based on an estimate of eligible
procedures based on historical and other relevant data.
F-12
Other Current Liabilities
Other current liabilities are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Accrued incentives, including SARs liability |
|
$ |
37,906 |
|
|
$ |
26,671 |
|
Deferred revenue |
|
|
16,637 |
|
|
|
18,508 |
|
Other accrued expenses |
|
|
26,159 |
|
|
|
23,202 |
|
|
|
|
|
|
|
|
|
|
$ |
80,702 |
|
|
$ |
68,381 |
|
|
|
|
|
|
|
|
Deferred revenue is comprised of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Deferred revenue aesthetics products, net of cost of revenue |
|
$ |
10,334 |
|
|
$ |
13,467 |
|
Current portion of deferred contact revenue |
|
|
3,014 |
|
|
|
3,450 |
|
Deferred revenue sales into distribution
channel in excess of eight weeks of
projected demand |
|
|
582 |
|
|
|
1,263 |
|
Other deferred revenue |
|
|
2,707 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
$ |
16,637 |
|
|
$ |
18,508 |
|
|
|
|
|
|
|
|
The Company defers revenue, and the related cost of revenue, of its aesthetics products,
including DYSPORT®, PERLANE® and RESTYLANE®, until its exclusive
U.S. distributor ships the product to physicians. The current portion of deferred contract revenue
relates to the Companys strategic collaboration with Hyperion (see Note 4). The Company also
defers the recognition of revenue for certain sales of inventory into the distribution channel that
are in excess of eight (8) weeks of projected demand.
Revenue Recognition
Revenue from product sales is recognized pursuant to ASC 605, Revenue Recognition.
Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products has occurred; (iii) the selling
price is both fixed and determinable; and (iv) collectibility is reasonably assured. The Companys
customers consist primarily of large pharmaceutical wholesalers who sell directly into the retail
channel. Provisions for estimated product returns, sales discounts and chargebacks are established
as a reduction of product sales revenues at the time such revenues are recognized. Provisions for
managed care and Medicaid rebates and consumer rebate and loyalty programs are established as a
reduction of product sales revenues at the later of the date at which revenue is recognized or the
date at which the sales incentive is offered. These deductions from gross revenue are established
by the Companys management as its best estimate based on historical experience adjusted to reflect
known changes in the factors that impact such reserves, including but not limited to, prescription
data, industry trends, competitive developments and estimated inventory in the distribution
channel. The Companys estimates of inventory in the distribution channel are based on inventory
information reported to the Company by its major wholesale customers for which the Company has
inventory management agreements, historical shipment and return information from its accounting
records, and data on prescriptions filled, which the Company purchases from one of the leading
providers of prescription-based information. The Company continually monitors internal and
external data, in order to ensure that information obtained from external sources is reasonable.
The Company also utilizes projected prescription demand for its products, as well as, the Companys
internal information regarding its products. These deductions from gross revenue are generally
reflected either as a direct reduction to accounts receivable through an allowance, as a reserve
within current liabilities, or as an addition to accrued expenses.
F-13
The Company enters into licensing arrangements with other parties whereby the Company receives
contract revenue based on the terms of the agreement. The timing of revenue recognition is
dependent on the level of the Companys continuing involvement in the manufacture and delivery of
licensed products. If the Company has continuing involvement, the revenue is deferred and
recognized on a straight-line basis over the period of continuing involvement. In addition, if the
licensing arrangements require no continuing involvement and payments are merely based on the
passage of time, the Company assesses such payments for revenue recognition under the
collectibility criteria of ASC 605. Direct costs related to contract acquisition and origination
of licensing agreements are expensed as incurred.
The Company does not provide any material forms of price protection to its wholesale customers
and permits product returns if the product is damaged, or, depending on the customer and product,
if it is returned within six months prior to expiration or up to 12 months after expiration. The
Companys customers consist principally of financially viable wholesalers, and depending on the
customer, revenue is based upon shipment (FOB shipping point) or receipt (FOB destination), net
of estimated provisions. As a result of certain modifications made to the Companys distribution
services agreement with McKesson, the Companys exclusive U.S. distributor of its aesthetics
products DYSPORT®, PERLANE® and RESTYLANE®, the Company began
recognizing revenue on these products upon the shipment from McKesson to physicians beginning in
the second quarter of 2009. As a general practice, the Company does not ship prescription product
that has less than 12 months until its expiration date. The Company also authorizes returns for
damaged products and credits for expired products in accordance with its returned goods policy and
procedures.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses for 2010, 2009 and
2008 were $62.8 million, $51.9 million and $47.0 million, respectively. Advertising expenses
include samples of the Companys products given to physicians for marketing to their patients.
Shipping and Handling Costs
Substantially all costs of shipping and handling of products to customers are included in
selling, general and administrative expense. Shipping and handling costs for 2010, 2009 and 2008
were approximately $3.2 million, $2.5 million and $2.8 million, respectively.
Research and Development Costs and Accounting for Strategic Collaborations
All research and development costs, including payments related to products under development
and research consulting agreements, are expensed as incurred. The Company may continue to make
non-refundable payments to third parties for new technologies and for research and development work
that has been completed. These payments may be expensed at the time of payment depending on the
nature of the payment made.
The Companys policy on accounting for costs of strategic collaborations determines the timing
of the recognition of certain development costs. In addition, this policy determines whether the
cost is classified as development expense or capitalized as an asset. Management is required to
form judgments with respect to the commercial status of such products in determining whether
development costs meet the criteria for immediate expense or capitalization. For example, when the
Company acquires certain products for which there is already an Abbreviated New Drug Application
(ANDA) or a New Drug Application (NDA) approval related directly to the product, and there is
net realizable value based on projected sales for these products, the Company capitalizes the
amount paid as an intangible asset. If the Company acquires product rights which are in the
development phase and to which the Company has no assurance that the third party will successfully
complete its development milestones, the Company expenses such payments.
F-14
Research and development expense for 2010, 2009 and 2008 was as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Ongoing research and development costs |
|
$ |
38,080 |
|
|
$ |
38,944 |
|
|
$ |
35,045 |
|
Payments related to strategic
collaborations |
|
|
18,900 |
|
|
|
32,500 |
|
|
|
65,000 |
|
Share-based compensation expense |
|
|
1,302 |
|
|
|
1,053 |
|
|
|
332 |
|
|
|
|
|
Total research and development |
|
$ |
58,282 |
|
|
$ |
72,497 |
|
|
$ |
100,377 |
|
|
|
|
Income Taxes
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 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 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.
Legal Contingencies
In the ordinary course of business, the Company is involved in legal proceedings involving
regulatory inquiries, contractual and employment relationships, product liability claims, patent
rights, and a variety of other matters. The Company records contingent liabilities resulting from
asserted and unasserted claims against it, when it is probable that a liability has been incurred
and the amount of the loss is estimable. Estimating probable losses requires analysis of multiple
factors, in some cases including judgments about the potential actions of third-party claimants and
courts. Therefore, actual losses in any future period are inherently uncertain. Currently, the
Company does not believe any of its pending legal proceedings or claims will have a material
adverse effect on its results of operations or financial condition. See Note 12 for further
discussion.
Foreign Currency Translations
The
local currency is typically the functional currency of our foreign subsidiaries. The financial
statements of foreign subsidiaries have been translated into U.S. Dollars. All balance sheet
accounts have been translated using the exchange rates in effect at the balance sheet date. Income
statement amounts have been translated using the average exchange rate for the year. The gains and
losses resulting from the changes in exchange rates from year to year have been reported in other
comprehensive income. Total accumulated gains from foreign currency translation, included in
accumulated other comprehensive loss at December 31, 2010, and December 31, 2009, was approximately
$1.6 million and $1.3 million, respectively. Transaction losses included in the consolidated
statements of income for 2010, 2009 and 2008 were $0.5 million, $0.1 million and $0.1 million,
respectively.
Earnings Per Common Share
Basic and diluted earnings per common share are calculated in accordance with the requirements
of ASC 260, Earnings Per Share. Because the Company has Contingently Convertible Debt (see Note
11), diluted net income per common share must be calculated using the if-converted method.
Diluted net income per common share is calculated by adjusting net income for tax-effected net
interest and issue costs on the Contingent Convertible Debt, divided by the weighted average number
of common shares outstanding assuming conversion.
F-15
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 stockholders. Restricted stock granted to certain
employees by the Company (see Note 15) 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 participating security.
A detailed presentation of earnings per share is included in Note 16.
Use of Estimates and Risks and Uncertainties
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The accounting estimates that require managements
most significant, difficult and subjective judgments include the assessment of recoverability of
long-lived assets and goodwill; the valuation of auction rate floating securities; the recognition
and measurement of current and deferred income tax assets and liabilities; and the reductions to
revenue recorded at the time of sale for various items, including sales returns and rebate
reserves. The actual results experienced by the Company may differ from managements estimates.
The Company purchases its inventory from third-party manufacturers, many of whom are the sole
source of products for the Company. The failure of such manufacturers to provide an uninterrupted
supply of products could adversely impact the Companys ability to sell such products.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities reported in the consolidated balance sheets approximates
fair value because of the immediate or short-term maturity of these financial instruments.
Long-term investments are carried at fair value based on market quotations and a discounted cash
flow analysis for auction rate floating securities. The fair value of the Companys contingent
convertible senior notes, based on market quotations, is approximately $177.2 million at December
31, 2010.
Supplemental Disclosure of Cash Flow Information
During 2010, 2009 and 2008, the Company made interest payments of $4.2 million, $4.2 million
and $6.4 million, respectively.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $2.1 million as of December 31, 2010 included $3.7
million of accumulated unrealized losses related the Companys short-term and long-term
available-for-sale securities investments, partially offset by $1.6 million of accumulated foreign
currency translation adjustments.
Reclassifications
Certain personnel costs were reclassified from selling, general and administrative expense to
research and development expense in 2009 and 2008, to be consistent with how these costs were
classified during 2010.
Recent Accounting Pronouncements
In October 2009, the FASB approved for issuance Accounting Standards Update (ASU) No.
2009-13, Revenue Recognition (ASC 605) Multiple Deliverable Revenue Arrangements, a consensus
of EITF 08-01, Revenue Arrangements with Multiple Deliverables. This guidance modifies the fair
value requirements of ASC subtopic 605-25 Revenue Recognition Multiple Element Arrangements by
providing principles for allocation of consideration among its multiple-elements, allowing more
flexibility in identifying and accounting for separate deliverables under an arrangement. An
estimated selling price method is introduced for valuing the elements of a
F-16
bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available,
and significantly expands related disclosure requirements. This updated guidance is effective
on a prospective basis for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and
early application is permitted. The adoption of the guidance on January 1, 2011 is not expected to
have a material impact on the Companys results of operations and financial condition.
In March 2010, the FASB approved for issuance ASU No. 2010-17, Revenue Recognition-Milestone
Method (Topic 605): Milestone Method of Revenue Recognition. The updated guidance recognizes the
milestone method as an acceptable revenue recognition method for substantive milestones in research
or development transactions, and is effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of the guidance on January 1, 2011 is not expected to have a
material impact on the Companys results of operations and financial condition.
3. SEGMENT AND PRODUCT INFORMATION
The Company operates in one 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, non-invasive body sculpting
technology 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 DYSPORT®,
LOPROX®, PERLANE®, RESTYLANE® and VANOS®. The
non-dermatological product lines include AMMONUL®, BUPHENYL® and the
LIPOSONIXTM system. The non-dermatological field also includes contract revenues
associated with licensing agreements and authorized generics.
The Companys pharmaceutical products, with the exception of AMMONUL® and
BUPHENYL®, are promoted to dermatologists and plastic surgeons. Such products are often
prescribed by physicians outside these two 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. During 2010, 2009 and 2008, three wholesalers accounted for the following portions of the
Companys net revenues:
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
|
|
|
McKesson |
|
42.6% |
|
40.8% |
|
|
45.8 |
% |
Cardinal |
|
35.4% |
|
37.1% |
|
|
21.2 |
% |
AmerisourceBergen |
|
10.8% |
|
* |
|
|
* |
|
McKesson is the sole distributor for the Companys RESTYLANE® and
PERLANE® branded products and DYSPORT® in the U.S.
F-17
Net revenues and the percentage of net revenues for each of the product categories are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Acne and acne-related
dermatological products |
|
$ |
482,359 |
|
|
$ |
398,861 |
|
|
$ |
325,020 |
|
Non-acne dermatological products |
|
|
174,978 |
|
|
|
133,595 |
|
|
|
147,954 |
|
Non-dermatological products |
|
|
42,631 |
|
|
|
39,459 |
|
|
|
44,776 |
|
|
|
|
Total net revenues |
|
$ |
699,968 |
|
|
$ |
571,915 |
|
|
$ |
517,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Acne and acne-related
dermatological products |
|
|
69 |
% |
|
|
70 |
% |
|
|
63 |
% |
Non-acne dermatological products |
|
|
25 |
|
|
|
23 |
|
|
|
29 |
|
Non-dermatological products |
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
During
2010, 2009 and 2008, the Companys top three products constituted 72.1%, 71.4% and
69.4%, respectively, of its total net revenues. Less than 5% of the Companys net revenues are
generated outside the U.S.
4. STRATEGIC COLLABORATIONS
Collaboration with a privately-held U.S. biotechnology company
On September 10, 2010, the Company and a privately-held U.S. biotechnology company entered
into a sublicense and development agreement to develop an agent for specific dermatological
conditions in the Americas and Europe and a purchase option to acquire the privately-held U.S.
biotechnology company.
Under the terms of the agreements, the Company paid the privately-held U.S. biotechnology
company $5.0 million in connection with the execution of the agreement, and will pay additional
potential milestone payments totaling approximately $100.5 million upon successful completion of
certain clinical, regulatory and commercial milestones. During the three months ended December 31,
2010, a development milestone was achieved, and the Company made a $10.0 million payment to the
privately-held U.S. biotechnology company pursuant to the development agreement. The initial $5.0
million payment and the $10.0 million milestone payment were recognized as research and development
expense during the year ended December 31, 2010.
Glenmark
On November 14, 2009, the Company entered into an Asset Purchase and Development Agreement
with Glenmark Generics Ltd. and Glenmark Generics Inc., USA (collectively, Glenmark) (the
Glenmark Asset Purchase Agreement) and two License and Settlement Agreements with Glenmark (one,
the Vanos License and Settlement Agreement, the other, the Loprox License and Settlement
Agreement and, collectively, the License and Settlement Agreements)
In connection with the Glenmark Asset Purchase and Development Agreement, the Company
purchased from Glenmark the North American rights of a dermatology product currently under
development, including the underlying technology and regulatory filings. In accordance with terms
of the agreement, the Company made a $5.0 million payment to Glenmark upon closing of the
transaction. The agreement also provided that the Company would make additional payments to Glenmark of up to $7.0 million upon the
achievement of certain development and regulatory milestones, as well
as certain royalty
payments on sales of the product. The initial $5.0 million payment was recognized as a
charge to research and development expense during the year ended
December 31, 2009. On October 4, 2010, the Company gave
notice to Glenmark that it had determined to stop development of the
product in accordance with the terms of the agreement, and on
January 6, 2011, the Company gave notice to Glenmark that the
parties obligations under the agreement have been fulfilled and
that the agreement has expired.
F-18
In connection with the Glenmark License and Settlement Agreements, the Company and
Glenmark agreed to terminate all legal disputes between them relating to the Companys
VANOS® (fluocinonide) Cream 0.1% and LOPROX® Gel (ciclopirox) 0.77%. In
addition, Glenmark confirmed that certain of the Companys patents relating to VANOS®
and LOPROX® are valid and enforceable, and cover Glenmarks activities relating to its
generic versions of VANOS® and LOPROX® Gel under ANDAs. Further, subject to
the terms and conditions contained in the Vanos License and Settlement Agreement, the Company
granted Glenmark, 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. Upon
commercialization by Glenmark of generic versions of VANOS® products, Glenmark will pay
the Company a royalty based on sales of such generic products. Subject to the terms and conditions
contained in the Loprox License and Settlement Agreement, the Company also granted Glenmark a
license to make and sell generic versions of LOPROX® Gel. Upon commercialization by
Glenmark of generic versions of LOPROX® Gel, Glenmark will pay the Company a royalty
based on sales of such generic products. In accordance with the terms of the License and
Settlement Agreements, the Company paid Glenmark $0.3 million for attorneys fees incurred by
Glenmark related to the legal disputes. The $0.3 million payment was recognized as selling,
general and administrative expense during the year ended December 31, 2009.
Revance
On July 28, 2009, the Company and Revance Therapeutics, Inc. (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 $10.0 million upon execution 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 $10.0 million payment was recognized as research and development expense
during the year ended December 31, 2009.
Hyperion
On August 28, 2007, the Company, through its wholly-owned subsidiary Ucyclyd Pharma, Inc.
(Ucyclyd), announced a strategic collaboration with Hyperion Therapeutics, Inc. (Hyperion)
whereby Hyperion will be responsible for the ongoing research and development of a compound
referred to as GT4P for the treatment of Urea Cycle Disorder, Hepatic Encephalopathies and other
indications, and additional indications for
AMMONUL®.
Under the terms of the Collaboration
Agreement between Ucyclyd and Hyperion, dated as of August 23, 2007, Hyperion made an initial
non-refundable payment of $10.0 million to Ucyclyd for the rights and licenses granted to Hyperion
in the agreement. This $10.0 million payment was recorded as deferred revenue and is being
recognized on a ratable basis over a period of four years. In addition, if certain specified
conditions are satisfied relating to the Ucyclyd development projects, then Hyperion will have
certain purchase rights with respect to the Ucyclyd development products, as well as Ucyclyds
existing on-market products, AMMONUL® and BUPHENYL®, and will pay Ucyclyd
royalties and regulatory and sales milestone payments in connection with certain licenses that
would be granted to Hyperion upon exercise of the purchase rights. Hyperion will be funding all
research and development costs for the Ucyclyd research projects.
Until June 6, 2008, Hyperion undertook certain sales and marketing efforts for Ucyclyds
existing on-market products. Hyperion received a commission from Ucyclyd equal to a certain
percentage of any increase in unit sales during the period Hyperion was performing these sales and
marketing efforts. Ucyclyd will continue to record product sales for the existing on-market
Ucyclyd products until such time as Hyperion exercises its purchase rights.
Ucyclyd entered into an amendment (the Amendment), effective as of November 24, 2008, to the
Collaboration Agreement with Hyperion. Among other actions, the Amendment terminates all rights,
including research and development rights, granted to Hyperion under the Collaboration Agreement
related to Ammonul for the treatment of hepatic encephalopathy (Ammonul HE). Hyperion retains
buyout rights to Ammonul HE in the event Hyperion exercises its buyout rights to Ucyclyds
on-market and other development products. Hyperion and Ucyclyd also agreed that Hyperions rights
to promote AMMONUL® and BUPHENYL® for the treatment of urea cycle disorder
were terminated, effective June 6, 2008.
F-19
On June 29, 2009, Ucyclyd and Hyperion entered into a second amendment (the Second
Amendment) to their existing Collaboration Agreement. 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 value of the Hyperion common shares is
included in other assets in the Companys consolidated balance sheets at December 31, 2010, along
with corresponding deferred revenue, which is being 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.
On October 12, 2009, Ucyclyd and Hyperion entered into a third amendment to the existing
Collaboration Agreement (Third Amendment). Under the terms of the Third Amendment, Ucyclyd
agreed to disclose to Hyperion certain know-how for the manufacture of GT4P.
The Company recognized approximately $3.2 million, $2.8 million and $2.5 million of contract
revenue during 2010, 2009 and 2008, respectively, related to this transaction, as amended.
Perrigo
On April 8, 2009, the Company entered into a License and Settlement Agreement (the Perrigo
License and Settlement Agreement) and a Joint Development Agreement (the Perrigo 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 Perrigo License and Settlement Agreement, the Company and Perrigo
agreed to terminate all legal disputes between them relating to the Companys VANOS®
(fluocinonide) Cream 0.1%. 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 Perrigo License and
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 ANDA #090256. Further, subject to the terms and conditions contained in
the Perrigo 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 |
|
|
|
|
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 Perrigo 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 an NDA for a novel proprietary product is submitted to the U.S. Food and
Drug Administration (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 |
F-20
|
|
|
the Company will pay to Perrigo royalty payments on sales of the novel proprietary
product. |
During the year ended December 31, 2009, a development milestone was achieved, and the Company
made a $2.0 million payment to Perrigo pursuant to the Perrigo Joint Development Agreement. The
$3.0 million up-front payment and the $2.0 million development milestone payment were recognized as
research and development expense during the year ended December 31, 2009.
Impax
On November 26, 2008, the Company entered into a Joint Development Agreement with Impax
Laboratories, Inc. (Impax), which was amended by a Settlement Agreement between the parties dated
January 21, 2011. 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 the terms of the agreement, the Company made an initial payment of
$40.0 million upon execution of the agreement. During the year ended December 31, 2009, the
Company paid Impax $12.0 million upon the achievement of clinical milestones, in accordance with
terms of the agreement. In addition, the Company will be required to pay up to $11.0 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 the Company upon approval by the FDA. The Company will share 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 year ended December 31, 2008, and the $12.0 million of clinical milestone
payments were recognized as a charge to research and development expense during the year ended
December 31, 2009.
|
|
|
5. |
|
DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO IPSENS BOTULINUM TOXIN TYPE
A PRODUCT KNOWN AS DYSPORT® |
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., rights to develop, distribute and commercialize Ipsens botulinum toxin type A product in the
United States, Canada and Japan for aesthetic use by healthcare professionals. 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 FDA accepted the filing of Ipsens Biologics License Application (BLA) for
RELOXIN® and, in accordance with the agreement, Medicis paid Ipsen $25.0 million upon
achievement of this milestone. The $25.0 million was recognized as a charge to research and
development expense during the year ended December 31, 2008.
On April 29, 2009, the FDA approved the BLA for Ipsens botulinum toxin type A product,
DYSPORT®. 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 DYSPORT®. Ipsen will
market DYSPORT® in the U.S. for the therapeutic indication (cervical dystonia), while
Medicis markets DYSPORT® in the U.S. for the aesthetic indication (glabellar lines).
In accordance with the agreement, the Company paid Ipsen $75.0 million as a result of the
approval by the FDA. The $75.0 million payment was capitalized into intangible assets in the
Companys 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, as defined under the agreement.
The product is not currently approved for aesthetic 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.
F-21
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
BioMarin 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 BioMarin 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
BioMarin Option Closing). The aggregate cash consideration paid to Medicis in conjunction with
the BioMarin Option Closing was approximately $70.3 million and the purchase was completed
substantially in accordance with the previously disclosed terms of the BioMarin Securities Purchase
Agreement.
As a result of the BioMarin Option Closing, the Company recognized a pretax gain of $2.2
million, which is included in other (income) expense, net, in the consolidated statements of income
for the year ended December 31, 2009. The $2.2 million pretax gain is net of approximately $0.7
million of professional fees related to the transaction. 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, which is included in income tax expense in the consolidated statements of income for
the year ended December 31, 2009.
7. INVESTMENT IN REVANCE
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 Companys option is exercisable after Revance completes an
End of Phase 2 meeting as determined by the FDA. 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 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 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 year 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 option is exercisable after Revance completes an
End of Phase 2 meeting as determined by the FDA. 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 estimated 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 was available for these purposes (such as the completion of an equity
financing by Revance). During 2009 and 2008, the
F-22
Company reduced the carrying value of its investment in Revance by approximately $2.9 million
and $9.1 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 in other (income) expense. As of December 31, 2010, the Companys investment in Revance
related to this transaction was $0.
A business entity is subject to consolidation rules 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 certain
criteria. Disclosures are required 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. ACQUISITION OF LIPOSONIX
On July 1, 2008, the Company, through its wholly-owned subsidiary Donatello, Inc., acquired
LipoSonix, an independent, privately-held company with a staff of approximately 40 scientists,
engineers and clinicians located near Seattle, Washington. LipoSonix, now known as Medicis
Technologies Corporation, is a medical device company developing non-invasive body sculpting
technology. It launched its first product, the LIPOSONIXTM system, in Europe during
2008, Canada during 2009 and recently had its first sales in Japan. The LIPOSONIXTM
system is being marketed and sold through distributors in Europe and Japan, and direct to
practitioners in Canada. In the U.S., the LIPOSONIXTM system is an investigational
device and is currently not cleared or approved for sale.
Under the terms of the transaction, Medicis paid $150 million in cash for all of the
outstanding shares of LipoSonix. In addition, Medicis will pay LipoSonix stockholders certain
milestone payments up to an additional $150 million upon FDA approval of the LIPOSONIXTM
technology and if various commercial milestones are achieved on a worldwide basis.
The following is a summary of the components of the LipoSonix purchase price (in millions):
|
|
|
|
|
Cash consideration |
|
$ |
150.0 |
|
Transaction costs |
|
|
3.6 |
|
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
The following is a summary of the estimated fair values of the net assets acquired (in millions):
|
|
|
|
|
Current assets |
|
$ |
2.1 |
|
Deferred tax assets, short-term |
|
|
3.8 |
|
Deferred tax assets, long-term |
|
|
14.9 |
|
Property and equipment |
|
|
0.7 |
|
Identifiable intangible assets |
|
|
9.4 |
|
In-process research and development |
|
|
30.5 |
|
Goodwill |
|
|
93.7 |
|
Accounts payable and other current liabilities |
|
|
(1.5 |
) |
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
The Company believes the fair values assigned to the assets acquired and liabilities assumed
are based on reasonable assumptions.
During the years ended December 31, 2010 and 2009, the Company recorded $0.9 million and $0.4
million, respectively, of net deferred tax assets and decreased goodwill by $0.9 million and $0.4
million, respectively, as a result of adjustments to the tax attributes acquired.
Identifiable intangible assets of $9.4 million include existing technology of $6.7 million,
with an estimated amortizable life of ten years, and trademarks and trade names of $2.7 million,
with an estimated indefinite amortizable life.
F-23
The $30.5 million of acquired in-process research and development was recognized as in-process
research and development expense in the Companys statement of operations during the year ended
December 31, 2008. No tax benefit was recognized related to this charge.
The results of operations of LipoSonix are included in the Companys consolidated financial
statements beginning on July 1, 2008.
The following unaudited proforma financial information for the year ended December 31, 2008
gives effect to the acquisition of LipoSonix as if it had occurred on January 1, 2007. Such
unaudited proforma information is based on historical financial information with respect to the
acquisition and does not reflect operational and administrative cost savings, or synergies, that
management of the combined company estimates may be achieved as a result of the acquisition. The
$30.5 million in-process research and development charge has not been included in the unaudited
proforma financial information since this adjustment is non-recurring in nature.
|
|
|
|
|
|
|
YEAR ENDED |
|
|
|
DECEMBER 31, 2008 |
|
|
|
(in millions, except |
|
|
|
per share data) |
|
Net revenues |
|
$ |
518.5 |
|
Net income |
|
|
4.6 |
|
Diluted net income per share |
|
$ |
0.08 |
|
9. 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 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 December 31, 2010, the Company has recorded the estimated fair value in available-for-sale
securities for short-term and long-term investments of approximately $485.2 million and $21.5
million, respectively.
F-24
Available-for-sale securities consist of the following at December 31, 2010 and 2009 (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Temporary |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Value |
|
|
Corporate notes and bonds |
|
$ |
145,758 |
|
|
$ |
454 |
|
|
$ |
(48 |
) |
|
$ |
|
|
|
$ |
146,164 |
|
Federal agency notes and bonds |
|
|
328,262 |
|
|
|
953 |
|
|
|
(88 |
) |
|
|
|
|
|
|
329,127 |
|
Auction rate floating securities |
|
|
28,575 |
|
|
|
|
|
|
|
(7,095 |
) |
|
|
|
|
|
|
21,480 |
|
Asset-backed securities |
|
|
9,896 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
|
|
|
|
9,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
512,491 |
|
|
$ |
1,413 |
|
|
$ |
(7,232 |
) |
|
$ |
|
|
|
$ |
506,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Temporary |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Value |
|
|
Corporate notes and bonds |
|
$ |
98,993 |
|
|
$ |
506 |
|
|
$ |
(83 |
) |
|
$ |
|
|
|
$ |
99,416 |
|
Federal agency notes and bonds |
|
|
215,759 |
|
|
|
221 |
|
|
|
(203 |
) |
|
|
|
|
|
|
215,777 |
|
Auction rate floating securities |
|
|
35,000 |
|
|
|
|
|
|
|
(8,179 |
) |
|
|
|
|
|
|
26,821 |
|
Asset-backed securities |
|
|
3,070 |
|
|
|
25 |
|
|
|
(356 |
) |
|
|
|
|
|
|
2,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
352,822 |
|
|
$ |
752 |
|
|
$ |
(8,821 |
) |
|
$ |
|
|
|
$ |
344,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010, 2009 and 2008, gross realized gains on sales of available-for-sale
securities totaled $0, $1.6 million and $1.1 million, respectively, and gross realized losses
totaled $0.7 million, $0 and $6.5 million (including $6.4 million of other-than-temporary
impairment losses), respectively. Gross realized gains and losses are determined based on the
specific identification method. The net adjustment to unrealized gains during 2010, 2009 and 2008,
on available-for-sale securities included in stockholders equity totaled $1.2 million, $5.9
million and $0, respectively. Of the 2009 amount, $3.1 million was reclassified from retained
earnings to other comprehensive income in accordance with a new accounting standard (see below)
during the three months ended June 30, 2009. The amortized cost and estimated fair value of the
available-for-sale securities at December 31, 2010, by maturity, are shown below (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2010 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
300,324 |
|
|
$ |
301,167 |
|
Due after one year through five years |
|
|
183,592 |
|
|
|
184,025 |
|
Due after 10 years |
|
|
28,575 |
|
|
|
21,480 |
|
|
|
|
|
|
|
|
|
|
$ |
512,491 |
|
|
$ |
506,672 |
|
|
|
|
|
|
|
|
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 December 31, 2010,
approximately $21.5 million in estimated fair value expected to mature greater than one year has
been classified as long-term investments because 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.
F-25
As of December 31, 2010, the Companys investments included auction rate floating securities
with a fair value of $21.5 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, 2009 and 2010 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 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, which is now part of ASC 320, Investments Debt and Equity Securities, 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 consolidated balance sheets.
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 provided
the Company with the right to put an auction rate floating security held by the Company back to the
broker beginning on June 30, 2010. At December 31, 2009, the Company held one auction rate
floating security with a par value of $1.3 million that was subject to the settlement agreement.
At inception, the Company elected the irrevocable Fair Value Option treatment under ASC 825,
Financial Instruments, and accordingly adjusted the put option to fair value at each reporting
date. Concurrent with the execution of the settlement agreement, the Company reclassified this
auction rate floating security from available-for-sale to trading securities. This auction rate
floating security was settled at par on July 1, 2010.
During the three months ended March 31, 2010, the Company became aware of new circumstances
that directly impacted the valuation of an asset-backed security that is owned by the Company. An
unrealized loss on the asset-backed security, based on the Companys intent to hold the security
until recovery of the fair value, had previously been recorded in stockholders equity. Based on
the new circumstances related to the investment, the Company determined that the impairment of the
asset-backed security was other-than-temporary, as the Company believed it would not recover its
investment even if the asset were held to maturity. A $0.3 million impairment charge was therefore
recorded in other expense, net, during the three months ended March 31, 2010 related to the
asset-backed security. The asset-backed security was sold in April 2010.
On July 14, 2009, the broker through which the Company purchased auction rate floating
securities agreed to repurchase from the Company three auction rate floating securities with an
aggregate par value of $7.0 million, at par. The adjusted basis of these securities was $5.5
million, in aggregate, as a result of an other-than-temporary impairment loss of $1.5 million
recorded during the year ended December 31, 2008. The realized gain of $1.5 million was recognized
in other (income) expense during the three months ended September 30, 2009.
F-26
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 and length of time that individual securities have been in a
continuous unrealized loss position at December 31, 2010 (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 |
|
$ |
38,248 |
|
|
$ |
48 |
|
|
$ |
|
|
|
$ |
|
|
Federal agency notes and bonds |
|
|
37,233 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
|
|
|
|
|
|
|
|
|
21,480 |
|
|
|
7,095 |
|
Asset-backed securities |
|
|
2,497 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
77,978 |
|
|
$ |
137 |
|
|
$ |
21,480 |
|
|
$ |
7,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, 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 does not intend to sell and it is not
more-likely-than-not that the Company will be required to sell any of the securities before the
recovery of their amortized cost basis.
10. FAIR VALUE MEASUREMENTS
As of December 31, 2010, 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.
The Company has invested in auction rate floating securities, which are classified as
available-for-sale securities and reflected at fair value. Due to 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 9). 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 December 31, 2010. 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.
F-27
The Companys assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820, Fair Value Measurements and Disclosures, at December 31, 2010, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Dec. 31, 2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Corporate notes and bonds |
|
$ |
146,164 |
|
|
$ |
146,164 |
|
|
$ |
|
|
|
$ |
|
|
Federal agency notes and bonds |
|
|
329,127 |
|
|
|
329,127 |
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
|
21,480 |
|
|
|
|
|
|
|
|
|
|
|
21,480 |
|
Asset-backed securities |
|
|
9,901 |
|
|
|
9,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
506,672 |
|
|
$ |
485,192 |
|
|
$ |
|
|
|
$ |
21,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010 (in
thousands):
|
|
|
|
|
|
Fair Value Measurements |
|
Using Significant Unobservable |
|
Inputs (Level 3) |
|
|
Auction Rate |
|
|
|
Floating |
|
|
|
Securities |
|
Balance at December 31, 2009 |
|
$ |
26,821 |
|
Transfers to (from) Level 3 |
|
|
|
|
Total gains (losses) included in other
(income) expense, net |
|
|
|
|
Total gains included in other
comprehensive income |
|
|
1,084 |
|
Purchases and settlements (net) |
|
|
(6,425 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
21,480 |
|
|
|
|
|
11. 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
December 31, 2010. 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. Under GAAP, 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
F-28
with the deferred tax liability associated 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 December 31, 2010. 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, and are still
outstanding as of December 31, 2010.
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:
F-29
|
|
|
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 all of the fiscal quarters during 2010, 2009 and 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.
12. COMMITMENTS AND CONTINGENCIES
Occupancy Arrangements
During July 2006, the Company executed a lease agreement for new headquarter office space to
accommodate its expected long-term growth. The first phase is for approximately 150,000 square
feet with the right to expand. The Company occupied the new headquarter office space in
Scottsdale, Arizona, during the second quarter of 2008. The Company obtained possession of the
leased premises and, therefore, began accruing rent expense during the first quarter of 2008. The
term of the lease is twelve years. The average annual expense under the amended lease agreement is
approximately $3.9 million. During the first quarter of 2008, the Company received approximately
$6.7 million in tenant improvement incentives from the landlord. This amount has been capitalized
into leasehold improvements and is being depreciated on a straight-line basis over the lesser of
the useful life or the term of the lease. The tenant improvement incentives are also included in
other long-term liabilities as deferred rent, and will be recognized as a reduction of rent expense
on a straight-line basis over the term of the lease.
During October 2006, the Company executed a lease agreement for additional headquarter office
space, which is located approximately one mile from the Companys current headquarter office space
in Scottsdale, Arizona to accommodate its current needs and future growth. The agreement provided
for the lease of approximately 21,000 square feet of office space. In May 2007, the Company began
occupancy of the additional headquarter office space. In August 2010, the Company amended the
lease to reduce the square footage of the leased office space to approximately 13,000 square feet
and extended the term of the lease to May 2015.
LipoSonix, now known as Medicis Technologies Corporation, presently leases approximately
24,700 square feet of office, laboratory and manufacturing space in Bothell, Washington under a
lease agreement that expires in October 2012.
Medicis Aesthetics Canada Ltd., a wholly owned subsidiary of the Company, presently leases
approximately 3,600 square feet of office space in Toronto, Ontario, Canada, under a lease
agreement, as extended, that expires in December 2011.
F-30
Rent expense was approximately $3.4 million, $3.6 million and $9.4 million for 2010, 2009 and
2008, respectively. Rent expense for 2008 includes a $4.8 million charge for the estimated
remaining net cost for the Companys previous headquarters facility lease, net of potential
sublease income.
At December 31, 2010, approximate future lease payments under the Companys operating leases
are as follows (amounts in thousands):
|
|
|
|
|
YEAR ENDING DECEMBER 31, |
|
|
|
|
2011 |
|
$ |
4,808 |
|
2012 |
|
|
4,709 |
|
2013 |
|
|
4,621 |
|
2014 |
|
|
4,795 |
|
2015 |
|
|
4,677 |
|
Thereafter |
|
|
20,825 |
|
|
|
|
|
|
|
$ |
44,435 |
|
|
|
|
|
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 consisted 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 expired in December 2010. Under ASC 420, Exit or Disposal Cost Obligations, a
liability for the costs associated with an exit or disposal activity is recognized when the
liability is incurred. 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, other than accretion expense.
As of December 31, 2010, the amended lease agreement has expired and the Company has made all
of its required payments under the terms of the lease. The following is a summary of the activity
in the liability for lease exit costs for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
|
Amounts Charged |
|
|
Cash Payments |
|
|
Cash Received |
|
|
Liability as of |
|
|
|
December 31, 2009 |
|
|
to Expense |
|
|
Made |
|
|
from Sublease |
|
|
Dec. 31, 2010 |
|
Lease exit costs
liability |
|
$ |
2,063,677 |
|
|
$ |
74,434 |
|
|
$ |
(2,138,111 |
) |
|
$ |
|
|
|
$ |
|
|
Research and Development and Consulting Contracts
The Company has various consulting agreements with certain scientists in exchange for the
assignment of certain rights and consulting services. At December 31, 2010, the Company had
approximately $867,300 of commitments (solely attributable to the Chairman of the Central Research
Committee of the Company) payable over the remaining five years under an agreement that is
cancelable by either party under certain conditions.
Legal Matters
The Company is currently party to various legal proceedings, including those noted in this
section. Unless specifically noted below, any possible range of loss associated with the legal
proceedings described below is not reasonably estimable at this time. The Company is engaged in
numerous other legal actions not described below arising in the ordinary course of its business and,
while there can be no assurance, the Company believes that the ultimate outcome of these actions will
not have a material adverse effect on its operating results, liquidity or financial position.
From
time to time the Company may conclude it is in the best interests of its
stockholders, employees, and customers to settle one or more litigation matters, and any such
settlement could include substantial payments; however, other than as noted below, the Company
has not reached this conclusion with respect to any particular matter at this time. There are a
variety of factors that influence the Companys decisions to settle and the amount the Company
may choose to pay, including the strength of its case, developments in the litigation, the behavior
of other interested parties, the demand on management time and the possible distraction of the
Companys employees associated with the case and/or the possibility that the Company may be
subject to an injunction or other equitable remedy. It is difficult to predict whether a settlement is
possible, the amount of an appropriate settlement or when is the opportune time to settle a matter
in light of the numerous factors that go into the settlement decision. Unless otherwise specified
below, any settlement payment made pursuant to any of the completed settlement agreements
described below is immaterial to the Company for financial reporting purposes.
Impax SOLODYN® Litigation and Settlement
On November 26, 2008, the Company and Impax Laboratories, Inc. (Impax) entered into a
Settlement and License Agreement (the First Impax Settlement Agreement) that terminated all legal
disputes between them relating to SOLODYN®. Under the terms of the First Impax
Settlement Agreement, Impax will have a license to market its generic versions of
SOLODYN® in 45mg, 90mg and 135mg strengths under the SOLODYN® intellectual
property rights belonging to the Company upon the occurrence of certain events and no later than
November 2011. On June 23, 2009, the Company and Impax entered into a second Settlement Agreement
(the Second Impax Settlement Agreement) and an Amendment No. 2 to the First Impax Settlement
Agreement. Pursuant to the Second Impax Settlement Agreement, both 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 that Impax
F-31
commenced after the First Impax Settlement Agreement. On July 27, 2010, Impax filed an action
in the Superior Court of the State of Arizona in and for the County of Maricopa seeking a
declaration that certain rights of Impax under the First and Second Impax Settlement Agreements
have been triggered. Impax filed an amended complaint and the Company filed counterclaims against
Impax. On January 21, 2011, the Company and Impax entered into a Settlement Agreement (the Third
Impax Settlement Agreement) which terminated the disputes between the Company and Impax relating
to the First and Second Impax Settlement Agreements. The Third Impax Settlement Agreement also
amended certain provisions of the Joint Development Agreement between the Company and Impax. The
parties filed a stipulation to dismiss with prejudice all claims in the amended complaint and the
counterclaims. On February 4, 2011, the Court granted the order dismissing the action in its
entirety with prejudice.
Genzyme RESTYLANE®/PERLANE® Litigation
On October 15, 2010, the Company received notice that Genzyme Corporation (Genzyme) had
filed a lawsuit against the Company in the United States District Court for the District of
Massachusetts alleging that the Company has infringed, contributorily infringed and/or induced the
infringement by others of one or more claims of Genzymes U.S. Patent No. 5,399,351 by using,
selling, offering to sell and/or importing RESTYLANE®, PERLANE®,
RESTYLANE-L® and/or PERLANE-L® (the RESTYLANE® family of
products) in the United States and/or advising others with respect to such activities. The
Company acquired exclusive U.S. and Canadian rights to the RESTYLANE® family of products
through certain license agreements with Q-Med AB, a Swedish biotechnology and medical device
company and its affiliates (collectively Q-Med), in March 2003, and first launched
RESTYLANE® in January 2004 following approval by the FDA in December 2003.
PERLANE® was approved by the FDA and launched in May 2007. RESTYLANE-L® and
PERLANE-L® were approved by the FDA in January 2010 and launched in February 2010. The
RESTYLANE® family of products is covered by a U.S. patent that expires in 2015 or later.
Pursuant to the Companys license agreement with Q-Med, Q-Med elected to assume the defense of
Genzymes claim. On February 14, 2011, Q-Med, the Company and Genzyme entered into a written
settlement agreement whereby none of the parties admits any liability or wrongdoing relating to the
claims in the lawsuit, and pursuant to which Genzyme has agreed to dismiss the case and release the
Company and Q-Med from any liability relating to the lawsuit, and has also agreed to a certain
covenant not to sue in exchange for a lump sum payment by Q-Med to Genzyme. The Company is not
required to make any payment to Genzyme or Q-Med under the terms of the settlement agreement.
Stockholder Class Action Litigation
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 consolidated these actions into a single proceeding and on May 18, 2009 an
amended complaint was filed alleging violations of the federal securities laws arising out of the
Companys restatement of its consolidated financial statements in 2008. On December 2, 2009, the
court granted the Companys and other defendants dismissal motions and dismissed the consolidated
amended complaint without prejudice. On January 18, 2010 the lead plaintiff filed a second amended
complaint, and on or about August 9, 2010, the court denied the Companys and other defendants
related dismissal motions. On December 17, 2010, the lead plaintiff filed a motion for class
certification. The defendants opposition to the lead plaintiffs motion for class certification is due March 8, 2011. The Company will continue 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.
Stockholder Derivative Lawsuits
On January 21, 2009, the Company received a letter from an alleged 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 stated that, if the
Board of Directors did not take the demanded action, the alleged stockholder would commence a
derivative action on behalf of the Company. The Companys Board of Directors reviewed the letter
during the course of 2009 and established a special committee of the Board of Directors, comprised
of directors who are independent and disinterested with respect to the allegations in the letter,
F-32
to assess the allegations contained in the letter. The special committee engaged outside
counsel to assist with the investigation. The special committee completed its investigation, and on
or about February 16, 2010, the Board of Directors, pursuant to the report and recommendation of
the special committee, resolved to decline the derivative demand. On February 26, 2010, Company
counsel sent a declination letter to opposing counsel. On or about October 21, 2010, the
stockholder filed a derivative complaint against the Company and its directors and certain officers
in the Superior Court of the State of Arizona in and for the County of Maricopa, alleging that such
individuals breached their fiduciary duties to the Company in connection with the restatement. The
stockholder seeks to recover unspecified damages and costs, including counsel and expert fees.
On or about October 20, 2010, a second alleged stockholder of the Company filed a derivative
complaint against the Company and its directors and certain officers in the Superior Court of the
State of Arizona in and for the County of Maricopa. The complaint alleges, among other things,
that such individuals breached their fiduciary duties to the Company in connection with the
restatement. The complaint further alleges that a demand upon the Board of Directors to institute
an action in the Companys name would be futile and that the stockholder is therefore excused under
Delaware law from making such a demand prior to filing the complaint. The stockholder seeks, among
other things, to recover unspecified damages and costs, including counsel and expert fees.
By agreement of the parties, both stockholder lawsuits have been stayed at present. In the
event the stay is lifted, the Company intends to vigorously defend all claims in 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.
13. INCOME TAXES
The provision (benefit) for income taxes consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
63,481 |
|
|
$ |
55,978 |
|
|
$ |
68,767 |
|
State |
|
|
(752 |
) |
|
|
4,364 |
|
|
|
3,631 |
|
Foreign |
|
|
5,659 |
|
|
|
2,704 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,388 |
|
|
|
63,046 |
|
|
|
74,820 |
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
14,370 |
|
|
|
(2,873 |
) |
|
|
(40,435 |
) |
State |
|
|
1,313 |
|
|
|
(534 |
) |
|
|
(2,255 |
) |
Foreign |
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,105 |
|
|
|
(3,407 |
) |
|
|
(42,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,493 |
|
|
$ |
59,639 |
|
|
$ |
32,130 |
|
|
|
|
|
|
|
|
|
|
|
During 2010, 2009 and 2008, Additional paid-in-capital within stockholders equity was
decreased by $0.8 million, $0.9 million and $1.6 million, respectively, as a result of tax
shortfalls related to the vesting of restricted stock and exercise of employee stock options.
F-33
The reconciliations of the U.S. federal statutory rate to the combined effective tax rate used
to determine income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State tax rate, net of federal benefit |
|
|
0.4 |
|
|
|
0.9 |
|
|
|
2.2 |
|
Share-based payments |
|
|
0.5 |
|
|
|
0.7 |
|
|
|
2.4 |
|
Foreign taxes |
|
|
1.8 |
|
|
|
1.2 |
|
|
|
3.3 |
|
Tax contingencies reserve |
|
|
(0.4 |
) |
|
|
|
|
|
|
0.3 |
|
Non-deductible research and
development
expense |
|
|
|
|
|
|
|
|
|
|
25.2 |
|
Taxable gain in excess of book gain on
sale of subsidiary |
|
|
|
|
|
|
5.9 |
|
|
|
|
|
Other non-deductible items |
|
|
0.4 |
|
|
|
0.7 |
|
|
|
4.2 |
|
Credits and other |
|
|
(0.2 |
) |
|
|
(1.1 |
) |
|
|
(4.5 |
) |
Valuation allowance |
|
|
2.9 |
|
|
|
0.7 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.4 |
% |
|
|
44.0 |
% |
|
|
75.8 |
% |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys deferred tax assets and
liabilities are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Current |
|
|
Long-term |
|
|
Current |
|
|
Long-term |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
2,706 |
|
|
$ |
|
|
|
$ |
7,177 |
|
|
$ |
2,706 |
|
Reserves and liabilities |
|
|
72,679 |
|
|
|
1,685 |
|
|
|
59,104 |
|
|
|
3,847 |
|
Investments |
|
|
|
|
|
|
13,964 |
|
|
|
|
|
|
|
7,979 |
|
Unrealized losses on securities |
|
|
(458 |
) |
|
|
2,547 |
|
|
|
40 |
|
|
|
2,885 |
|
Excess of tax basis over net
book value of intangible assets |
|
|
|
|
|
|
72,816 |
|
|
|
|
|
|
|
83,204 |
|
Share-based payment awards |
|
|
|
|
|
|
16,836 |
|
|
|
|
|
|
|
18,511 |
|
Credits and other |
|
|
1,775 |
|
|
|
469 |
|
|
|
|
|
|
|
1,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,702 |
|
|
|
108,317 |
|
|
|
66,321 |
|
|
|
120,907 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond interest |
|
|
|
|
|
|
(53,324 |
) |
|
|
|
|
|
|
(45,334 |
) |
Depreciation on property and equipment |
|
|
|
|
|
|
(3,402 |
) |
|
|
|
|
|
|
(3,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,726 |
) |
|
|
|
|
|
|
(48,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
(13,605 |
) |
|
|
|
|
|
|
(7,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
76,702 |
|
|
$ |
37,986 |
|
|
$ |
66,321 |
|
|
$ |
64,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-34
In connection with its acquisition of LipoSonix in July 2008, the Company recorded $18.7
million of net deferred tax assets and decreased goodwill by $18.7 million as a result of tax
attributes acquired and basis differences in the net assets acquired. During the years ended
December 31, 2010 and 2009, the Company recorded $0.9 million and $0.4 million, respectively, of
net deferred tax assets and decreased goodwill by $0.9 million and $0.4 million, respectively, as a
result of adjustments to the tax attributes acquired.
At December 31, 2010, the Company has a federal net operating loss carryforward of
approximately $7.7 million, of which a portion will expire beginning in 2021 if not previously
utilized. The net operating loss carryforward was acquired in connection with the Companys
acquisition of LipoSonix. As a result of the related ownership change for LipoSonix, the annual
utilization of the net operating loss carryforward is limited under Internal Revenue Code Section
382.
At December 31, 2010 and 2009, the Company has an unrealized tax loss of $21.0 million related
to the Companys option to acquire Revance or license Revances topical 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 December 31, 2010 and 2009, the Company has 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.
At December 31, 2010, the Company has an unrealized tax loss of $16.4 million related to the
Companys option to acquire a privately-held U.S. biotechnology company. If the Company fails to
exercise its option, a capital loss will be recognized. A loss characterized as a capital loss can
only be used to offset capital gains. At December 31, 2010, the Company has recorded a valuation
allowance of $5.9 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.
The Company recorded a deferred tax asset (liability) of approximately $2.1 million, $2.9
million and $(0.4) million related to unrealized gains on available-for-sale securities in 2010,
2009 and 2008, respectively. All amounts have been presented as a component of other comprehensive
income in stockholders equity.
During 2010, 2009 and 2008, the Company made net tax payments of $81.1 million, $44.6 million
and $87.8 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 2006. The state of California is currently conducting an
examination on the Companys tax returns for the periods ending June 30, 2005, December 31, 2005,
December 31, 2006 and December 31, 2007. The state has proposed audit adjustments. The Company
has recorded adequate accruals for these proposed adjustments. During the first quarter of 2011,
the Company reached a settlement with the state of California and paid approximately $0.5 million.
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 limitations
may be open for up to five years from the date the tax return was filed. Thus, all returns filed
for periods ending December 31, 2006 forward are open under the statute of limitations.
F-35
A reconciliation of the 2010, 2009 and 2008 beginning and ending amount of unrecognized tax
benefits is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
2,599 |
|
|
$ |
2,512 |
|
|
$ |
3,410 |
|
Additions based on tax positions related to the
current year |
|
|
87 |
|
|
|
118 |
|
|
|
|
|
Additions for tax positions of prior years |
|
|
|
|
|
|
1,352 |
|
|
|
|
|
Reductions for tax positions of prior years |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
Settlements |
|
|
(296 |
) |
|
|
|
|
|
|
(898 |
) |
Reductions due to lapse in statute of limitations |
|
|
(833 |
) |
|
|
(1,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,357 |
|
|
$ |
2,599 |
|
|
$ |
2,512 |
|
|
|
|
|
|
|
|
|
|
|
The amount of unrecognized tax benefits which, if ultimately recognized, could favorably
affect the effective tax rate in a future period is $0.9 million, $1.7 million and $2.1 million as
of December 31, 2010, 2009 and 2008, respectively. The Company estimates that it is reasonably
possible that the amount of unrecognized tax benefits will decrease by $0.8 million in the next
twelve months due to audit settlements.
The Company recognizes accrued interest and penalties, if applicable, related to unrecognized
tax benefits in income tax expense. During the years ended December 31, 2010, 2009 and 2008, the
Company did not recognize a material amount in interest and penalties. The Company had
approximately $0.5 million and $0.6 million for the payment of interest and penalties accrued (net
of tax benefit) at December 31, 2010 and 2009, respectively.
14. DIVIDENDS DECLARED ON COMMON STOCK
During 2010, 2009 and 2008, the Company paid quarterly cash dividends aggregating $13.2
million, $9.4 million and $8.6 million, respectively, on its common stock. In addition, on
December 15, 2010, the Company announced that its Board of Directors had declared a cash dividend
of $0.06 per issued and outstanding share of the Companys Class A common stock payable on January
31, 2011, to stockholders of record at the close of business on January 3, 2011. The $3.6 million
dividend was recorded as a reduction of accumulated earnings and is included in other current
liabilities in the accompanying consolidated balance sheets as of December 31, 2010. The Company
has not adopted a dividend policy.
F-36
15. STOCK OPTION PLANS AND SHARE-BASED COMPENSATION
As of December 31, 2010, the Company has seven active Stock Option Plans (the 2006, 2004,
2002, 1998, 1996, 1995 and 1992 Plans or, collectively, the Plans). Of these seven Plans, only
the 2006 Incentive Award Plan is eligible for the granting of future awards. As of December 31,
2010, 6,491,353 options were outstanding under these Plans. Except for the 2002 Stock Option Plan,
which only includes non-qualified incentive options, the Plans allow the Company to designate
options as qualified incentive or non-qualified on an as-needed basis. Stock option awards granted
from these plans are granted at the fair market value on the date of grant. Qualified and
non-qualified stock options 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. Options
outstanding at December 31, 2010 vary in price from $11.28 to $39.04, with a weighted average
exercise price of $30.01 as is set forth in the following chart:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
Range of |
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Contractual |
|
|
Exercise |
|
Exercise Prices |
|
Outstanding |
|
|
Life |
|
|
Price |
|
|
Exercisable |
|
|
Life |
|
|
Price |
|
$11.28 $18.33
|
|
|
651,842 |
|
|
|
2.5 |
|
|
$ |
17.56 |
|
|
|
612,504 |
|
|
|
2.1 |
|
|
$ |
17.96 |
|
$19.60 $26.89
|
|
|
526,704 |
|
|
|
3.6 |
|
|
$ |
23.34 |
|
|
|
379,422 |
|
|
|
2.2 |
|
|
$ |
23.42 |
|
$26.95 $26.95
|
|
|
1,046,934 |
|
|
|
0.5 |
|
|
$ |
26.95 |
|
|
|
1,046,934 |
|
|
|
0.5 |
|
|
$ |
26.95 |
|
$27.39 $27.46
|
|
|
8,000 |
|
|
|
2.3 |
|
|
$ |
27.42 |
|
|
|
8,000 |
|
|
|
2.3 |
|
|
$ |
27.42 |
|
$27.70 $28.87
|
|
|
45,310 |
|
|
|
1.6 |
|
|
$ |
28.24 |
|
|
|
45,310 |
|
|
|
1.6 |
|
|
$ |
28.24 |
|
$29.20 $29.20
|
|
|
1,525,010 |
|
|
|
2.6 |
|
|
$ |
29.20 |
|
|
|
1,525,010 |
|
|
|
2.6 |
|
|
$ |
29.20 |
|
$29.30 $32.56
|
|
|
862,780 |
|
|
|
3.2 |
|
|
$ |
31.63 |
|
|
|
861,580 |
|
|
|
3.2 |
|
|
$ |
31.63 |
|
$32.81 $36.06
|
|
|
150,963 |
|
|
|
3.4 |
|
|
$ |
33.75 |
|
|
|
146,424 |
|
|
|
3.3 |
|
|
$ |
33.76 |
|
$38.45 $39.04
|
|
|
1,673,810 |
|
|
|
3.6 |
|
|
$ |
38.50 |
|
|
|
1,673,810 |
|
|
|
3.6 |
|
|
$ |
38.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,491,353 |
|
|
|
2.7 |
|
|
$ |
30.01 |
|
|
|
6,298,994 |
|
|
|
2.5 |
|
|
$ |
30.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options outstanding and exercisable, respectively, at December 31,
2010 was $7,835,397 and $6,689,932.
The total value of the stock options awards is expensed ratably over the service period of the
employees receiving the awards. As of December 31, 2010, total unrecognized compensation cost
related to stock option awards, to be recognized as expense subsequent to December 31, 2010, was
approximately $1.0 million and the related weighted-average period over which it is expected to be
recognized is approximately 2.4 years.
F-37
A summary of stock options granted within the Plans and related information for 2010, 2009 and
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Qualified |
|
|
Non-Qualified |
|
|
Total |
|
|
Price |
|
Balance at December 31, 2007 |
|
|
997,816 |
|
|
|
10,669,139 |
|
|
|
11,666,955 |
|
|
$ |
27.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
127,702 |
|
|
|
127,702 |
|
|
$ |
22.22 |
|
Exercised |
|
|
(62,422 |
) |
|
|
(216,070 |
) |
|
|
(278,492 |
) |
|
$ |
15.59 |
|
Terminated/expired |
|
|
(58,936 |
) |
|
|
(749,872 |
) |
|
|
(808,808 |
) |
|
$ |
31.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
876,458 |
|
|
|
9,830,899 |
|
|
|
10,707,357 |
|
|
$ |
27.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
182,017 |
|
|
|
182,017 |
|
|
$ |
13.94 |
|
Exercised |
|
|
(157,515 |
) |
|
|
(976,900 |
) |
|
|
(1,134,415 |
) |
|
$ |
14.21 |
|
Terminated/expired |
|
|
(51,884 |
) |
|
|
(449,228 |
) |
|
|
(501,112 |
) |
|
$ |
30.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
667,059 |
|
|
|
8,586,788 |
|
|
|
9,253,847 |
|
|
$ |
29.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
153,295 |
|
|
|
153,295 |
|
|
$ |
23.33 |
|
Exercised |
|
|
(90,259 |
) |
|
|
(640,115 |
) |
|
|
(730,374 |
) |
|
$ |
22.35 |
|
Terminated/expired |
|
|
(291,656 |
) |
|
|
(1,893,759 |
) |
|
|
(2,185,415 |
) |
|
$ |
28.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
285,144 |
|
|
|
6,206,209 |
|
|
|
6,491,353 |
|
|
$ |
30.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2010 was $3,560,347.
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 December 31,
2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding, net of expected forfeitures |
|
|
6,067,354 |
|
|
$ |
30.14 |
|
|
|
2.7 |
|
|
$ |
6,802,624 |
|
Exercisable |
|
|
5,910,329 |
|
|
$ |
30.36 |
|
|
|
2.6 |
|
|
$ |
6,005,934 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED |
|
|
DECEMBER 31, 2010 |
|
DECEMBER 31, 2009 |
|
DECEMBER 31, 2008 |
Expected dividend yield |
|
1.02% to 1.06% |
|
0.34% to 1.01% |
|
0.61% to 0.70% |
Expected stock price volatility |
|
|
0.33 |
|
|
|
0.45 to 0.46 |
|
|
|
0.35 to 0.38 |
|
Risk-free interest rate |
|
2.82% to 3.04% |
|
2.18% to 2.76% |
|
3.02% to 3.35% |
Expected life of options |
|
7.0 Years |
|
7.0 Years |
|
7.0 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
F-38
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 2010, 2009 and 2008 was $8.28,
$6.44 and $8.90, respectively.
Restricted Stock Awards
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. As of December 31, 2010, the total amount of unrecognized compensation cost
related to nonvested restricted stock awards, to be recognized as expense subsequent to December
31, 2010, was approximately $24.1 million, and the related weighted-average period over which it is
expected to be recognized is approximately 2.7 years.
A summary of restricted stock activity within the Companys share-based compensation plans and
changes for 2010, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at December 31, 2007 |
|
|
552,769 |
|
|
$ |
31.92 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
864,423 |
|
|
$ |
19.14 |
|
Vested |
|
|
(122,722 |
) |
|
$ |
31.57 |
|
Forfeited |
|
|
(89,619 |
) |
|
$ |
23.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008 |
|
|
1,204,851 |
|
|
$ |
23.38 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
975,173 |
|
|
$ |
11.28 |
|
Vested |
|
|
(201,600 |
) |
|
$ |
25.35 |
|
Forfeited |
|
|
(62,955 |
) |
|
$ |
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
1,915,469 |
|
|
$ |
17.12 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
511,235 |
|
|
$ |
22.69 |
|
Vested |
|
|
(400,408 |
) |
|
$ |
19.44 |
|
Forfeited |
|
|
(231,851 |
) |
|
$ |
19.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010 |
|
|
1,794,445 |
|
|
$ |
17.94 |
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during 2010, 2009 and 2008 was approximately
$7.8 million, $5.1 million and $3.9 million, respectively.
Stock Appreciation Rights
During 2009, the Company began granting cash-settled stock appreciation rights (SARs) to
many 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
F-39
SAR on the date of grant. The total value of the SAR is expensed over the service period of
the employee receiving the grant, and a liability is recognized in the Companys consolidated
balance sheets until settled. The fair value of SARs is required 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.
As of December 31, 2010, the total measured amount of unrecognized compensation cost related to
outstanding SARs, to be recognized as expense subsequent to December 31, 2010, based on the
remeasurement at December 31, 2010, was approximately $28.3 million, and the related weighted
average period over which it is expected to be recognized is approximately 3.7 years.
The fair value of each SAR was estimated on the date of the grant, and was remeasured at
year-end, using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
SARS Granted During |
|
SARS Granted During |
|
Remeasurement |
|
|
the Year Ended |
|
the Year Ended |
|
as of |
|
|
December 31, 2010 |
|
December 31, 2009 |
|
December 31, 2010 |
Expected dividend yield
|
|
0.86% to 1.06%
|
|
0.35% to 1.01%
|
|
|
0.90 |
% |
Expected stock price volatility
|
|
0.32 to 0.33
|
|
0.38 to 0.46
|
|
|
0.31 |
|
Risk-free interest rate
|
|
1.91% to 3.07%
|
|
2.18% to 3.00%
|
|
|
2.71 |
% |
Expected life of SARs
|
|
7.0 years
|
|
7.0 years
|
|
5.2 to 6.9 years
|
The weighted average fair value of SARs granted during 2010 and 2009, as of the
respective grant dates, was $8.20 and $5.36, respectively. The weighted average fair value of all
SARs outstanding as of the remeasurement date of December 31, 2010, was $13.21
A summary of SARs activity for the years ended December 31, 2010 and 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 |
|
|
2,039,558 |
|
|
$ |
11.39 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(123,402 |
) |
|
$ |
11.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
1,916,156 |
|
|
$ |
11.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,487,988 |
|
|
$ |
23.10 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(128,458 |
) |
|
$ |
11.29 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(245,544 |
) |
|
$ |
13.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
3,030,142 |
|
|
$ |
16.99 |
|
|
|
5.7 |
|
|
$ |
29,767,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of SARs exercised during the year ended December 31, 2010, was
$1,815,632.
As of December 31, 2010, 61,202 SARs were exercisable, with a weighted average exercise price
of $11.63, a weighted average remaining contractual term of 5.2 years, and an aggregate intrinsic
value of $928,019.
F-40
Total share-based compensation expense recognized during 2010, 2009 and 2008 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Stock options |
|
$ |
1,417 |
|
|
$ |
4,844 |
|
|
$ |
10,654 |
|
Restricted stock awards |
|
|
8,252 |
|
|
|
8,712 |
|
|
|
5,943 |
|
Stock appreciation rights |
|
|
7,908 |
|
|
|
5,619 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
17,577 |
|
|
$ |
19,175 |
|
|
$ |
16,597 |
|
|
|
|
F-41
16. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per common
share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
123,335 |
|
|
$ |
75,951 |
|
|
$ |
10,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income allocated to participating securities |
|
|
3,807 |
|
|
|
2,363 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
119,528 |
|
|
$ |
73,588 |
|
|
$ |
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
58,430 |
|
|
|
57,252 |
|
|
|
56,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
2.05 |
|
|
$ |
1.29 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
123,335 |
|
|
$ |
75,951 |
|
|
$ |
10,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income allocated to participating securities |
|
|
3,807 |
|
|
|
2,363 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
119,528 |
|
|
|
73,588 |
|
|
|
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to unvested stockholders |
|
|
(3,450 |
) |
|
|
(2,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to unvested stockholders |
|
|
3,430 |
|
|
|
2,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense and issue costs related to
Old Notes |
|
|
2,664 |
|
|
|
2,664 |
|
|
|
|
|
Tax-effected interest expense and issue costs related to
New Notes |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income assuming dilution |
|
$ |
122,174 |
|
|
$ |
76,251 |
|
|
$ |
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
58,430 |
|
|
|
57,252 |
|
|
|
56,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Old Notes |
|
|
5,823 |
|
|
|
5,823 |
|
|
|
|
|
New Notes |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
Stock options |
|
|
344 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares assuming dilution |
|
|
64,601 |
|
|
|
63,172 |
|
|
|
56,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
1.89 |
|
|
$ |
1.21 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share must be calculated using the if-converted method.
Diluted net income per share using the if-converted method 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.
F-42
Unvested share-based payment awards that contain rights to receive nonforfeitable dividends or
dividend equivalents (whether paid or unpaid) are participating securities, and thus, are 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 stockholders. Restricted stock granted to certain
employees by the Company (see Note 15) 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 participating security.
The diluted net income per common share computation for 2010 and 2009 excludes 8,356,506 and
10,329,552 shares of stock, respectively, that represented outstanding stock options whose impact
would be anti-dilutive.
The diluted net income per common share computation for 2008 excludes 9,919,690 shares of
stock that represented outstanding stock options whose impact would be anti-dilutive. The diluted
net income per common share computation for 2009 also excludes restricted stock and stock options
convertible into 755,408 shares in the aggregate, and 5,822,551 and 3,124,742 shares of common
stock, issuable upon conversion of the Old Notes and New Notes, respectively, whose impact would be
anti-dilutive.
17. FINANCIAL INSTRUMENTS CONCENTRATIONS OF CREDIT AND OTHER RISKS
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash, cash equivalents, short-term and long-term investments and
accounts receivable.
The Company maintains cash, cash equivalents and short-term and long-term investments
primarily with two financial institutions that invest funds in short-term, interest-bearing,
investment-grade, marketable securities. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of investments in debt securities and
trade receivables. The Companys investment policy requires it to place its investments with
high-credit quality counterparties, and requires investments in debt securities with original
maturities of greater than six months to consist primarily of AAA rated financial instruments and
counterparties. The Companys investments are primarily in direct obligations of the United States
government or its agencies and corporate notes and bonds.
At December 31, 2010 and 2009, two customers comprised approximately 74.6% and 84.2%,
respectively, of accounts receivable. The Company does not require collateral from its customers,
but performs periodic credit evaluations of its customers financial condition. Management does
not believe a significant credit risk exists at December 31, 2010.
Substantially all of the Companys inventory is contract manufactured. The Company and the
manufacturers of its products rely on suppliers of raw materials used in the production of its
products. Some of these materials are available from only one source and others may become
available from only one source. Any disruption in the supply of raw materials or an increase in
the cost of raw materials to these manufacturers could have a significant effect on their ability
to supply the Company with its products. The failure of any such suppliers to meet its commitment
on schedule could have a material adverse effect on the Companys business, operating results and
financial condition. If a sole-source supplier were to go out of business or otherwise become
unable to meet its supply commitments, the process of locating and qualifying alternate sources
could require up to several months, during which time the Companys production could be delayed.
Such delays could have a material adverse effect on the Companys business, operating results and
financial condition.
18. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (the Contribution Plan) that is intended to
qualify under Section 401(k) of the Internal Revenue Code. All employees, except those who have
not attained the age of 21, are eligible to participate in the Contribution Plan. Participants may
contribute, through payroll deductions, up to 100.0% of their basic compensation, not to exceed
Internal Revenue Code limitations. Although the Contribution Plan provides for profit sharing
contributions by the Company, the Company had not made any such contributions since its inception
until April 2002. The Company matches 50% of the first 6% of basic compensation contributed by the
participants. During 2010, 2009 and 2008, the Company also made a discretionary contribution to
the plan. During
F-43
2010, 2009 and 2008, the Company recognized expense related to matching and
discretionary contributions under the Contribution Plan of $4.7 million, $3.7 million and $2.7
million, respectively.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The tables below list the quarterly financial information for 2010 and 2009. All figures are
in thousands, except per share amounts, and certain amounts do not total the annual amounts due to
rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2010 |
|
|
|
|
|
|
|
(FOR THE QUARTERS ENDED) |
|
|
|
MARCH 31, 2010 (a) |
|
|
JUNE 30, 2010 (b) |
|
|
SEPTEMBER 30, 2010 (c) |
|
|
DECEMBER 31, 2010 (d) |
|
|
Net revenues |
|
$ |
166,491 |
|
|
$ |
174,045 |
|
|
$ |
177,314 |
|
|
$ |
182,119 |
|
Gross profit (1) |
|
|
150,734 |
|
|
|
157,518 |
|
|
|
159,285 |
|
|
|
162,450 |
|
Net income |
|
|
35,371 |
|
|
|
36,499 |
|
|
|
27,578 |
|
|
|
23,888 |
|
Basic net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per common share |
|
$ |
0.59 |
|
|
$ |
0.61 |
|
|
$ |
0.46 |
|
|
$ |
0.39 |
|
Diluted net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per common share |
|
$ |
0.54 |
|
|
$ |
0.56 |
|
|
$ |
0.42 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2009 |
|
|
|
|
|
|
|
(FOR THE QUARTERS ENDED) |
|
|
|
MARCH 31, 2009 (e) |
|
|
JUNE 30, 2009 (f) |
|
|
SEPTEMBER 30, 2009 (g) |
|
|
DECEMBER 31, 2009 (h) |
|
|
Net revenues |
|
$ |
99,819 |
|
|
$ |
141,246 |
|
|
$ |
151,811 |
|
|
$ |
179,040 |
|
Gross profit (1) |
|
|
90,373 |
|
|
|
128,179 |
|
|
|
138,271 |
|
|
|
158,259 |
|
Net income |
|
|
329 |
|
|
|
15,593 |
|
|
|
21,148 |
|
|
|
38,882 |
|
Basic net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per common share |
|
$ |
0.01 |
|
|
$ |
0.26 |
|
|
$ |
0.36 |
|
|
$ |
0.65 |
|
Diluted net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per common share |
|
$ |
0.01 |
|
|
$ |
0.25 |
|
|
$ |
0.33 |
|
|
$ |
0.60 |
|
|
|
|
(1) |
|
Gross profit does not include amortization of the related intangibles. |
|
|
|
Quarterly results were impacted by the following items: |
|
(a) |
|
Operating expenses included approximately $3.1 million of compensation expense related
to stock options, restricted stock and stock appreciation rights. |
|
(b) |
|
Operating expenses included approximately $2.3 million of compensation expense related
to stock options, restricted stock and stock appreciation rights. |
|
(c) |
|
Included in operating expenses is $5.0 million paid to a privately-held U.S.
biotechnology company related to a product development agreement, $2.3 million related to
the write-down of an intangible asset related to certain non-primary products and $8.7
million of compensation expense related to stock options, restricted stock and stock
appreciation rights. |
|
(d) |
|
Included in operating expenses is $10.0 million paid to a privately-held U.S.
biotechnology company related to a product development agreement, $3.9 million paid to a
Medicis partner related to a product development agreement, $9.8 million related to the
write-down of long-lived assets related to LipoSonixTM and $3.5 million of
compensation expense related to stock options, restricted stock and stock appreciation
rights. |
|
(e) |
|
Operating expenses included $5.0 million paid to Impax related to a product development
agreement and approximately $3.9 million of compensation expense related to stock options,
restricted stock and stock appreciation rights. |
F-44
|
|
|
(f) |
|
Operating expenses included approximately $5.0 million of compensation expense related
to stock options, restricted stock and stock appreciation rights and $3.0 million paid to
Perrigo related to a product development agreement. |
|
(g) |
|
Operating expenses included $10.0 million paid to Revance related to a product
development agreement, $5.0 million paid to Impax related to a product development
agreement, $2.0 million paid to Perrigo related to a product development agreement and
approximately $4.7 million of compensation expense related to stock options, restricted
stock and stock appreciation rights. |
|
(h) |
|
Operating expenses included $5.3 million paid to Glenmark related to license and
settlement agreements, $2.0 million paid to Impax related to a product development
agreement and approximately $5.6 million of compensation expense related to stock options,
restricted stock and stock appreciation rights. |
20. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of issuance of its financial
statements.
On February 9, 2011, the Company entered into a research and development agreement with Anacor
Pharmaceuticals, Inc. (Anacor) for the discovery and development of boron-based small molecule
compounds directed against a target for the potential treatment of acne. Under the terms of the
agreement, the Company paid Anacor $7.0 million in connection with the execution of the agreement,
and will pay up to $153.0 million upon the achievement of certain research, development, regulatory
and commercial milestones, as well as royalties on sales by the Company. Anacor will be
responsible for discovering and conducting the early development of product candidates which
utilize Anacors proprietary boron chemistry platform, while the Company will have an option to
obtain an exclusive license for products covered by the agreement.
On February 25, 2011, the Company announced that as a result of the Companys strategic
planning process and the current regulatory and commercial capital equipment environment, the
Company has determined to explore strategic alternatives for its LipoSonix business
including, but not limited to, the sale of the stand-alone business. The Company has engaged an
investment banking firm to assist the Company in its exploration of strategic alternatives for
LipoSonix. As a result of this decision, the Company will classify the LipoSonix business as a
discontinued operation for financial statement reporting purposes beginning during the three months
ended March 31, 2011.
F-45
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of |
|
|
costs and |
|
|
Charged to |
|
|
|
|
|
|
Balance at end |
|
Description |
|
period |
|
|
expense |
|
|
other accounts |
|
|
Deductions |
|
|
of period |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
2,848 |
|
|
$ |
28,617 |
|
|
$ |
|
|
|
$ |
(27,484 |
) |
|
$ |
3,981 |
|
Inventory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
|
6,234 |
|
|
|
8,719 |
|
|
|
|
|
|
|
(6,360 |
) |
|
|
8,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
1,719 |
|
|
$ |
21,983 |
|
|
$ |
|
|
|
$ |
(20,854 |
) |
|
$ |
2,848 |
|
Inventory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
|
1,415 |
|
|
|
7,567 |
|
|
|
|
|
|
|
(2,748 |
) |
|
|
6,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
830 |
|
|
$ |
15,157 |
|
|
$ |
|
|
|
$ |
(14,268 |
) |
|
$ |
1,719 |
|
Inventory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
|
3,818 |
|
|
|
(978 |
) |
|
|
|
|
|
|
(1,425 |
) |
|
|
1,415 |
|
S-1