e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
file number: 0-18443
MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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52-1574808 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
8125 North Hayden Road
Scottsdale, Arizona 85258-2463
(Address of principal executive offices)
(602) 808-8800
(Registrants telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2) YES o NO
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at May 3, 2006 |
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Class A Common Stock $.014 Par Value
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54,434,252 |
MEDICIS PHARMACEUTICAL CORPORATION
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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March 31, 2006 |
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December 31, 2005 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
245,789 |
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$ |
446,997 |
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Short-term investments |
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352,879 |
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295,535 |
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Accounts receivable, net |
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50,379 |
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46,697 |
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Inventories, net |
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15,695 |
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19,076 |
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Deferred tax assets, net |
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12,040 |
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12,738 |
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Other current assets |
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13,469 |
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12,241 |
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Total current assets |
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690,251 |
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833,284 |
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Property and equipment, net |
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5,025 |
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5,416 |
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Intangible assets: |
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Intangible assets related to product line
acquisitions and business combinations |
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311,406 |
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311,406 |
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Other intangible assets |
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5,133 |
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4,888 |
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316,539 |
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316,294 |
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Less: accumulated amortization |
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81,582 |
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76,458 |
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Net intangible assets |
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234,957 |
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239,836 |
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Goodwill |
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63,269 |
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63,094 |
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Long-term investments |
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4,693 |
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Deferred financing costs, net |
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3,789 |
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4,325 |
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$ |
1,001,984 |
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$ |
1,145,955 |
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See accompanying notes to condensed consolidated financial statements.
3
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(in thousands, except share amounts)
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March 31, 2006 |
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December 31, 2005 |
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(unaudited) |
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Liabilities |
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Current liabilities: |
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Accounts payable |
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$ |
35,767 |
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$ |
57,708 |
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Short-term contract obligation |
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27,407 |
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Income taxes payable |
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9,217 |
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31,521 |
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Other current liabilities |
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30,042 |
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24,195 |
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Total current liabilities |
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75,026 |
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140,831 |
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Long-term liabilities: |
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Contingent convertible senior notes |
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453,065 |
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453,065 |
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Deferred tax liability, net |
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11,735 |
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8,572 |
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Stockholders Equity |
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Preferred stock, $0.01 par value; shares
authorized: 5,000,000; no shares issued |
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Class A common stock, $0.014 par value;
shares authorized: 150,000,000; issued and
outstanding: 67,082,926 and 67,052,326 at
March 31, 2006 and December 31, 2005,
respectively |
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939 |
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938 |
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Class B common stock, $0.014 par value; shares
authorized: 1,000,000; no shares issued and
outstanding at March 31, 2006 and December 31, 2005 |
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Additional paid-in capital |
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557,753 |
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550,006 |
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Accumulated other comprehensive income |
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1,486 |
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379 |
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Accumulated earnings |
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244,710 |
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334,894 |
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Less: Treasury stock, 12,651,554 and 12,647,554 shares
at cost at March 31, 2005 and December 31, 2005,
respectively |
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(342,730 |
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(342,730 |
) |
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Total stockholders equity |
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462,158 |
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543,487 |
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$ |
1,001,984 |
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$ |
1,145,955 |
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See accompanying notes to condensed consolidated financial statements.
4
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
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Three Months Ended |
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March 31, 2006 |
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March 31, 2005 |
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Net product revenues |
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$ |
71,087 |
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$ |
75,788 |
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Net contract revenues |
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4,071 |
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19,400 |
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Net revenues |
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75,158 |
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95,188 |
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Cost of product revenue (1) |
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12,179 |
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13,914 |
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Gross profit |
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62,979 |
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81,274 |
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Operating expenses: |
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Selling, general and administrative (2) |
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51,223 |
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31,934 |
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Research and development (3) |
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97,218 |
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14,452 |
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Depreciation and amortization |
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5,856 |
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6,054 |
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Operating (loss) income |
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(91,318 |
) |
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28,834 |
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Interest income |
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7,020 |
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2,989 |
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Interest expense |
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2,658 |
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2,658 |
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(Loss) income before income tax (benefit) expense |
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(86,956 |
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29,165 |
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Income tax expense |
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1,587 |
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9,794 |
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Net (loss) income |
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$ |
(88,543 |
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$ |
19,371 |
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Basic net (loss) income per common share |
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$ |
(1.63 |
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$ |
0.36 |
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Diluted net (loss) income per common share |
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$ |
(1.63 |
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$ |
0.30 |
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Cash dividend declared per common share |
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$ |
0.03 |
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$ |
0.03 |
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Basic common shares outstanding |
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54,356 |
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54,251 |
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Diluted common shares outstanding |
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54,356 |
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69,773 |
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(1) amounts exclude amortization of intangible
assets related to acquired products |
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$ |
5,075 |
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$ |
5,342 |
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(2) amounts include share-based
compensation expense |
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$ |
6,647 |
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$ |
129 |
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(3) amounts include share-based
compensation expense |
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$ |
534 |
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See accompanying notes to condensed consolidated financial statements.
5
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Three Months Ended |
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March 31, 2006 |
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March 31, 2005 |
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Operating Activities: |
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Net (loss) income |
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$ |
(88,543 |
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$ |
19,371 |
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Adjustments to reconcile net (loss) income to
net cash provided by operating activities: |
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Depreciation and amortization |
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5,856 |
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6,054 |
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Amortization of deferred financing fees |
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536 |
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536 |
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(Gain) loss on sale of available-for-sale investments |
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(1 |
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156 |
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Share-based compensation expense |
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7,181 |
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129 |
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Deferred income tax expense |
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3,860 |
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3,518 |
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Tax benefit from exercise of stock options |
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(452 |
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Provision for doubtful accounts and returns |
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640 |
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327 |
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Accretion of (discount) premium on investments |
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(480 |
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1,398 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(4,322 |
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(2,615 |
) |
Inventories |
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3,381 |
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(2,148 |
) |
Other current assets |
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(1,228 |
) |
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4,703 |
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Accounts payable |
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(21,940 |
) |
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4,204 |
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Income taxes payable |
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(22,304 |
) |
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(1,928 |
) |
Other current liabilities |
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5,844 |
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635 |
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Net cash (used in) provided by operating activities |
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(111,520 |
) |
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33,888 |
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Investing Activities: |
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Purchase of property and equipment |
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(343 |
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(582 |
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Payment of direct merger costs |
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(27,582 |
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(820 |
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Payment for purchase of product rights |
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(245 |
) |
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62 |
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Purchase of available-for-sale investments |
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(186,744 |
) |
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(185,470 |
) |
Sale of available-for-sale investments |
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92,032 |
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171,583 |
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Maturity of available-for-sale investments |
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34,270 |
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19,425 |
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Net cash (used in) provided by investing activities |
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(88,612 |
) |
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4,198 |
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Financing Activities: |
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Payment of dividends |
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(1,637 |
) |
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(1,627 |
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Proceeds from the exercise of stock options |
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567 |
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129 |
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Net cash used in financing activities |
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(1,070 |
) |
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(1,498 |
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Effect of exchange rate on cash and cash equivalents |
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(6 |
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64 |
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Net
(decrease) increase in cash and cash equivalents |
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(201,208 |
) |
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36,652 |
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Cash and cash equivalents at beginning of period |
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446,997 |
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31,521 |
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Cash and cash equivalents at end of period |
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$ |
245,789 |
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$ |
68,173 |
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See accompanying notes to condensed consolidated financial statements.
6
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Medicis Pharmaceutical Corporation (Medicis or the Company) is a leading specialty
pharmaceutical company focusing primarily on the development and marketing of products in
the United States (U.S.) for the treatment of dermatological, aesthetic and podiatric
conditions. Medicis also markets products in Canada for the treatment of dermatological and
aesthetic conditions. Medicis has built its business by executing a four-part growth
strategy. This strategy consists of promoting existing core brands, developing new products
and important product line extensions, entering into strategic collaborations and acquiring
complementary products, technologies and businesses.
The Company offers a broad range of products addressing various conditions including
acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, eczema, skin and
skin-structure infections, seborrheic dermatitis and cosmesis (improvement in the texture
and appearance of skin). Medicis currently offers 15 branded products. Its core brands are
DYNACIN® (minocycline HCI), LOPROX® (ciclopirox), OMNICEF®
(cefdinir), PLEXION® (sodium sulfacetamide/sulfur), RESTYLANE®
(hyaluronic acid), TRIAZ® (benzoyl peroxide), and VANOS
(fluocinonide) Cream, 0.1%.
In March 2003, Medicis expanded into the dermal aesthetic market through its
acquisition of the exclusive U.S. and Canadian rights to market, distribute and
commercialize the dermal restorative product lines known as RESTYLANE®,
PERLANE and RESTYLANE FINE LINES from Q-Med AB, a Swedish
biotechnology/medical device company and its affiliates, collectively Q-Med.
RESTYLANE® has been approved by the Food and Drug Administration (the FDA) for
use in the U.S. as a medical device for the correction of moderate to severe facial wrinkles
and folds, such as nasolabial folds. RESTYLANE®, PERLANE and
RESTYLANE FINE LINES have been approved for use in Canada.
The consolidated financial statements include the accounts of Medicis Pharmaceutical
Corporation and its wholly owned subsidiaries. The Company does not have any subsidiaries
in which it does not own 100% of the outstanding stock. All of the Companys subsidiaries
are included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements of Medicis have
been prepared in conformity with U.S. generally accepted accounting principles, consistent
in all material respects with those applied in the Companys Transition Report on Form
10-K/T for the six-month period ended December 31, 2005 (the Transition Period). The
financial information is unaudited, but reflects all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of the Companys management, necessary to a
fair statement of the results for the interim periods presented. Interim results are not
necessarily indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with the Companys Transition Report on Form 10-K/T for
the Transition Period. Certain prior period amounts have been reclassified to conform with
current period presentation.
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2. |
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SHARE-BASED COMPENSATION |
At March 31, 2006, the Company had six active share-based employee compensation plans.
Stock option awards granted from these plans are granted at the fair market value on the
date of grant. The option awards vest over a period determined at the time the options are
granted, ranging from one to five years, and generally have a maximum term of ten years.
Certain options provide for accelerated vesting if there is a change in control (as defined
in the plans). When options are exercised, new shares of the Companys Class A common
stock are issued. Prior to July 1, 2005, the Company accounted for share-based
employee compensation, including stock options, using the method prescribed in Accounting
Principles Board Opinion
7
No. 25, Accounting for Stock Issued to Employees and related
Interpretations (APB Opinion No. 25). Under APB Opinion No. 25, stock options are granted
at market price and no compensation cost is recognized, and a disclosure is made regarding
the pro forma effect on net earnings assuming compensation cost had been recognized in
accordance with Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). On December 16, 2004, the FASB issued SFAS No.
123R, which requires companies to measure and recognize compensation expense for all
share-based payments at fair value. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, and generally requires that
such transactions be accounted for using prescribed fair-value-based methods. SFAS No. 123R
permits public companies to adopt its requirements using one of two methods: (a) a modified
prospective method in which compensation costs are recognized beginning with the effective
date based on the requirements of SFAS No. 123R for all share-based payments granted or
modified after the effective date, and based on the requirements of SFAS No. 123 for all
awards granted to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date or (b) a modified retrospective method which includes the
requirements of the modified prospective method described above, but also permits companies
to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures either for all periods presented or prior interim periods of the year of
adoption. Effective July 1, 2005, the Company adopted SFAS No. 123R using the modified
prospective method. Other than restricted stock, no share-based employee compensation cost
has been reflected in net income prior to the adoption of SFAS No. 123R. Results for prior
periods have not been restated.
The adoption of SFAS No. 123R increased the loss before income tax expense for the
three months ended March 31, 2006 by approximately $7.2 million and increased the net loss
for the three months ended March 31, 2006 by approximately $5.2 million. As a result, basic
and diluted net loss per common share were increased $0.10.
The total value of the stock option awards is expensed ratably over the service period
of the employees receiving the awards. As of March 31, 2006, total unrecognized
compensation cost related to stock option awards was approximately $57.9 million and the
related weighted-average period over which it is expected to be recognized is approximately
2.8 years.
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows in the
condensed consolidated statements of cash flows. SFAS No. 123R requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash
flows. No excess tax benefits were recognized during the three months ended March 31, 2006.
8
A summary of stock options activity within the Companys stock-based compensation plans
and changes for the three months ended March 31, 2006 is as follows:
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Weighted |
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Weighted |
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Average |
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Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Balance at December 31, 2005 |
|
|
14,379,336 |
|
|
$ |
27.21 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
38,625 |
|
|
$ |
30.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(26,600 |
) |
|
$ |
21.32 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(84,598 |
) |
|
$ |
30.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
14,306,763 |
|
|
$ |
27.21 |
|
|
|
6.25 |
|
|
$ |
92,892,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the three months ended March 31, 2006
was $261,802. Options exercisable under the Companys share-based compensation plans at
March 31, 2006 were 7,310,875, with an average exercise price of $24.27, an average
remaining contractual term of 5.2 years, and an aggregate intrinsic value of $63,788,916.
A summary of fully vested stock options and stock options expected to vest, as of March
31, 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Outstanding |
|
|
13,759,712 |
|
|
$ |
27.19 |
|
|
|
6.2 |
|
|
$ |
89,556,658 |
|
Exercisable |
|
|
7,078,896 |
|
|
$ |
24.25 |
|
|
|
5.2 |
|
|
$ |
61,878,760 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Expected dividend yield |
|
|
0.4 |
% |
|
|
0.3 |
% |
Expected stock price volatility |
|
|
0.36 |
|
|
|
0.44 |
|
Risk-free interest rate |
|
|
4.5 |
% |
|
|
3.6 |
% |
Expected life of options |
|
7 Years |
|
5 Years |
The expected dividend yield is based on expected annual dividends to be paid by the
Company as a percentage of the market value of the Companys stock as of the date of grant.
The Company determined that a blend of implied volatility and historical volatility is more
reflective of market conditions and a better indicator of expected volatility than using
purely historical volatility. The risk-free interest rate is based on the U.S. treasury
security rate in effect as of the date of grant. The expected lives of options are based on
historical data of the Company.
The weighted average fair value of stock options granted during the three months ended
March 31, 2006 was $13.36. There were no stock options granted during the three months
ended March 31, 2005.
9
The following table illustrates the effect on net income and net income per common
share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to
all outstanding stock option awards for periods presented prior to the Companys adoption of
SFAS No. 123R (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
THREE MONTHS |
|
|
|
ENDED |
|
|
|
MARCH 31, |
|
|
|
2005 |
|
Net income, as reported |
|
$ |
19,371 |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |
|
|
5,049 |
|
|
|
|
|
Pro-forma net income |
|
$ |
14,322 |
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
Basic, as reported |
|
$ |
0.36 |
|
Basic, pro forma |
|
$ |
0.26 |
|
Diluted, as reported |
|
$ |
0.30 |
|
Diluted, pro forma |
|
$ |
0.23 |
|
The Company also grants restricted stock awards to certain employees. Restricted stock
awards are valued at the closing market value of the Companys Class A common stock on the
date of grant, and the total value of the award is expensed ratably over the service period
of the employees receiving the grants. During the three months ended March 31, 2006,
110,025 shares of restricted stock were granted to certain employees. Share-based
compensation expense related to all restricted stock awards outstanding during the three
months ended March 31, 2006 and 2005, was approximately $0.5 million and $0.1 million,
respectively. As of March 31, 2006, the total amount of unrecognized compensation cost
related to nonvested restricted stock awards was approximately $7.6 million, and the related
weighted-average period over which it is expected to be recognized is approximately 4.4
years.
A summary of restricted stock activity within the Companys share-based compensation
plans and changes for the three months ended March 31, 2006 is as follows (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
Nonvested Shares |
|
Shares |
|
Fair Value |
Nonvested at December 31, 2005 |
|
|
212,260 |
|
|
$ |
29.65 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
110,025 |
|
|
$ |
30.05 |
|
Vested |
|
|
(4,000 |
) |
|
$ |
23.30 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
318,285 |
|
|
$ |
29.87 |
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the three months ended March
31, 2006 was approximately $0.1 million. No restricted shares vested during the three
months ended March 31, 2005.
10
|
|
|
3. |
|
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. In contrast, if the Company acquires product rights that are in the development
phase and as to which the Company has no assurance that the third party will successfully
complete its developmental milestones, the Company expenses such payments.
On January 28, 2005, the Company amended its strategic alliance with AAIPharma Inc.
(AAIPharma) previously initiated in June 2002 for the development, commercialization and
license of a dermatologic product. The consummation of the amendment has not affected the
timing of the development project. The amendment allowed for the immediate transfer of the
work product, as defined under the agreement, as well as the work products management and
development, to Medicis, and provides that AAIPharma will continue to assist Medicis with
the development of the product on a fee for services basis. Medicis will have no future
financial obligations to pay AAIPharma on the attainment of clinical milestones, but
incurred approximately $8.3 million as a charge to research and development expense during
the three months ended March 31, 2005, as part of the amendment and the assumption of all
liabilities associated with the project.
|
|
|
4. |
|
DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO IPSENS
BOTULINUM TOXIN PRODUCT KNOWN AS RELOXIN® |
On March 17, 2006, the Company entered into a development and distribution agreement
with Ipsen Ltd., a wholly-owned subsidiary of Ipsen (Ipsen), whereby Ipsen granted
Aesthetica Ltd., a wholly-owned subsidiary of Medicis, rights to develop, distribute and
commercialize Ipsens botulinum toxin product in the United States, Canada and Japan for
aesthetic use by physicians. The product is commonly referred to as Reloxin® in
the U.S. aesthetic market and Dysport® for medical and aesthetic markets outside
the U.S. The product is not currently approved for use in the U.S., Canada or Japan.
Under the terms of the agreement, Medicis paid Ipsen $90.1 million in consideration for
the exclusive distribution rights in the U.S., Canada and Japan and will pay an additional
$26.5 million upon successful completion of various clinical and regulatory milestones,
$75.0 million upon the products approval by the FDA and $2.0 million upon regulatory
approval of the product in Japan. Ipsen will manufacture and provide the product to Medicis
for the term of the agreement, which extends to September 2019. Ipsen will receive a
royalty based on sales and a supply price, the total of which is equivalent to approximately
30% of net sales as defined under the agreement. The initial $90.1 million payment was
recognized as a charge to research and development expense during the three months ended
March 31, 2006. Under the terms of the agreement, Medicis is responsible for all remaining
research and development costs associated with obtaining the products approval in the U.S.,
Canada and Japan.
Additionally, Medicis and Ipsen agreed to negotiate and enter into an agreement
relating to the exclusive distribution and development rights of the product for the
aesthetic market in Europe, and
subsequently in certain other markets. Under this agreement, Medicis would pay
up-front and other milestone payments linked to the development and approval of Ipsens
botulinum toxin Type A product in
11
aesthetic indications as well as royalties based on net
sales. Ipsen would manufacture and supply the product to Medicis. Medicis was obligated to
make an additional payment to Ipsen in connection with the U.S., Canada and Japan agreement
if this agreement was not entered into by April 15, 2006. On April 13, 2006, Medicis and
Ipsen agreed to extend this deadline to July 15, 2006.
|
|
|
5. |
|
MERGER OF ASCENT PEDIATRICS, INC. |
As part of its merger with Ascent completed in November 2001, the Company may be
required to make contingent purchase price payments (Contingent Payments) for each of the
first five years following closing based upon reaching certain sales threshold milestones on
the Ascent products for each twelve month period through November 15, 2006, subject to
certain deductions and set-offs. From time to time the Company assesses the probability and
likelihood of payment in the coming respective November period based on current sales
trends. There can be no assurance that such payment will ultimately be made nor is the
accrual of a liability an indication of current sales levels. A total of approximately
$27.4 million was included in short-term contract obligation in the Companys condensed
consolidated balance sheets as of December 31, 2005, representing the first four years
Contingent Payments. Pursuant to the merger agreement, payment of the contingent portion of
the purchase price was withheld pending the final outcome of certain pending litigation.
The Company distributed the accumulated Contingent Payments to the former shareholders of
Ascent during the three months ended March 31, 2006, as the pending litigation matter had
concluded. In addition, the Company settled an additional dispute during May 2006 which was
initiated in March 2006 related to the concluded lawsuitA $1.8 million settlement was
recognized as a charge to selling, general administrative expense during the three months
ended March 31, 2006.
|
|
|
6. |
|
SHORT-TERM AND LONG-TERM INVESTMENTS |
The Companys short-term and long-term investments are intended 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. 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 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
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. Dividend and interest
income are recognized when earned. The cost of security sold is calculated using the
specific identification method. At March 31, 2006, the Company has recorded the estimated
fair value in available-for-sale securities for short-term and long-term investments of
approximately $352.9 million and $4.7 million, respectively. The following is a summary of
available-for-sale securities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. corporate securities |
|
$ |
199,569 |
|
|
$ |
1,620 |
|
|
$ |
273 |
|
|
$ |
200,917 |
|
Other debt securities |
|
|
156,859 |
|
|
|
1 |
|
|
|
204 |
|
|
|
156,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
356,428 |
|
|
$ |
1,621 |
|
|
$ |
477 |
|
|
$ |
357,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
During the three months ended March 31, 2006, the gross realized gains on sales of
available-for-sale securities totaled $1,458, while no gross losses were realized. Such
amounts of gains and losses are determined based on the specific identification method. The
net adjustment to unrealized gains during the three months ended March 31, 2006, on
available-for-sale securities included in stockholders equity totaled $976,207. The
amortized cost and estimated fair value of the available-for-sale securities at March 31,
2006, by maturity, are shown below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, 2006 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
236,938 |
|
|
$ |
238,181 |
|
Due after one year through five years |
|
|
16,490 |
|
|
|
16,391 |
|
Due after five years through 10 years |
|
|
4,000 |
|
|
|
4,000 |
|
Due after 10 years |
|
|
99,000 |
|
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
$ |
356,428 |
|
|
$ |
357,572 |
|
|
|
|
|
|
|
|
At March 31, 2006, approximately $114.7 million of the $119.4 million in estimated fair
value expected to mature greater than one year has been classified as short-term investments
since these investments are in an unrealized gain position. 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.
The following table shows the gross unrealized losses and 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 March 31, 2006 (amount in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
Greater Than 12 Months |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
U.S. corporate securities |
|
$ |
121,931 |
|
|
$ |
105 |
|
|
$ |
30,024 |
|
|
$ |
168 |
|
Other debt securities |
|
|
26,945 |
|
|
|
17 |
|
|
|
36,410 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
148,876 |
|
|
$ |
122 |
|
|
$ |
66,434 |
|
|
$ |
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on the Companys investments were caused primarily by interest
rate increases. It is expected that the investments will not be settled at a price less
than the amortized cost. Because the Company has the ability to and intent to hold these
investments until a recovery of fair value, which may be maturity, the Company does not
consider these investments to be other than temporarily impaired at March 31, 2006.
|
|
|
7. |
|
SEGMENT AND PRODUCT INFORMATION |
The Company operates in one significant business segment: Pharmaceuticals. The
Companys current pharmaceutical franchises are divided between the dermatological and
non-dermatological fields. The dermatological field represents products for the treatment
of acne and acne-related dermatological conditions and non-acne dermatological conditions.
The non-dermatological field represents products for the treatment of urea cycle disorder
and contract revenue. The acne and acne-related dermatological product lines include core
brands DYNACIN®, PLEXION® and TRIAZ®. The non-acne
dermatological product lines include core brands LOPROX®, OMNICEF®,
RESTYLANE® and VANOS. The non-dermatological product lines include
AMMONUL® and BUPHENYL®. The non-dermatological field also includes
contract revenues associated with licensing agreements and authorized generics.
13
The Companys pharmaceutical products, with the exception of AMMONUL® and
BUPHENYL®, are promoted to dermatologists, podiatrists and plastic surgeons.
Such products are often prescribed by physicians outside these three specialties; including
family practitioners, general practitioners, primary-care physicians and OB/GYNs, as well as
hospitals, government agencies and others. All products, with the exception of
BUPHENYL®, are sold primarily to wholesalers and retail chain drug stores.
BUPHENYL® is primarily sold directly to hospitals and pharmacies.
The percentage of net revenues for each of the product categories is as follows:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
MARCH 31, |
|
|
|
2006 |
|
|
2005 |
|
Acne and acne-related dermatological products |
|
|
19 |
% |
|
|
25 |
% |
Non-acne dermatological products |
|
|
67 |
|
|
|
50 |
|
Non-dermatological products |
|
|
14 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The Company utilizes third parties to manufacture and package inventories held for
sale, takes title to certain inventories once manufactured, and warehouses such goods until
packaged for final distribution and sale. Inventories consist of salable products held at
the Companys warehouses, as well as raw materials and components at the manufacturers
facilities, and are valued at the lower of cost or market using the first-in, first-out
method. The Company provides valuation reserves for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market conditions.
Inventories are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Raw materials |
|
$ |
6,996 |
|
|
$ |
6,436 |
|
Finished goods |
|
|
10,367 |
|
|
|
13,925 |
|
Valuation reserve |
|
|
(1,668 |
) |
|
|
(1,285 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
15,695 |
|
|
$ |
19,076 |
|
|
|
|
|
|
|
|
|
|
|
9. |
|
CONTINGENT CONVERTIBLE SENIOR NOTES |
In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5%
Contingent Convertible 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. 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, 2007, 2012 and 2017; and 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.
14
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 is amortizing these costs over the five-year Put
period, which runs through May 2007. The Put period runs from the date the Old Notes were
issued to the date the Company may redeem some or all of the Old Notes.
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. The New Notes mature on June 4, 2033.
The Company may redeem some or all of the New Notes at any time on or after June 11,
2008, at a redemption price, payable in cash, of 100% of the principal amount of the New
Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders of
the New Notes may require the Company to repurchase all or a portion of their New Notes on
June 4, 2008, 2013 and 2018, and upon a change in control, as defined in the indenture
governing the New Notes, at 100% of the principal amount of the New Notes, plus accrued and
unpaid interest to the date of the repurchase, payable in cash.
The
New Notes are convertible, at the holders option, prior to the maturity date into shares of the Companys Class A common stock in the following circumstances:
|
|
|
during any quarter commencing after September 30, 2003, if the closing price of
the Companys Class A common stock over a specified number of trading days during
the previous quarter,
including the last trading day of such quarter, is more than 120% of the conversion
price of the |
15
|
|
|
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 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.
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. Both the New Notes and Old
Notes are reported in aggregate on the Companys condensed consolidated balance sheets. The
Company incurred approximately $5.1 million of fees and other origination costs related to
the issuance of the New Notes. The Company is amortizing these costs over the five-year Put
period, which runs through August 2008. The Put period runs from the date the New Notes
were issued to the date the Company may redeem some or all of the New Notes.
During the quarters ended December 31, 2005, September 30, 2005, December 31, 2004,
September 30, 2004, June 30, 2004, March 31, 2004 and December 31, 2003, the Old Notes met
the criteria for the right of conversion into shares of the Companys Class A common stock.
This right of conversion of the holders of Old Notes was triggered by the stock closing
above $31.96 on 20 of the last 30 trading days and the last trading day of the quarters
ended December 31, 2005, September 30, 2005, December 31, 2004, September 30, 2004, June 30,
2004, March 31, 2004 and December 31, 2003. The holders of Old Notes had this conversion
right only until March 31, 2006. During the quarters ended March 31, 2006, June 30, 2005
and March 31, 2005, the Old Notes did not meet the criteria for the right of conversion. At
the end of all future quarters, the conversion rights will be reassessed in accordance with
the bond indenture agreement to determine if the conversion trigger rights have been
achieved. During the three months ended September 30, 2004 and March 31, 2004, outstanding
principal amounts of $2,000 and $6,000 of Old Notes, respectively,
were converted into shares of the Companys Class A common stock. As of May 8, 2006, no other Old Notes had
been converted.
Income taxes have been provided for using the liability method in accordance with
Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes. The
provision for income taxes generally reflects managements estimate of the effective tax
rate expected to be applicable for the full fiscal year. However, during the three months
ended March 31, 2006, the Companys effective tax rate of (1.8%) differs from the Companys
estimate of the effective tax rate for the full fiscal year. The Companys effective tax
rate during the three months ended March 31, 2006 is a result of not booking tax benefits on
the $90.1 million charge to research and development expense related to the Companys
development and distribution agreement with Ipsen for the development of
Reloxin®. The $90.1 million charge was incurred by Aesthetica Ltd., a Bermuda
company, which is not subject to corporate income taxes.
At March 31, 2006, the Company has a federal net operating loss carryforward of
approximately $61.7 million that begins expiring in varying amounts in the years 2008
through 2020 if not previously
16
utilized. The net operating loss carryforward was acquired
in connection with the Companys merger with Ascent during fiscal 2002. As a result of the
merger and related ownership change for Ascent, the annual utilization of the net operating
loss carryforward is limited under Internal Revenue Code Section 382. Based upon this
limitation, the Company estimates that approximately $15.2 million of the $61.7 million net
operating loss carryforward will be realized. Accordingly, a valuation reserve has been
recorded for the remaining net operating loss carryforward that is not expected to be
realized.
At March 31, 2006, the Company had a research and experimentation credit carryforward
of approximately $1.3 million that begins expiring in varying amounts in the years 2008
through 2020 if not previously utilized. All of the research and experimentation credit
carryforward was acquired in connection with the Companys merger with Ascent during fiscal
2002 and is subject to the limitation under Internal Revenue Code Section 383. As a result
of this limitation, the Company does not expect to realize any of the research and
experimentation credits acquired from Ascent. Accordingly, a valuation reserve of $1.3
million has been established for the acquired research and experimentation credits.
At March 31, 2006, the Company had a foreign tax credit carryover of approximately $0.7
million. The foreign tax credit will expire in 2016 if not previously utilized.
As a result of the limitations described above, the Company recorded a deferred tax
asset valuation allowance of $17.5 million related to the net operating loss and research
and experimentation credit carryforwards acquired in the merger with Ascent. Subsequent
realization of loss and credit carryforwards in excess of the amounts estimated to be
realized as of March 31, 2006 will be applied to reduce the valuation allowance and goodwill
recorded in connection with the merger with Ascent.
During the three months ended March 31, 2006 and March 31, 2005, the Company made net
tax payments of $20.7 million and $8.1 million, respectively.
17
|
|
|
11. |
|
DIVIDENDS DECLARED ON COMMON STOCK |
On March 15, 2006, the Company declared a cash dividend of $0.03 per issued and
outstanding share of its Class A common stock payable on April 28, 2006 to stockholders of
record at the close of business on April 3, 2006. The $1.6 million dividend was recorded as
a reduction of accumulated earnings and is included in other current liabilities in the
accompanying condensed consolidated balance sheets as of March 31, 2006.
|
|
|
12. |
|
COMPREHENSIVE INCOME (LOSS) |
Total comprehensive income (loss) includes net income (loss) and other comprehensive
income, which consists of foreign currency translation adjustments and unrealized gains and
losses on available-for-sale investments. Total comprehensive loss for the three months
ended March 31, 2006 was $87.4 million. Total comprehensive income for the three months
ended March 31, 2005 was $18.6 million.
|
|
|
13. |
|
NET (LOSS) INCOME PER COMMON SHARE |
The following table sets forth the computation of basic and diluted net (loss) income
per common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(88,543 |
) |
|
$ |
19,371 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding |
|
|
54,356 |
|
|
|
54,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per common
share |
|
$ |
(1.63 |
) |
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(88,543 |
) |
|
$ |
19,371 |
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
Tax-effected interest expense and
issue costs related to Old Notes |
|
|
|
|
|
|
836 |
|
Tax-effected interest expense and
issue costs related to New Notes |
|
|
|
|
|
|
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income assuming dilution |
|
$ |
(88,543 |
) |
|
$ |
21,046 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares |
|
|
54,356 |
|
|
|
54,251 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Old Notes |
|
|
|
|
|
|
5,823 |
|
New Notes |
|
|
|
|
|
|
7,325 |
|
Stock options and restricted stock |
|
|
|
|
|
|
2,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares assuming dilution |
|
|
54,356 |
|
|
|
69,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common
share |
|
$ |
(1.63 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
18
Diluted net (loss) income per common share must be calculated using the if-converted
method in accordance with EITF 04-8, Effect of Contingently Convertible Debt on Earnings
per Share. Diluted net (loss) income per share is calculated by adjusting net (loss)
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.
Due to the Companys net loss during the three months ended March 31, 2006, a
calculation of diluted earnings per share is not required. For the three months ended March
31, 2006, potentially dilutive securities consisted of restricted stock and stock options
convertible into 2,209,105 shares in the aggregate, and 5,822,894 and 7,324,819 shares of
common stock, issuable upon conversion of the Old Notes and New Notes, respectively.
The diluted net income per common share computation for the three months ended March
31, 2005 excludes 2,761,900 shares of stock that represented outstanding stock options whose
exercise price were greater than the average market price of the common shares during the
period and were anti-dilutive.
The government notified the Company on December 14, 2004, that it is investigating
claims that the Company violated the federal False Claims Act. The Company is fully
cooperating with the government in its investigation, which relates to the Companys
marketing and promotion of LOPROX® products to pediatricians prior to the
Companys May 2004, disposition of the Companys pediatric sales division. In April 2006,
the Company offered $6.0 million to resolve the governments civil claims contingent on the
execution of appropriate releases. The Justice Department countered with a demand of $12.8
million to resolve the civil claims that the government is prepared to pursue. The Company
is continuing to hold settlement discussions with the government in an effort to resolve
their claims, and these discussions may or may not result in a monetary settlement with the
government. Accordingly, the Company has accrued a loss contingency of $6.0 million as of
March 31, 2006, related to this matter. This loss contingency is included in other current
liabilities as of March 31, 2006 in the accompanying condensed consolidated balance sheets,
and is included in selling, general and administrative expenses for the three months ended
March 31, 2006 in the accompanying condensed consolidated statements of income.
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 or financial condition of the
Company.
|
|
|
15. |
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1),
which provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is other-than-temporary, and on
measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent
to the recognition of other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary impairments. FSP
115-1 is required to be applied to reporting periods beginning after December 15, 2005, and
is required to be adopted by the Company in the first quarter of 2006. The Company adopted
FSP 115-1 beginning on January 1, 2006, and the adoption of FSP 115-1 did not have a
material impact on the Companys consolidated results of operations and financial condition.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Executive Summary
We are 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 of products in the U.S. for the treatment of dermatological,
aesthetic and podiatric conditions. We also market products in Canada for the treatment of
dermatological and aesthetic conditions. We offer a broad range of products addressing
various conditions or aesthetics improvements, including dermal fillers, acne, fungal
infections, rosacea, hyperpigmentation, photoaging, psoriasis, eczema, skin and
skin-structure infections, seborrheic dermatitis and cosmesis (improvement in the texture
and appearance of skin).
Our current product lines are divided between the dermatological and non-dermatological
fields. The dermatological field represents products for the treatment of acne and
acne-related dermatological conditions and non-acne dermatological conditions. The
non-dermatological field represents products for the treatment of urea cycle disorder and
contract revenue. Our acne and acne-related dermatological product lines include core
brands DYNACIN®, PLEXION® and TRIAZ®. Our non-acne
dermatological product lines include core brands LOPROX®, OMNICEF®,
RESTYLANE® and VANOS. Our non-dermatological product lines include
AMMONUL® and BUPHENYL®. Our non-dermatological field also includes
contract revenues associated with licensing agreements and authorized generic agreements.
Key Aspects of Our Business
We derive a majority of our prescription volume from our core prescription products:
DYNACIN®, LOPROX®, OMNICEF®, PLEXION®,
TRIAZ® and VANOS. We believe that sales of our core prescription
products and sales of our dermal aesthetic product, RESTYLANE®, which we began
selling in the U.S. on January 6, 2004, will continue to constitute a significant portion of
our sales for the foreseeable future.
We have built our business by executing a four-part growth strategy: promoting existing
core 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 relationships of trust and confidence with the high
prescribing dermatologists and podiatrists and the leading plastic surgeons in the United
States.
As a result of customer buying patterns, a substantial portion of our product revenues
has been recognized in the last month of each quarter, and 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. Our
operating expenses are based upon anticipated sales levels, and a high percentage of our
operating expenses are relatively fixed in the short term. 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 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 inadequate supply of our products in channels of distribution.
We sell our products primarily to major wholesalers and retail pharmacy chains.
Consistent with pharmaceutical industry patterns, approximately 80% of our revenues are
derived from three major drug
20
wholesale concerns. While we attempt to estimate inventory
levels of our products at our major wholesale customers by using historical prescription
information and historical purchase patterns, this process is inherently imprecise. Rarely
do wholesale customers provide us complete inventory levels at regional distribution
centers, or within their national distribution systems. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of our products. Based upon
historically consistent purchasing patterns of our major wholesale customers, we believe our
estimates of trade inventory levels of our products 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 products, consistent with prescriptions written by licensed
health care providers. Because many of our products compete in multi-source markets, it is
important for us to ensure the licensed health care providers dispensing instructions are
fulfilled with our branded products and are not substituted with a generic product or
another therapeutic alternative product which may be contrary to the licensed health care
providers recommended and prescribed Medicis brand. We believe that a critical component
of our brand protection program is maintenance of full product availability at drugstore and
wholesale customers. We believe such availability reduces the probability of local and
regional product substitutions, shortages and backorders, which could result in lost sales.
We expect to continue providing favorable terms to wholesale and retail drug chain customers
as may be necessary to ensure the fullest possible distribution of our branded products
within the pharmaceutical chain of commerce.
We cannot control or significantly influence the purchasing patterns of our wholesale
and retail drug chain customers. They are highly sophisticated customers that purchase
products in a manner consistent with their industry practices and, presumably, based upon
their projected demand levels. 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.
The following significant events and transactions occurred during the three months
ended March 31, 2006 and affected our results of operations, our cash flows and our
financial condition:
|
|
Development and distribution agreement with Ipsen for rights to Ipsens
botulinum toxin product known as Reloxin®; and |
|
|
|
Loss contingency for legal matter |
Development and Distribution Agreement With Ipsen for Rights to Ipsens Botulinum Toxin
Product Known as Reloxin®
On March 17, 2006, we entered into a development and distribution agreement with Ipsen
Ltd., a wholly-owned subsidiary of Ipsen (Ipsen), whereby Ipsen granted Aesthetica Ltd., a
wholly-owned subsidiary of Medicis, rights to develop, distribute and commercialize Ipsens
botulinum toxin product in the United States, Canada and Japan for aesthetic use by
physicians. The product is commonly referred to as Reloxin® in the U.S.
aesthetic market and Dysport® for medical and aesthetic markets outside the U.S.
The product is not currently approved for use in the U.S., Canada or Japan.
Under the terms of the agreement, we paid Ipsen $90.1 million in consideration for the
exclusive distribution rights in the U.S., Canada and Japan and will pay an additional $26.5
million upon successful completion of various clinical and regulatory milestones, $75.0
million upon the products approval by the FDA and $2.0 million upon regulatory approval of
the product in Japan. Ipsen will manufacture and provide the product to us for the term of
the agreement, which extends to September 2019. Ipsen will receive a royalty based on sales
and a supply price, the total of which is equivalent to approximately 30% of net sales as
defined under the agreement. The initial $90.1 million payment was recognized as a
charge to research and development expense during the three months ended March 31,
2006. Under the terms of the agreement, we are responsible for all remaining research and
development costs associated with obtaining the products approval in the U.S., Canada and
Japan. We expect to incur significant additional research
21
and development expenses related
to the development of Reloxin® each quarter throughout the development process.
Additionally, Medicis and Ipsen agreed to negotiate and enter into an agreement
relating to the exclusive distribution and development rights of the product for the
aesthetic market in Europe, and subsequently in certain other markets. Under this
agreement, we would pay up-front and other milestone payments linked to the development and
approval of Ipsens botulinum toxin Type A product in aesthetic indications as well as
royalties based on net sales. Ipsen would manufacture and supply the product to us. We
were obligated to make an additional payment to Ipsen in connection with the U.S., Canada
and Japan agreement if this agreement was not entered into by April 15, 2006. On April 13,
2006, Medicis and Ipsen agreed to extend this deadline to July 15, 2006.
Loss contingency for legal matter
The government notified us on December 14, 2004, that it is investigating claims that
we violated the federal False Claims Act. We are fully cooperating with the government in
its investigation, which relates to our marketing and promotion of LOPROX®
products to pediatricians prior to our May 2004, disposition of the Companys pediatric
sales division. In April 2006, we offered $6.0 million to resolve the governments civil
claims contingent on the execution of appropriate releases. The Justice Department
countered with a demand of $12.8 million to resolve the civil claims that the government is
prepared to pursue. We are continuing to hold settlement discussions with the government in
an effort to resolve their claims, and these discussions may or may not result in a monetary
settlement with the government. Accordingly, we have accrued a loss contingency of $6.0
million as of March 31, 2006, related to this matter. This loss contingency was recognized
as a charge to selling, general and administrative expenses during the three months ended
March 31, 2006.
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
MARCH 31, |
|
MARCH 31, |
|
|
2006 (a) |
|
2005 (b) |
|
|
|
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (c) |
|
|
83.8 |
|
|
|
85.4 |
|
Operating expenses |
|
|
205.3 |
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(121.5 |
) |
|
|
30.3 |
|
Interest income (expense), net |
|
|
5.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax (benefit) expense |
|
|
(115.7 |
) |
|
|
30.6 |
|
Income tax expense |
|
|
2.1 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(117.8 |
)% |
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in operating expenses is $90.9 million (121.0% of net revenues) related
to our development and distribution agreement with Ipsen for the development of
Reloxin ® , $7.2 million (9.6% of net revenues) of compensation
expense related to stock options and restricted stock, $6.0 million (8.0% of net
revenues) related to a loss contingency for a legal matter and $1.8 million (2.4% of
net revenues) related to a settlement of a dispute related to our merger with Ascent. |
|
(b) |
|
Included in operating expenses is $8.3 million (8.8% of net revenues) related
to a research and development collaboration with AAIPharma and $0.1 million (0.1% of
net revenues) of compensation expense related to restricted stock. |
|
(c) |
|
Gross profit does not include amortization of the related intangibles as such
expenses is included in operating expenses. |
22
Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
Net Revenues
The following table sets forth the net revenues for the three months ended March 31,
2006 (the first quarter of 2006) and March 31, 2005 (the first quarter of 2005), along
with the percentage of net revenues and percentage point change for each of our product
categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
First Quarter |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Net product revenues |
|
$ |
71.1 |
|
|
$ |
75.8 |
|
|
$ |
( 4.7 |
) |
|
|
( 6.2 |
)% |
Net contract revenues |
|
$ |
4.1 |
|
|
$ |
19.4 |
|
|
$ |
(15.3 |
) |
|
|
(79.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
75.2 |
|
|
$ |
95.2 |
|
|
$ |
(20.0 |
) |
|
|
(21.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$ Change |
|
|
Acne and acne-related
dermatological products |
|
|
18.6 |
% |
|
|
25.2 |
% |
|
|
(6.6 |
)% |
|
|
|
|
Non-acne dermatological
products |
|
|
67.3 |
% |
|
|
49.7 |
% |
|
|
17.6 |
% |
|
|
|
|
Non-dermatological products |
|
|
14.1 |
% |
|
|
25.1 |
% |
|
|
(11.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues decreased during the first quarter of 2006 primarily as a result
of a decrease in net contract revenues associated with licensing agreements and authorized
generic agreements. Net contract revenues decreased primarily due to a decrease in contract
revenues during the first quarter of 2006 related to our outlicensing of the
ORAPRED® brand pursuant to the terms of our license agreement with BioMarin.
Core brand revenues, which are included in net product revenues and includes revenues
associated with RESTYLANE®, DYNACIN®, LOPROX®,
OMNICEF®, PLEXION®, TRIAZ® and VANOS,
represented approximately $64.8 million, or approximately 86.2% of net revenues, during the
first quarter of 2006, a decrease of approximately 6.6%, compared to core brand revenues of
approximately $69.4 million, or approximately 72.9% of net revenues, for the first quarter
of 2005. Net revenues associated with our acne and acne-related dermatological products
decreased as a percentage of net revenues and decreased in net dollars by 41.6% during the
first quarter of 2006 as compared to the first quarter of 2005 due to competitive market
pressures on our DYNACIN®, PLEXION® and TRIAZ® products.
Net revenues associated with our non-acne dermatological products increased as a percentage
of net revenues, and increased in net dollars by 6.7% during the first quarter of 2006,
primarily due to an increase in sales of RESTYLANE®. Net revenues associated
with our non-dermatological products decreased as a percentage of net revenues, and
decreased in net dollars by 55.6% during the first quarter of 2006, primarily due to the
decrease in ORAPRED® contract revenues discussed above.
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 acquired products is not included in gross profit. 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.
23
The following table sets forth our gross profit for the first quarter of 2006 and 2005,
along with the percentage of net revenues represented by such gross profit (dollar amounts
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$ Change |
|
% Change |
Gross profit |
|
$ |
63.0 |
|
|
$ |
81.3 |
|
|
$ |
(18.3 |
) |
|
|
(22.5 |
)% |
% of net revenues |
|
|
83.8 |
% |
|
|
85.4 |
% |
|
|
|
|
|
|
|
|
The decrease in gross profit during the first quarter of 2006, compared to the first
quarter of 2005, was due to the decrease 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 the first quarter of 2006 as compared to the first quarter of 2005.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the
first quarter of 2006 and 2005, along with the percentage of net revenues represented by
selling, general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$ Change |
|
% Change |
Selling, general and administrative |
|
$ |
51.2 |
|
|
$ |
31.9 |
|
|
$ |
19.3 |
|
|
|
60.4 |
% |
% of net revenues |
|
|
68.2 |
% |
|
|
33.5 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
6.6 |
|
|
$ |
0.1 |
|
|
$ |
6.5 |
|
|
|
5,062.6 |
% |
The increase in selling, general and administrative expenses during the first quarter
of 2006 from the first quarter of 2005 was attributable to approximately $6.5 million of
additional share-based compensation expense recognized in accordance with SFAS No. 123R,
$6.0 million related to a loss contingency for a legal matter, approximately $1.8 million
related to a settlement of a dispute related to our merger with Ascent, approximately $0.5
million of professional fees related to our development and distribution agreement with
Ipsen for the development of Reloxin®, and $4.5 million of additional selling,
general and administrative expenses incurred during the first quarter of 2006.
24
Research and Development Expenses
The following table sets forth our research and development expenses for the first
quarter of 2006 and 2005 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$ Change |
|
% Change |
Research and development |
|
$ |
97.2 |
|
|
$ |
14.5 |
|
|
$ |
82.7 |
|
|
|
572.7 |
% |
Charges included in research
and development |
|
|
90.5 |
|
|
|
8.3 |
|
|
|
82.2 |
|
|
|
992.9 |
% |
Share-based compensation
expense included in
research and development |
|
|
0.5 |
|
|
|
|
|
|
$ |
0.5 |
|
|
|
100.0 |
% |
Included in research and development expenses for the first quarter of 2006 was $90.5
million related to the development and distribution agreement with Ipsen for the development
of Reloxin® (including $90.1 million paid to Ipsen) and approximately $0.5
million of compensation expense for stock options and restricted stock. Included in
research and development expense for the first quarter of 2005 was approximately $8.3
million related to a research and development collaboration with AAIPharma. Absent these
charges, research and development expenses during the first quarter of 2006 and the first
quarter of 2005 was approximately $6.2 million. 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. We expect to
incur significant research and development expenses related to the development of
Reloxin® each quarter throughout the development process, beginning during the
quarter ended June 30, 2006.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the first quarter of 2006 decreased $0.2
million, or 3.3%, to $5.9 million from $6.1 million during the first quarter of 2005. This
decrease was primarily due to less intangible assets being amortized during the first
quarter of 2006 as compared to the first quarter of 2005, due to the write-down of a
long-lived asset due to impairment during the three months ended December 31, 2005.
Interest Income
Interest income during the first quarter of 2006 increased $4.0 million, or 134.9%, to
$7.0 million from $3.0 million during the first quarter of 2005, due to an increase in the
funds available for investment and an increase in the interest rates achieved by our
invested funds during the first quarter of fiscal 2006.
Interest Expense
Interest expense during the first quarter of 2006 remained consistent with the first
quarter of 2005, at $2.7 million. Our interest expense during the first quarter of 2006 and
2005 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 Old Notes and New Notes. See Note 9
in our accompanying condensed consolidated financial statements for further discussion on
the Old Notes and New Notes.
25
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 the first quarter of 2006 and 2005 (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$
Change |
|
% Change |
Income tax expense |
|
$ |
1.6 |
|
|
$ |
9.8 |
|
|
$ |
(8.2 |
) |
|
|
(83.8 |
)% |
Effective tax rate |
|
|
(1.8 |
)% |
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
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,
charitable contribution deductions, tax credits available in the U.S., the treatment of
certain share-based payments under SFAS 123R that are not designed to normally result in tax
deductions, 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 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.
Our effective tax rate for the three months ended March 31, 2006 was (1.8)% compared to
our effective tax rate of 33.6% for the three months ended March 31, 2005. Generally, the
provision for income taxes reflects managements estimate of the effective tax rate expected
to be applicable for the full fiscal year. However, during the three months ended March 31,
2006, the Companys effective tax rate of (1.8%) differs from the Companys estimate of the
effective tax rate for the full fiscal year. The Companys effective tax rate during the
three months ended March 31, 2006 relates to the tax treatment of the $90.1 million paid to
Ipsen under the development and distribution agreement for the development of
Reloxin®. The $90.1 million was incurred by Aesthetica Ltd., our wholly-owned
Bermuda subsidiary. Aesthetica Ltd is not subject to corporate income taxes. As such, we
did not record tax benefit on the $90.1 million charge that was included in research and
development expenses. We expect Aesthetica Ltd. to incur certain research and development
costs during the fiscal year that will not be benefited by taxes which will put upward
pressure on our effective tax rate. We would expect our effective tax rate to be
approximately 39% 40% for the full fiscal year. The estimated effective tax rate for the
full fiscal year ending December 31, 2006 is higher than our effective tax rate of 38% for
the six-month Transition Period ended December 31, 2005, primarily due to Aesthetica Ltd.s
charges that will not result in tax benefits.
26
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the first quarter of
2006 and 2005, and selected balance sheet components as of March 31, 2006 and December 31,
2005 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
|
|
|
|
|
2006 |
|
2005 |
|
$ Change |
|
% Change |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(111.5 |
) |
|
$ |
33.9 |
|
|
$ |
(145.4 |
) |
|
|
(429.1 |
)% |
Investing activities |
|
|
(88.6 |
) |
|
|
4.2 |
|
|
|
(92.8 |
) |
|
|
(2,210.7 |
)% |
Financing activities |
|
|
(1.1 |
) |
|
|
(1.5 |
) |
|
|
0.4 |
|
|
|
(28.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, 2006 |
|
Dec. 31, 2005 |
|
$ Change |
|
% Change |
Cash, cash equivalents and
short-term investments |
|
$ |
598.7 |
|
|
$ |
742.5 |
|
|
$ |
(143.8 |
) |
|
|
(19.4 |
)% |
Working capital |
|
|
615.2 |
|
|
|
692.5 |
|
|
|
(77.3 |
) |
|
|
(11.2 |
)% |
2.5% contingent convertible
senior notes due 2032 |
|
|
169.2 |
|
|
|
169.2 |
|
|
|
|
|
|
|
|
|
1.5% contingent convertible
senior notes due 2033 |
|
|
283.9 |
|
|
|
283.9 |
|
|
|
|
|
|
|
|
|
Working Capital
Working capital as of March 31, 2006 and December 31, 2005 consisted of the following
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, 2006 |
|
|
Dec. 31, 2005 |
|
|
$ Change |
|
|
% Change |
|
Cash, cash equivalents and
short-term investments |
|
$ |
598.7 |
|
|
$ |
742.5 |
|
|
$ |
(143.8 |
) |
|
|
(19.4 |
)% |
Accounts receivable, net |
|
|
50.4 |
|
|
|
46.7 |
|
|
|
3.7 |
|
|
|
7.9 |
% |
Inventories, net |
|
|
15.7 |
|
|
|
19.1 |
|
|
|
( 3.4 |
) |
|
|
(17.7 |
)% |
Deferred tax assets, net |
|
|
12.0 |
|
|
|
12.7 |
|
|
|
(0.7 |
) |
|
|
(5.5 |
)% |
Other current assets |
|
|
13.4 |
|
|
|
12.3 |
|
|
|
1.1 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
690.2 |
|
|
|
833.3 |
|
|
|
(143.1 |
) |
|
|
(17.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
35.8 |
|
|
|
57.7 |
|
|
|
(21.9 |
) |
|
|
(38.0 |
)% |
Short-term contract obligation |
|
|
|
|
|
|
27.4 |
|
|
|
(27.4 |
) |
|
|
(100.0 |
)% |
Income taxes payable |
|
|
9.2 |
|
|
|
31.5 |
|
|
|
(22.3 |
) |
|
|
(70.8 |
)% |
Other current liabilities |
|
|
30.0 |
|
|
|
24.2 |
|
|
|
5.8 |
|
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
75.0 |
|
|
|
140.8 |
|
|
|
(65.8 |
) |
|
|
(46.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
615.2 |
|
|
$ |
692.5 |
|
|
$ |
(77.3 |
) |
|
|
(11.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $598.7 million and working
capital of $615.2 million at March 31, 2006, as compared to $742.5 million and $692.5
million, respectively, at December 31, 2005. The decreases were primarily due to a $90.1
million payment to Ipsen related to a development and distribution agreement for the
development of Reloxin®, payment of the $27.4 million contingent payment related
to the merger with Ascent, and payments of $20.7 million of income taxes during the first
quarter of 2006.
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 strategic
investments, mergers and acquisitions, and other potential large-scale needs. In addition,
we may consider issuing additional debt or equity securities in
the future to fund potential acquisitions or investments, to refinance existing debt or for
general corporate
27
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.
We are currently pursuing additional or new headquarter office space to accommodate our
expected long-term growth.
Operating Activities
Net cash used in operating activities during the first quarter of 2006 was
approximately $111.5 million, compared to cash provided by operating activities of
approximately $33.9 million during the first quarter of 2005. The change was primarily
attributable to the $90.1 million payment made to Ipsen related to a development and
distribution agreement for the development of Reloxin® during the first quarter
of 2006 and approximately $16.7 million of professional fees paid related to the termination
of the proposed merger with Inamed Corporation. Additionally, approximately $20.7 million
of income tax payments were made during the first quarter of 2006, as compared to
approximately $8.1 million of income tax payments made during the first quarter of 2005.
Investing Activities
Net cash used in investing activities during the first quarter of 2006 was
approximately $88.6 million, compared to net cash provided by investing activities during
the first quarter of 2005 of $4.2 million. The change was primarily due to the net
purchases or sales of our short-term investments during the respective quarters. In
addition, approximately $27.4 million was paid during the first quarter of 2006 for
Contingent Payments related to our 2001 merger with Ascent.
Financing Activities
Net cash used in financing activities during the first quarter of 2006 was $1.1
million, compared to net cash used in financing activities of $1.5 million during the first
quarter of 2005. Dividends paid during the first quarter of 2006 and the first quarter of
2005 was $1.6 million. Proceeds from the exercise of stock options was $0.6 million during
the first quarter of 2006 compared to $0.1 million during the first quarter of 2005.
Contingent Convertible Senior Notes and Other Long-Term Commitments
On August 14, 2003, we exchanged $230.8 million in principal amount of our Old Notes
for $283.9 million in principal amount of our 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 did not exchange will continue to be subject to the terms
of the Old Notes. See Note 9 of Notes to Condensed Consolidated Financial Statements for
further discussion.
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.
Except for the Old Notes, the New Notes and deferred tax liabilities, we have no
long-term liabilities and had only $75.0 million of current liabilities at March 31, 2006.
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.
28
We have made available to BioMarin the ability to draw down on a Convertible Note up to
$25.0 million beginning July 1, 2005 (the Convertible Note). The Convertible Note is
convertible based on certain terms and conditions including a change of control provision.
Money advanced under the Convertible Note is convertible into BioMarin shares at a strike
price equal to the BioMarin average closing price for the 20 trading days prior to such
advance. The Convertible Note matures on the option purchase date in 2009 as defined in the
securities purchase agreement entered into on May 18, 2004 but may be repaid by BioMarin at
any time prior to the option purchase date. As of May 9, 2006, BioMarin has not requested
any monies to be advanced under the Convertible Note, and no amounts are outstanding.
Dividends
Since July 2003, we have paid quarterly cash dividends aggregating approximately $16.8
million on our common stock. In addition, on March 15, 2006, we declared a cash dividend of
$0.03 per issued and outstanding share of common stock payable on April 28, 2006 to our
stockholders of record at the close of business on April 3, 2006. Prior to these dividends,
we had not paid a cash dividend on our common stock, and we have not adopted a dividend
policy. 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.
Line of Credit
We have a revolving line of credit facility of up to $25.0 million from Wells Fargo
Bank, N.A. The facility may be drawn upon by us, at our discretion, and is collateralized
by certain short-term investments. Any outstanding balance of the credit facility bears
interest at a floating rate of 150 basis points in excess of the 30-day London Interbank
Offered Rate and expires in November 2006. The agreement requires us to comply with certain
covenants, including covenants relating to our financial condition and results of operation;
we are in compliance with such covenants. We have never drawn on this credit facility.
Off-Balance Sheet Arrangements
As of March 31, 2006, we are not involved in any off-balance sheet arrangements, as
defined in Item 3(a)(4)(ii) of Securities and Exchange Commission (SEC) Regulation S-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been prepared in
conformity with U.S. generally accepted accounting principles. The preparation of the
condensed consolidated financial statements requires us to make estimates and assumptions
that affect the amounts reported in the condensed consolidated financial statements and
accompanying notes. On an ongoing basis, we evaluate our estimates related to sales
allowances, chargebacks, rebates, returns and other pricing adjustments, depreciation and
amortization and other contingencies and litigation. We base our estimates on historical
experience and various other factors related to each circumstance. Actual results could
differ from those estimates based upon future events, which could include, among other
risks, changes in the regulations governing the manner in which we sell our products,
changes in the health care environment and managed care consumption patterns. Our
significant accounting policies are described in Note 2 to the consolidated financial
statements included in our Form 10-K/T for the six-month transition period ended December
31, 2005. We believe the following critical accounting policies affect our most significant
estimates and assumptions used in the preparation of our condensed 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 Staff Accounting Bulletin No.
104 (SAB 104), Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive evidence that an
arrangement exists; (ii) delivery of the
29
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 forms of price protection to our wholesale customers and permit
product returns if the product is damaged, or, depending on the customer, 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.
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 SAB 104.
Items Deducted From Gross Revenue
Provisions for estimates for product returns and exchanges, sales discounts,
chargebacks, managed care and Medicaid rebates and other adjustments are established as a
reduction of product sales revenues at the time such revenues are recognized. These
deductions from gross revenue are established by us as our best estimate at the time of sale
based on historical experience adjusted to reflect known changes in the factors that impact
such reserves. These deductions from gross revenue are generally reflected either as a
direct reduction to accounts receivable through an allowance, or as an addition to accrued
expenses if the payment is due to a party other than the wholesale or retail customer.
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 and exchanges, cash
discounts, chargebacks, managed care and Medicaid rebates and other adjustments 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.
Product Returns and Exchanges
We account for returns and exchanges of product in accordance with SFAS 48, Revenue
Recognition When Right of Return Exists, whereby an allowance is established based on our
estimate of revenues recorded for which the related products are expected to be returned in
the future. We determine our estimate of product returns and exchanges based on historical
experience and other qualitative factors that could impact the level of future product
returns and exchanges. These factors include estimated shelf life, competitive developments
including introductions of generic products, product discontinuations and our introduction
of new formulations of our products. Typically, these other factors that influence our
allowance for product returns and exchanges do not change significantly from quarter to
quarter. 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
and exchanges. Estimates for returns and exchanges of new products are based on historical
experience of new products at various stages of their life cycle.
Our actual experience and the qualitative factors that we use to determine the
necessary allowance for future product returns and exchanges are susceptible to change based
on unforeseen events
and uncertainties. We review our allowance for product returns and exchanges quarterly
to assess the trends being considered to estimate the allowance, and make changes to the
allowance as necessary.
30
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.
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.
Managed Care and Medicaid Rebates
We establish and maintain reserves for amounts payable by us to managed care
organizations and state Medicaid programs for the reimbursement of portions of the retail
price of prescriptions filled that are covered by these programs. The amounts estimated to
be paid relating to products sold are recognized as deductions from gross revenue and as
additions to accrued expenses at the time of sale based on our best estimate of the expected
prescription fill rate to these managed care and state Medicaid patients, using historical
experience adjusted to reflect known changes in the factors that impact such reserves,
including changes in formulary status and contractual pricing.
Other
In addition to the significant items deducted from gross revenue described above, we
deduct other items from gross revenue. For example, we offer consumer rebates on many of
our products and a consumer loyalty program for our RESTYLANE® dermal filler
product. We generally account for these other items deducted from gross revenue by
establishing an accrual based on our estimate of the adjustments attributable to a sale. We
generally base our estimates for the accrual of these items deducted from gross sales 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.
We believe that our allowances and accruals for items that are deducted from gross
revenue are reasonable and appropriate based on current facts and circumstances. However,
it is possible 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 revenue. Additionally, changes in actual experience or changes in other
qualitative factors could cause our allowances and accruals to fluctuate. A five percent
change in the expenses related to the allowances and accruals described above would lead to
an approximate $5.9 million annual effect on our income before income tax expense, based on
the amount of expense we recognized during the year ended June 30, 2005 related to the
allowances and accruals described above.
Share-Based Compensation
As part of our adoption of SFAS No. 123R as of July 1, 2005, we are required to
recognize the fair value of share-based compensation awards as an expense. We apply the
Black-Scholes option-pricing model in order to determine the fair value of stock options on
the date of grant, and we apply judgment in estimating key assumptions that are important
elements in the model such as the expected stock-price volatility, expected stock option
life and expected forfeiture rates. Our estimates of these important assumptions are based
on historical data and judgment regarding market trends and factors.
31
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.
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 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 fair value, 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.
Income Taxes
Income taxes are determined using an annual effective tax rate, which generally differs
from the U.S. Federal statutory rate because of state and local income taxes, tax-exempt
interest, charitable contribution deductions, nondeductible expenses and research and
experimentation tax credits available in the U.S. 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, valuation allowances
against deferred tax assets, reserves for tax audit issues and settlements, utilization of
research and experimentation tax credits and changes in tax laws in jurisdictions where we
conduct operations. We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of our assets and
liabilities. We record valuation allowances against our deferred tax assets to reduce the
net carrying value to an amount that management believes is more likely than not to be
realized.
Based on the Companys historical pre-tax earnings, management believes it is more
likely than not that the Company will realize the benefit of the existing net deferred tax
assets at March 31, 2006. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net taxable income;
however, there can be no assurance that the Company 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.
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 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.
Our policy on accounting for costs of strategic collaborations determines the timing of
our 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
32
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 that are
in the development phase and as to which we have no assurance that the third party will
successfully complete its developmental milestones, we expense such payments.
Recent Accounting Pronouncements
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1),
which provides guidance on determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is other-than-temporary, and on
measuring such impairment loss. FSP 115-1 also includes accounting considerations
subsequent to the recognition of other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. FSP 115-1 is required to be applied to reporting periods beginning after
December 15, 2005, and is required to be adopted by us in the first quarter of 2006. We
adopted FSP 115-1 beginning on January 1, 2006, and the adoption of FSP 115-1 did not have a
material impact on our consolidated results of operations and financial condition.
33
Forward Looking Statements
This Quarterly Report on Form 10-Q and other documents we file with the SEC include
forward looking statements. These include statements relating to future actions,
prospective products or product approvals, future performance or results of current and
anticipated products, sales and marketing efforts, expenses, the outcome of contingencies,
such as legal proceedings, and financial results. From time to time, we also may make
forward-looking statements in press releases or written statements, or in our communications
and discussions with investors and analysts in the normal course of business through
meetings, webcasts, phone calls, and conference calls. All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). These statements are
based on certain assumptions made by us based on our experience and perception of historical
trends, current conditions, expected future developments and other factors we believe are
appropriate in the circumstances. We caution you that actual outcomes and results may
differ materially from what is expressed, implied, or forecast by our forward-looking
statements. Such statements are subject to a number of assumptions, risks and
uncertainties, many of which are beyond our control. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They use words
such as anticipate, estimate, expect, project, intend, plan, believe, will,
should, outlook, could, target, intend, plan, and other words and terms of
similar meaning in connection with any discussion of future operations or financial
performance. Among the factors that could cause actual results to differ materially from
our forward-looking statements are the following:
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the success of research and development activities and the speed with which
regulatory authorizations and product launches may be achieved; |
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changes in our product mix; |
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changes in prescription levels and the effect of economic changes in hurricane-effected areas; |
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manufacturing or supply interruptions; |
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competitive developments affecting our current growth products, such as the recent
FDA approval of HYLAFORM®, HYLAFORM PLUS® and
CAPTIQUE®, competitors to RESTYLANE®, a generic form of
our DYNACIN® Tablets product and generic forms of our LOPROX® TS
and LOPROX® Cream products; |
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importation of other dermal filler products; |
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changes in the prescribing or procedural practices of dermatologists, podiatrists
and/or plastic surgeons; |
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the ability to successfully market both new and existing products; |
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difficulties or delays in manufacturing; |
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the ability to compete against generic and other branded products; |
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trends toward managed care and health care cost containment; |
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our ability to protect our patents and other intellectual property; |
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possible U.S. legislation or regulatory action affecting, among other things,
pharmaceutical pricing and reimbursement, including Medicaid and Medicare and
involuntary approval of prescription medicines for over-the-counter use; |
34
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legal defense costs, insurance expenses, settlement costs and the risk of an
adverse decision or settlement related to product liability, patent protection,
government investigations, and other legal proceedings; |
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changes in U.S. generally accepted accounting principles; |
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additional costs related to compliance with changing regulation of corporate
governance and public financial disclosure; |
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any changes in business, political and economic conditions due to the threat of
future terrorist activity in the U.S. and other parts of the world; |
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access to available and feasible financing on a timely basis; |
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the risks and uncertainties normally incident to the pharmaceutical and medical
device industries, including product liability claims; |
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the risks and uncertainties associated with obtaining necessary FDA approvals; |
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growth in costs and expenses; and |
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the impact of acquisitions, divestitures and other significant corporate transactions. |
We undertake no obligation to publicly update forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to review
any future disclosures contained in the reports that we file with the SEC. Our Transition
Report on Form 10-K/T for the six-month period ended December 31, 2005 contains discussions
of various risks relating to our business that could cause actual results to differ
materially from expected and historical results, which is incorporated herein by reference
and which you should review. You should understand that it is not possible to predict or
identify all such factors. Consequently, you should not consider any such list or
discussion to be a complete set of all potential risks or uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2006, there were no material changes to the information previously
reported under Item 7A in our Transition Report on Form 10-K/T for the six-month period
ended December 31, 2005.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act that are designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms and that such
information is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. Our Chief Executive Officer and Chief Financial Officer, with the
participation of other members of management, evaluated the effectiveness of our disclosure
controls and procedures as of March 31, 2006 and have concluded that, as of such date our
disclosure controls and procedures were effective to ensure that the information we are
required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and
forms.
Although the management of our 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
35
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 our 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 March 31, 2006, 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.
Part II. Other Information
Item 1. Legal Proceedings
The government notified us on December 14, 2004, that it is investigating claims that
we violated the federal False Claims Act. We are fully cooperating with the government in
its investigation, which relates to our marketing and promotion of LOPROX®
products to pediatricians prior to our May 2004, disposition of the Companys pediatric
sales division. In April 2006, we offered $6.0 million to resolve the governments civil
claims contingent on the execution of appropriate releases. The Justice Department
countered with a demand of $12.8 million to resolve the civil claims that the government is
prepared to pursue. We are continuing to hold settlement discussions with the government in
an effort to resolve their claims, and these discussions may or may not result in a monetary
settlement with the government. Accordingly, we have accrued a loss contingency of $6.0
million as of March 31, 2006, related to this matter.
On October 27, 2005, we filed suit against Upsher-Smith Laboratories, Inc. of Plymouth,
Minnesota and against Prasco Laboratories of Cincinnati, Ohio for infringement of Patent No.
6,905,675 entitled Sulfur Containing Dermatological Compositions and Methods for Reducing
Malodors in Dermatological Compositions covering our sodium sulfacetamide/sulfur
technology. This intellectual property is related to our PLEXION® Cleanser
product. The suit was filed in the U.S. District Court for the District of Arizona, and
seeks an award of damages, as well as a preliminary and a permanent injunction. We are in
the midst of accelerated discovery. A hearing on our preliminary injunction motion was
heard on March 8 and March 9, 2006. The Court has declined to grant a preliminary
injunction at this time.
We and certain of our subsidiaries are parties to other actions and proceedings
incident to our business, including litigation regarding our intellectual property,
challenges to the enforceability or validity of our intellectual property and claims that
our products infringe on the intellectual property rights of others. We record contingent
liabilities resulting from claims against us when it is probable (as that word is defined in
Statement of Financial Accounting Standards No. 5) that a liability has been incurred and
the amount of the loss is reasonably 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 all of the cases
noted where we are the defendant, we believe we have meritorious defenses to the claims in
these actions and resolution of these matters will not have a material adverse effect on our
business, financial condition, or results of operation; however, the results of the
proceedings are uncertain, and there can be no assurance to that effect.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in Part I of
Item 1A in our Transition Report on Form 10-K/T for the six month period ended December 31,
2005.
36
Item 6. Exhibits
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Exhibit 10.1+*
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Development and Distribution Agreement by and between Aesthetica, Ltd. and
Ipsen, Ltd. |
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Exhibit 10.2+*
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Trademark License Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. |
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Exhibit 10.3+*
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Trademark Assignment Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. |
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Exhibit 12+
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Computation of Ratios of Earnings to Fixed Charges |
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Exhibit 31.1+
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Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2+
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Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1+
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Certification by the Chief Executive Officer and the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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+ |
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Filed herewith |
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* |
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Confidential portions omitted and filed separately with the U.S. Securities and Exchange
Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934,
as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MEDICIS PHARMACEUTICAL CORPORATION |
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Date: May 10, 2006
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By:
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/s/ Jonah Shacknai
Jonah Shacknai
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Chairman of the Board and |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 10, 2006
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By:
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/s/ Mark A. Prygocki, Sr.
Mark A. Prygocki, Sr.
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Executive Vice President |
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Chief Financial Officer, Corporate |
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Secretary and Treasurer |
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(Principal Financial and Accounting
Officer) |
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EXHIBIT INDEX
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Exhibit 10.1+*
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Development and Distribution Agreement by and between Aesthetica, Ltd. and
Ipsen, Ltd. |
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Exhibit 10.2+*
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Trademark License Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. |
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Exhibit 10.3+*
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Trademark Assignment Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. |
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Exhibit 12+
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Computation of Ratios of Earnings to Fixed Charges |
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Exhibit 31.1+
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Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2+
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Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1+
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Certification by the Chief Executive Officer and the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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+ |
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Filed herewith |
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* |
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Confidential portions omitted and filed separately with the U.S. Securities and Exchange
Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934,
as amended. |
39