e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-15875
King Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
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54-1684963
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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501 Fifth Street,
Bristol, TN
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37620
(Zip Code)
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(Address of principal executive
offices)
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(423) 989-8000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Number of shares outstanding of Registrants common stock
as of May 3, 2010: 249,627,116
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
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|
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March 31,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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471,763
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|
$
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545,312
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Investments in debt securities
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27,127
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29,258
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Marketable securities
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1,476
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2,100
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Accounts receivable, net of allowance of $3,262 and $3,401
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207,062
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210,256
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Inventories
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188,644
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182,291
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Deferred income tax assets
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79,196
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83,675
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Income taxes receivable
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18,258
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16,091
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Prepaid expenses and other current assets
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49,903
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60,860
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|
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Total current assets
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1,043,429
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1,129,843
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Property, plant and equipment, net
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381,370
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391,839
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Intangible assets, net
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755,261
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794,139
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Goodwill
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467,613
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467,613
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Deferred income tax assets
|
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256,828
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|
|
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264,162
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Investments in debt securities
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204,785
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218,608
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Other assets (includes restricted cash of $15,903 and $15,900)
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59,584
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56,496
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Assets held for sale
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5,890
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|
|
5,890
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|
|
|
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|
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Total assets
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$
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3,174,760
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|
|
$
|
3,328,590
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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89,794
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$
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86,692
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Accrued expenses
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244,853
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320,992
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Short-term debt
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|
3,369
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|
3,662
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Current portion of long-term debt
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85,550
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|
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|
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Total current liabilities
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|
338,016
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496,896
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Long-term debt
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336,978
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339,016
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Other liabilities
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128,238
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123,371
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|
|
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Total liabilities
|
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803,232
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959,283
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Commitments and contingencies (Note 9)
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Shareholders equity
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2,371,528
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2,369,307
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Total liabilities and shareholders equity
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$
|
3,174,760
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$
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3,328,590
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|
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See accompanying notes.
2
KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
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Three Months Ended
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March 31,
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2010
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2009
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Revenues:
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Net sales
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$
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373,065
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$
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414,299
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Royalty revenue
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7,790
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14,758
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Total revenues
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380,855
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429,057
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Operating costs and expenses:
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Cost of revenues, exclusive of depreciation and amortization
shown below
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127,054
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150,939
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Selling, general and administrative
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140,475
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138,534
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Acquisition related costs
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3,789
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Total selling, general and administrative expense
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|
140,475
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|
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142,323
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|
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Research and development
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|
28,324
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27,256
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Depreciation and amortization
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57,275
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|
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|
53,349
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Restructuring charges (Note 13)
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|
262
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48,050
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|
|
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|
Total operating costs and expenses
|
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|
353,390
|
|
|
|
421,917
|
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|
|
|
|
|
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Operating income
|
|
|
27,465
|
|
|
|
7,140
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|
|
|
|
|
|
|
|
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Other income (expense):
|
|
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|
|
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|
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Interest income
|
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|
409
|
|
|
|
2,788
|
|
Interest expense
|
|
|
(8,736
|
)
|
|
|
(23,103
|
)
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Loss on investments
|
|
|
(872
|
)
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|
|
(823
|
)
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Other, net
|
|
|
(203
|
)
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|
|
(2,779
|
)
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|
|
|
|
|
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Total other expense
|
|
|
(9,402
|
)
|
|
|
(23,917
|
)
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|
|
|
|
|
|
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|
|
Income (loss) before income taxes
|
|
|
18,063
|
|
|
|
(16,777
|
)
|
Income tax expense (benefit)
|
|
|
13,594
|
|
|
|
(6,055
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,469
|
|
|
$
|
(10,722
|
)
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
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Basic net income (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
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|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
|
246,487,232
|
|
|
$
|
1,391,065
|
|
|
$
|
871,021
|
|
|
$
|
(28,287
|
)
|
|
$
|
2,233,799
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
(10,722
|
)
|
|
|
|
|
|
|
(10,722
|
)
|
Net unrealized gain on marketable securities, net of taxes of $43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
Net unrealized loss on interest rate swap, net of taxes of $202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(329
|
)
|
|
|
(329
|
)
|
Net unrealized loss on investments in debt securities, net of
taxes of $1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,666
|
)
|
|
|
(2,666
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,026
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,673
|
)
|
Stock-based award activity
|
|
|
1,326,589
|
|
|
|
5,413
|
|
|
|
|
|
|
|
|
|
|
|
5,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
247,813,821
|
|
|
$
|
1,396,478
|
|
|
$
|
860,299
|
|
|
$
|
(36,238
|
)
|
|
$
|
2,220,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
248,444,711
|
|
|
$
|
1,421,489
|
|
|
$
|
963,620
|
|
|
$
|
(15,802
|
)
|
|
$
|
2,369,307
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
4,469
|
|
|
|
|
|
|
|
4,469
|
|
Reclassification of unrealized losses on investments in debt
securities, net of taxes of $268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
428
|
|
Net unrealized loss on marketable securities, net of taxes of
$240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(384
|
)
|
|
|
(384
|
)
|
Net unrealized gain on investments in debt securities, net of
taxes of $89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
142
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,642
|
)
|
|
|
(5,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based award activity
|
|
|
1,158,404
|
|
|
|
3,208
|
|
|
|
|
|
|
|
|
|
|
|
3,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
249,603,115
|
|
|
$
|
1,424,697
|
|
|
$
|
968,089
|
|
|
$
|
(21,258
|
)
|
|
$
|
2,371,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows (used in) provided by operating activities
|
|
$
|
(1,801
|
)
|
|
$
|
11,334
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Transfers to restricted cash
|
|
|
(3
|
)
|
|
|
(65
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
16,810
|
|
|
|
8,000
|
|
Purchases of property, plant and equipment
|
|
|
(7,793
|
)
|
|
|
(6,892
|
)
|
Proceeds from sale of property and equipment
|
|
|
73
|
|
|
|
|
|
Proceeds from the sale of
Kadian®
|
|
|
20,000
|
|
|
|
|
|
Acquisition of Alpharma
|
|
|
|
|
|
|
(69,706
|
)
|
Acquisition of
Avinza®
|
|
|
|
|
|
|
(1
|
)
|
Forward foreign exchange contracts
|
|
|
|
|
|
|
5,406
|
|
Purchases of intellectual property and product rights
|
|
|
(504
|
)
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
28,583
|
|
|
|
(63,806
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
742
|
|
|
|
36
|
|
Net (payments) proceeds related to
stock-based
activity
|
|
|
(3,905
|
)
|
|
|
(2,000
|
)
|
Payments on debt
|
|
|
(92,554
|
)
|
|
|
(433,249
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(95,717
|
)
|
|
|
(436,433
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(4,614
|
)
|
|
|
(14,514
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(73,549
|
)
|
|
|
(503,419
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
545,312
|
|
|
|
940,212
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
471,763
|
|
|
$
|
436,793
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2010 and 2009
(In thousands, except share and per share data)
(Unaudited)
The accompanying unaudited Interim Condensed Consolidated
Financial Statements of King Pharmaceuticals, Inc.
(King or the Company) were prepared by
the Company in accordance with the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
and, accordingly, do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three months ended
March 31, 2010 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2010. These unaudited Interim Condensed
Consolidated Financial Statements should be read in conjunction
with the audited Consolidated Financial Statements and notes
thereto included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009. The year-end
Condensed Consolidated Balance Sheet was derived from the
audited Consolidated Financial Statements, but does not include
all disclosures required by generally accepted accounting
principles.
These unaudited Interim Condensed Consolidated Financial
Statements include the accounts of King and all of its
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Certain amounts from the prior Condensed Consolidated Financial
Statements have been reclassified to conform to the presentation
adopted in 2010.
The basic and diluted income (loss) per common share was
determined using the following share data:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
2009
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
245,205,560
|
|
|
|
243,888,839
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
245,205,560
|
|
|
|
243,888,839
|
|
Effect of stock options
|
|
|
663,897
|
|
|
|
|
|
Effect of dilutive share awards
|
|
|
3,997,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
249,866,787
|
|
|
|
243,888,839
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009, the dilutive
effect of options to purchase 5,176 shares of common stock
and 2,743,397 share awards were not included in the
computation of diluted loss per common share because their
inclusion would have reduced the loss per share.
For the three months ended March 31, 2010, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per common share,
included options to purchase 3,192,426 shares of common
stock, 102,354 restricted stock awards (RSAs) and
106,209 long-term performance units (LPUs). For the
three months ended March 31, 2009, the weighted average
shares that were anti-dilutive, and therefore excluded from the
calculation of diluted loss per common share, included options
to purchase 6,157,030 shares of common stock, 321,528 RSAs
and 153,606 LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 (the Convertible
Senior Notes) could be converted into the Companys
common stock in the future, subject to certain contingencies.
Shares of the Companys common stock associated with this
right of conversion were excluded from
6
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the calculations of diluted income (loss) per common share
because the conversion price of the notes was greater than the
average market price of the Companys common stock during
the quarters ended March 31, 2009 and 2010.
|
|
3.
|
Fair
Value Measurements
|
Cash and Cash Equivalents. The Company
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The
Companys cash and cash equivalents consisted of
institutional money market funds. There were no cumulative
unrealized holding gains or losses associated with these money
market funds as of March 31, 2010 and December 31,
2009.
Derivatives. During 2009, the Company had
forward foreign exchange contracts outstanding on certain
non-U.S. cash
balances. The forward exchange contracts were not designated as
hedges. The Company recorded these contracts at fair value and
changes in fair value were recognized in current earnings. All
foreign exchange contracts expired during 2009.
The terms of certain credit agreements require the Company to
maintain hedging agreements that fix the interest rates on 50%
of the Companys total outstanding long-term debt.
Accordingly, in March 2009, the Company entered into an interest
rate swap agreement with an aggregate notional amount of
$112,500, which was scheduled to expire in March 2011. The
interest rate swap was designated as a cash flow hedge and was
being used to offset the overall variability of cash flows. For
a cash flow hedge, the effective portion of the gain or loss on
the derivative is reported as a component of other comprehensive
income and reclassified into earnings in the period during which
the hedged transaction affects earnings. As a result of the
reduction of its variable rate long-term debt beginning in the
third quarter of 2009, more than 50% of the Companys
outstanding long-term debt is at fixed rates and therefore an
interest rate swap is no longer required. The Company terminated
the interest rate swap in the third quarter of 2009.
The following table summarizes the effect of derivative
instruments on the Condensed Consolidated Statements of
Operations for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) in
|
|
Gain or (Loss)
|
|
|
|
|
Other
|
|
Reclassified from
|
|
|
|
|
Comprehensive
|
|
Accumulated Other
|
|
Gain or (Loss)
|
|
|
Income on
|
|
Comprehensive
|
|
Recorded
|
|
|
Derivative
|
|
Income into Income
|
|
in Income
|
Derivatives in Cash Flow Hedging Relationships
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Ineffective Portion)
|
|
Interest rate swap
|
|
$
|
(531
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss)Recognized
|
|
|
in Income on Derivative
|
Derivatives not Designated as Hedging Instruments
|
|
Location
|
|
Amount
|
|
Foreign currency contracts
|
|
|
Other income (expense
|
)
|
|
$
|
3,545
|
|
Marketable Securities. As of March 31,
2010 and December 31, 2009, the Companys investment
in marketable securities consisted solely of Palatin
Technologies, Inc. common stock with a cost basis of $511. The
cumulative unrealized holding gain in this investment was $965
and $1,589, respectively, as of March 31, 2010 and
December 31, 2009.
Investments in Debt Securities. The Company
undertook investments in auction rate securities prior to the
end of the first quarter of 2008. Tax-exempt auction rate
securities are long-term variable rate bonds tied to short-term
interest rates that are intended to reset through an auction
process generally every seven, 28 or 35 days. On
February 11, 2008, the Company began to experience auction
failures with respect to its investments in auction rate
securities. In the event of an auction failure, the interest
rate on the security is reset according to the contractual terms
in the underlying indenture. The Company will not be able to
liquidate these securities until a successful auction occurs,
the issuer calls or restructures the underlying security, the
underlying security matures or it is purchased by a buyer
outside the auction process.
7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company classified auction rate securities as
available-for-sale
at the time of purchase. Temporary gains or losses are included
in accumulated other comprehensive income (loss).
Other-than-temporary
credit losses are included in Loss on investments in the
Condensed Consolidated Statements of Operations. Non-credit
related
other-than-temporary
losses are recorded in accumulated other comprehensive income
(loss), as the Company has no intent to sell the securities and
believes that it is more likely than not that it will not be
required to sell the securities prior to recovery.
As of March 31, 2010 and December 31, 2009, the par
value of the Companys investments in debt securities was
$264,075 and $281,525, respectively, and consisted solely of
tax-exempt auction rate securities associated with municipal
bonds and student loans. The Company has not invested in any
mortgage-backed securities or any securities backed by corporate
debt obligations. The Companys investment policy requires
it to maintain an investment portfolio with a high credit
quality. Accordingly, the Companys investments in debt
securities were limited to issues which were rated AA or higher
at the time of purchase.
Excluding the municipal bond discussed below, as of
March 31, 2010, there were cumulative unrealized holding
losses of $25,458 recorded in accumulated other comprehensive
income (loss) on the Condensed Consolidated Balance Sheet
associated with investments in debt securities with a par value
of $223,025, which were classified as available for sale. All of
these investments in debt securities have been in continuous
unrealized loss positions for greater than twelve months. As of
March 31, 2010, the Company believed the decline associated
with the underlying securities was temporary and it was probable
that the par amount of these auction rate securities would be
collectible under their contractual terms.
As of April 1, 2009, the Company adopted a new statement of
the Financial Accounting Standards Board (FASB) that
provides guidance in determining whether impairments in debt
securities are
other-than-temporary,
and modifies the presentation and disclosures surrounding such
instruments. During the fourth quarter of 2008, the Company
recognized unrealized losses of $6,832 in other (expense) income
for a municipal bond with a par value of $15,000 for which the
holding losses were determined to be
other-than-temporary.
The Company determined that $1,042 (or $646
net-of-tax)
of this previously recognized loss was non-credit related. Upon
the adoption of this statement, the Company was required to
reclassify this non-credit related loss from retained earnings
to accumulated other comprehensive income (loss). As of
March 31, 2010, there were cumulative unrealized holding
gains of $1,758 associated with this security recorded in
accumulated other comprehensive income (loss) on the Condensed
Consolidated Balance Sheet. During 2009 and 2010, no
other-than-temporary
impairment losses associated with available for sale investments
in debt securities were recognized.
During the first quarter of 2010, the Company sold certain
auction rate securities associated with student loans with a par
value of $8,000 for $7,360 to the issuer and realized a loss of
$640 in the Condensed Consolidated Statement of Operations. The
Company has not sold any other investments in debt securities
below par value during the periods presented in the accompanying
Condensed Consolidated Statements of Operations.
During the fourth quarter of 2008, the Company accepted an offer
from UBS Financial Services, Inc. (UBS) providing
the Company the right to sell to UBS at par value certain
auction rate securities during the period from June 30,
2010 to July 2, 2012 (the right). At
March 31, 2010 and December 31, 2009, the Company held
auction rate securities related to this offer with a par value
of $26,050 and $32,500, respectively. The Company has elected
the fair value option to account for this right. As a result,
gains and losses associated with this right are recorded in
Other income (expense) in the Condensed Consolidated Statements
of Operations. The value of the right to sell certain auction
rate securities to UBS was estimated considering the present
value of future cash flows, the fair value of the auction rate
security and counterparty risk. As of March 31, 2010 and
December 31, 2009, the fair value of the right to sell the
auction rate securities to UBS at par was $2,425 and $3,226,
respectively. With respect to this right, the Company recognized
an unrealized loss of $801 during the first quarter of 2010 and
$565 during the first quarter of 2009, in Other income (expense)
in the accompanying Condensed Consolidated Statements of
Operations.
8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, during the fourth quarter of 2008, the Company
reclassified the auction rate securities that are included in
this right from
available-for-sale
securities to trading securities. As of March 31, 2010 and
December 31, 2009, the fair value of the investments in
debt securities classified as trading was $23,377 and $29,258,
respectively. During the first quarter of 2010 and 2009, the
Company recognized unrealized gains of $569 and unrealized
losses of $258, respectively, in Other income (expense) in the
accompanying Condensed Consolidated Statements of Operations.
As of March 31, 2010, the Company has classified $27,127 of
auction rate securities as current assets and $204,785 as
long-term assets.
The following tables summarize the Companys assets which
are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Total
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
3/31/2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
446,394
|
|
|
$
|
446,394
|
|
|
$
|
|
|
|
$
|
|
|
U.S. Government Securities
|
|
|
4,138
|
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
1,476
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
|
|
231,912
|
|
|
|
|
|
|
|
3,750
|
|
|
|
228,162
|
|
Right to Sell Debt Securities
|
|
|
2,425
|
|
|
|
|
|
|
|
|
|
|
|
2,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
686,345
|
|
|
$
|
452,008
|
|
|
$
|
3,750
|
|
|
$
|
230,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Total
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
12/31/2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
518,950
|
|
|
$
|
518,950
|
|
|
$
|
|
|
|
$
|
|
|
U.S. Government Securities
|
|
|
4,138
|
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
2,100
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
|
|
247,866
|
|
|
|
|
|
|
|
|
|
|
|
247,866
|
|
Right to Sell Debt Securities
|
|
|
3,226
|
|
|
|
|
|
|
|
|
|
|
|
3,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
776,280
|
|
|
$
|
525,188
|
|
|
$
|
|
|
|
$
|
251,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of marketable securities within the Level 1
classification is based on the quoted price for identical
securities in an active market as of the valuation date.
The fair value of investments in debt securities within the
Level 2 classification is at par based on public call
notices from the issuer of the security.
The fair value of investments in debt securities within the
Level 3 classification is based on a trinomial discount
model. This model considers the probability at the valuation
date of three potential occurrences for each auction event
through the maturity date of the security. The three potential
outcomes for each auction are (i) successful auction/early
redemption, (ii) failed auction and (iii) issuer
default. Inputs in determining the probabilities of the
potential outcomes include, but are not limited to, the
securitys collateral, credit rating, insurance,
issuers financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of
each security is determined by summing the present value of the
probability-weighted future principal and interest payments
9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined by the model. As of March 31, 2010, the Company
assumed a weighted average discount rate of 4.8% and expected
terms which are generally less than five years. The discount
rate was determined as the loss-adjusted required rate of return
using public information such as spreads on near-risk free to
risk free assets. The expected term is based on the
Companys estimate of future liquidity as of March 31,
2010. Transfers out of Level 3 classification occur only
when public call notices have been announced by the issuer prior
to the date of the valuation.
The following table provides a reconciliation of assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance, January 1
|
|
$
|
251,092
|
|
|
$
|
361,913
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(872
|
)
|
|
|
(823
|
)
|
Included in other comprehensive income (loss)
|
|
|
927
|
|
|
|
(4,300
|
)
|
Settlements
|
|
|
(16,810
|
)
|
|
|
(8,000
|
)
|
Transfers in and/or out of Level 3
|
|
|
(3,750
|
)
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31
|
|
$
|
230,587
|
|
|
$
|
350,490
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$
|
70,664
|
|
|
$
|
62,054
|
|
Work-in-process
|
|
|
37,267
|
|
|
|
29,979
|
|
Finished goods (including $2,590 and $3,908 of sample inventory,
respectively)
|
|
|
121,012
|
|
|
|
126,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,943
|
|
|
|
218,738
|
|
Inventory valuation allowance
|
|
|
(40,299
|
)
|
|
|
(36,447
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
188,644
|
|
|
$
|
182,291
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property,
Plant and Equipment
|
During the first quarter of 2009, the Company classified as held
for sale a pharmaceutical facility which was acquired as a
result of the acquisition of Alpharma Inc., now Alpharma LLC
(Alpharma). The facility is recorded at estimated
fair value less cost to sell. The Company finalized its
determination of fair value of this asset in the first quarter
of 2009, reduced the value by $3,600 and adjusted goodwill
accordingly. During the fourth quarter of 2009, the Company
further reduced the fair value of this asset based on
managements estimate of current market conditions and
incurred an asset impairment charge of $2,010.
The net book value of some of the Companys manufacturing
facilities currently exceeds fair market value. Management
currently believes that the long-term assets associated with
these facilities are not impaired based on estimated
undiscounted future cash flows. However, if the Company were to
approve a plan to sell or close any of the facilities for which
the carrying value exceeds fair market value, the Company would
have to write off a portion of the assets or reduce the
estimated useful life of the assets which would accelerate
depreciation.
10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Acquisitions,
Dispositions, Co-Promotions and Alliances
|
On December 29, 2008, the Company completed its acquisition
of Alpharma. In connection with the acquisition of Alpharma, the
Company and Alpharma executed a consent order (the Consent
Order) with the U.S. Federal Trade Commission
(FTC). The Consent Order required the Company to
divest the assets related to Alpharmas branded oral
long-acting opioid analgesic drug
Kadian®
to Actavis Elizabeth, L.L.C. (Actavis LLC). In
accordance with the Consent Order, effective upon the
acquisition of Alpharma, on December 29, 2008, the Company
divested the
Kadian®
product to Actavis LLC. Actavis LLC is entitled to sell
Kadian®
as a branded or generic product. Prior to the divestiture,
Actavis LLC supplied
Kadian®
to Alpharma.
Actavis LLC will pay a purchase price of up to an aggregate of
$127,500 in cash based on the achievement of certain
Kadian®
quarterly gross profit-related milestones for the period
beginning January 1, 2009 and ending June 30, 2010.
The maximum purchase price payment associated with each calendar
quarter is as follows:
|
|
|
|
|
|
|
Maximum Purchase
|
|
|
Price Payment
|
|
First Quarter 2009
|
|
$
|
30,000
|
|
Second Quarter 2009
|
|
$
|
25,000
|
|
Third Quarter 2009
|
|
$
|
25,000
|
|
Fourth Quarter 2009
|
|
$
|
20,000
|
|
First Quarter 2010
|
|
$
|
20,000
|
|
Second Quarter 2010
|
|
$
|
7,500
|
|
None of the quarterly payments above, when combined with all
prior payments made by Actavis LLC, will exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis LLC and its affiliates for the
period beginning on January 1, 2009 and ending on the last
day of such calendar quarter. Any quarterly purchase price
payment that is not paid by Actavis LLC due to the application
of such provision will be carried forward to the next calendar
quarter, increasing the maximum quarterly payment in the
subsequent quarter. However, the cumulative purchase price
payable by Actavis LLC will not exceed the lesser of
(a) $127,500 and (b) the gross profits from the sale
of
Kadian®
in the United States by Actavis LLC and its affiliates for the
period from January 1, 2009 through June 30, 2010. The
Company recorded a receivable of $115,000 at the time of the
divestiture, reflecting the present value of the estimated
future purchase price payments from Actavis LLC. There was no
gain or loss recorded as a result of the divestiture. In
accordance with the agreement, quarterly payments are received
one quarter in arrears. During the first quarter of 2010, the
Company received $20,000 from Actavis LLC related to gross
profit from sales during the fourth quarter of 2009.
|
|
7.
|
Intangible
Assets and Goodwill
|
Intangible assets consist primarily of patents, licenses,
trademarks and product rights. A summary of the gross carrying
amount and accumulated amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
1,265,929
|
|
|
$
|
801,177
|
|
|
$
|
1,264,250
|
|
|
$
|
764,327
|
|
Animal Health
|
|
|
169,923
|
|
|
|
12,041
|
|
|
|
170,000
|
|
|
|
9,633
|
|
Meridian Auto-Injector
|
|
|
184,206
|
|
|
|
51,789
|
|
|
|
183,249
|
|
|
|
49,621
|
|
Royalties and other
|
|
|
3,731
|
|
|
|
3,521
|
|
|
|
3,731
|
|
|
|
3,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,623,789
|
|
|
$
|
868,528
|
|
|
$
|
1,621,230
|
|
|
$
|
827,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for the three months ended March 31,
2010 and 2009 was $41,437 and $38,178, respectively.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two
Skelaxin®
patents. In June 2009, the Court entered judgment against the
Company. The Company has appealed and intends to vigorously
defend its interests. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010. The
Companys sales of
Skelaxin®
will decline significantly as a result of generic competition.
The Company believes that the intangible assets associated with
Skelaxin®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, as a result of the
January 2009 order described above, the Company reduced the
estimated remaining useful life of the intangible assets of
Skelaxin®
during the first quarter of 2009. As of March 31, 2010, the
net intangible assets associated with
Skelaxin®
totaled approximately $19,979. For additional information
regarding
Skelaxin®
litigation, please see Note 9.
Goodwill at March 31, 2010 and December 31, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
|
|
|
Animal Health
|
|
|
Meridian
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Goodwill at December 31, 2009
|
|
$
|
267,024
|
|
|
$
|
92,179
|
|
|
$
|
108,410
|
|
|
$
|
467,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at March 31, 2010
|
|
$
|
267,024
|
|
|
$
|
92,179
|
|
|
$
|
108,410
|
|
|
$
|
467,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Convertible senior notes
|
|
$
|
336,978
|
|
|
$
|
332,305
|
|
Senior secured revolving credit facility
|
|
|
|
|
|
|
92,261
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
336,978
|
|
|
|
424,566
|
|
Less current portion
|
|
|
|
|
|
|
85,550
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
336,978
|
|
|
$
|
339,016
|
|
|
|
|
|
|
|
|
|
|
Convertible
Senior Notes
At March 31, 2010, the Company has $400,000 of Convertible
Senior Notes outstanding. The liability and equity components of
the Convertible Senior Notes have been separately accounted for
in a manner that reflects the Companys nonconvertible debt
borrowing rate at the date of issuance. The debt component is
being amortized through March 31, 2013.
A summary of the gross carrying amount, unamortized debt cost
and the net carrying amount of the liability component is as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross carrying amount
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Unamortized debt cost
|
|
|
63,022
|
|
|
|
67,695
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
336,978
|
|
|
$
|
332,305
|
|
|
|
|
|
|
|
|
|
|
12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Senior
Secured Revolving Credit Facility
During the first quarter of 2010, the Company made payments of
$92,261 on the Senior Secured Revolving Credit Facility
(Revolving Credit Facility), which represented full
payment of all outstanding borrowings under the Revolving Credit
Facility.
During the first quarter of 2009, the Company made payments of
$32,093 on the Revolving Credit Facility.
Under its terms, the availability for borrowing under the
Revolving Credit Facility was reduced to $150,000 as of
April 30, 2010. The remaining undrawn commitment amount
under the Revolving Credit Facility totals approximately
$146,891 after giving effect to outstanding letters of credit
totaling $3,109.
In connection with borrowings under the facility, the Company
incurred a total of approximately $22,219 of deferred financing
costs that are being amortized ratably through the maturity date.
Senior
Secured Term Facility
During the first quarter of 2009, the Company made payments of
$15,930 on its Senior Secured Term Facility. During the fourth
quarter of 2009, the Company completed its repayment obligations
under the facility.
Alpharma
Convertible Senior Notes
At the time of the acquisition of Alpharma by the Company,
Alpharma had $300,000 of Convertible Senior Notes outstanding
(Alpharma Notes). The Alpharma Notes were
convertible into shares of Alpharmas Class A common
stock at an initial conversion rate of 30.6725 Alpharma common
shares per $1,000 principal amount. The conversion rate of the
Alpharma Notes was subject to adjustment upon the direct or
indirect sale of all or substantially all of Alpharmas
assets or more than 50% of the outstanding shares of the
Alpharma common stock to a third party (a Fundamental
Change). In the event of a Fundamental Change, the
Alpharma Notes included a make-whole provision that adjusted the
conversion rate by a predetermined number of additional shares
of Alpharmas common stock based on (1) the effective
date of the Fundamental Change; and (2) Alpharmas
common stock market price as of the effective date. The
acquisition of Alpharma by the Company was a Fundamental Change.
As a result, any Alpharma Notes converted in connection with the
acquisition of Alpharma were entitled to be converted at an
increased rate equal to the value of 34.7053 Alpharma common
shares, at the acquisition price of $37 per share, per $1,000
principal amount of Alpharma Notes, at a date no later than 35
trading days after the occurrence of the Fundamental Change.
During the first quarter of 2009, the Company paid $385,227 to
redeem the Alpharma Convertible Senior Notes.
|
|
9.
|
Commitments
and Contingencies
|
Intellectual
Property Matters
Skelaxin®
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(CorePharma) and Mutual Pharmaceutical Company, Inc.
(Mutual) each filed an Abbreviated New Drug
Application (ANDA) with the U.S. Food and Drug
Administration (FDA) seeking permission to market a
generic version of
Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of
Skelaxin®
800 mg tablets. United States Patent Nos. 6,407,128 (the
128 patent) and 6,683,102 (the
102 patent), two method-of-use patents relating to
Skelaxin®,
are listed in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma each filed
Paragraph IV certifications against the 128 and
102 patents alleging
non-infringement,
invalidity and unenforceability of those patents. Mutual has
filed a Paragraph IV certification against the 102
patent alleging
non-infringement
and invalidity of that patent. A patent infringement suit was
filed against Eon Labs on January 2, 2003 in the
U.S. District Court for the Eastern District of New York;
against CorePharma on March 7, 2003 in the
U.S. District Court for the District of New Jersey
(subsequently transferred to the U.S. District Court for
the Eastern District of
13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New York); and against Mutual on March 12, 2004 in the
U.S. District Court for the Eastern District of
Pennsylvania, concerning their proposed 400 mg products.
Additionally, the Company filed a separate suit against Eon Labs
on December 17, 2004 in the U.S. District Court for
the Eastern District of New York, concerning its proposed
generic version of the 800 mg
Skelaxin®
product. On May 17, 2006, the U.S. District Court for
the Eastern District of Pennsylvania placed the Mutual case on
the Civil Suspense Calendar pending the outcome of the FDA
activity described below. On June 16, 2006, the
U.S. District Court for the Eastern District of New York
consolidated the Eon Labs cases with the CorePharma case. In
January 2008, the Company entered into an agreement with
CorePharma providing it with, among other things, the right to
launch an authorized generic version of
Skelaxin®
pursuant to a license in December 2012 or earlier under certain
conditions. On January 8, 2008, the Company and CorePharma
submitted a joint stipulation of dismissal without prejudice. On
January 15, 2008, the Court entered an order dismissing the
case without prejudice.
The Company believes that CorePharma began shipping a generic
form of
Skelaxin®
in early April 2010. On April 13, 2010, the Company brought
suit against CorePharma in the U.S. District Court for New
Jersey asserting certain of the Companys rights under the
January 2008 agreement. The parties appeared at a District Court
hearing on April 14, 2010, at which the Company sought, and
was denied, a temporary restraining order (TRO)
against CorePharma to prevent further sales of generic product.
On April 21 and April 30, 2010, the Court held
hearings and the parties await the Courts decision as to
whether a preliminary injunction is to be issued.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provided the Company with an automatic stay of
FDA approval of Eon Labs ANDA for its proposed 400 mg
and 800 mg products for 30 months (unless the patents
are held invalid, unenforceable or not infringed) from no
earlier than November 18, 2002 and November 3, 2004,
respectively. The
30-month
stay of FDA approval for Eon Labs ANDA for its proposed
400 mg product expired in May 2005 and Eon Labs
subsequently withdrew its 400 mg ANDA in September 2006.
The 30-month
stay of FDA approval for Eon Labs 800 mg product was
tolled by the Court from January 10, 2005 to April 30,
2007, and the stay expired in early August 2009. On
April 30, 2007, Eon Labs 400 mg case was
dismissed without prejudice, although Eon Labs claim for
fees and expenses was severed and consolidated with Eon
Labs 800 mg case. On August 27, 2007, Eon Labs
served a motion for summary judgment on the issue of
infringement. The Court granted the Company discovery for
purposes of responding to Eons motion until March 14,
2008 and set a briefing schedule. On March 7, 2008, the
Company filed a letter with the Court regarding Eon Labs
inability to adhere to the discovery schedule and the Court took
Eon Labs motion for summary judgment on the issue of
infringement off the calendar. Subsequently, Eon Labs filed an
amended motion for summary judgment on the issue of infringement
on April 4, 2008. Eon Labs also filed a motion for summary
judgment on the issue of validity on April 16, 2008. On
May 8, 2008, Eon Labs filed amended pleadings. On
May 22, 2008, the Company moved to dismiss certain defenses
and counterclaims. On June 6, 2008, the Company responded
to Eon Labs motion for summary judgment on the issue of
validity. On January 20, 2009, the Court issued an order
ruling invalid the 128 and 102 patents. The order
was issued without the benefit of a hearing in response to Eon
Labs motion for summary judgment. The order also allowed
Eon Labs to pursue its claim for exceptional case, and on
March 31, 2009, Eon Labs filed its motion for this purpose,
which was opposed by the Company and Elan Pharmaceuticals, Inc.
(Elan). Eon Labs has replied and the motion remains
pending before the Court. On May 20, 2009, Eon Labs asked
for entry of final judgment, and on June 4, 2009, the Court
granted this request. On July 1, 2009, the Company filed a
notice of appeal to the Court of Appeals for the Federal Circuit
of the Courts entry of judgment. On July 2, 2009,
Elan did the same. The appeals were docketed by the Federal
Circuit on July 10, 2009. In late July 2009, the companies
moved to dismiss the appeals for lack of jurisdiction. On
September 30, 2009, the Federal Circuit denied the motions
to dismiss. The Company and Elan filed opening briefs on
November 23, 2009. Eon filed its opposition brief on
January 19, 2010. The Company and Elan filed reply briefs
on February 19, 2010. The Federal Circuit set oral argument
for the appeal for May 7, 2010. The Company intends to
vigorously defend its interests.
On December 5, 2008, the Company, along with co-plaintiff
Pharmaceutical IP Holding, Inc. (PIH) initiated suit
in the U.S. District Court of New Jersey against Sandoz for
infringement of U.S. Patent No. 7,122,566 (the
566 patent). The 566 patent is a
method-of-use patent relating to
Skelaxin®
listed in the FDAs Orange Book; it
14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expires on February 6, 2026. The 566 patent is owned
by PIH and licensed to the Company. The Company and PIH sued
Sandoz, alleging that Eon Labs submission of its ANDA
seeking approval to sell a generic version of a 800 mg
Skelaxin®
tablet prior to the expiration of the 566 patent
constitutes infringement of the patent. Sandoz, which acquired
Eon Labs, is the named owner of Eon Labs ANDA and filed a
Paragraph IV certification challenging the validity and
alleging non-infringement of the 566 patent. On
January 13, 2009, Sandoz answered the complaint and filed
counterclaims of invalidity and non-infringement. The Company
filed a reply on February 5, 2009. The parties are
currently conducting fact discovery.
On March 31, 2010, Sandoz received approval from the FDA to
commercialize a generic product containing metaxalone. On
April 1, 2010, the Company sought, and the United States
District Court of New Jersey granted, a TRO enjoining Sandoz
from engaging in the use, offer to sell, or sale within the
United States its generic metaxalone product. On April 9,
2010, the TRO was vacated. On April 14 and May 5,
2010, the District Court heard the Companys arguments in
support of a preliminary injunction against Sandoz. The trial
date for the patent litigation against Sandoz is set for
July 6, 2010.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. The Company believes that
this decision is arbitrary, capricious and inconsistent with the
FDAs previous position on this issue. The Company filed a
Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent and
prohibit the removal of information corresponding to the use
listed in the Orange Book. The Company concurrently filed a
petition for stay of action requesting the FDA to stay approval
of any generic
Skelaxin®
products until the FDA has fully evaluated the Companys
Citizen Petition.
On March 12, 2004, the FDA sent a letter to the Company
explaining that the Companys proposed labeling revision
for
Skelaxin®,
which includes references to additional clinical studies
relating to food, age and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a petition
for stay of action requesting the FDA to stay approval of the
Companys proposed labeling revision until the FDA has
fully evaluated and ruled upon the Companys Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual filed responses and
supplements to their pending Citizen Petitions and responses. On
December 8, 2005, Mutual filed another supplement with the
FDA in which it withdrew its prior petition for stay, supplement
and opposition to the Companys Citizen Petition. On
November 24, 2006, the FDA approved the revision to the
Skelaxin®
labeling. On February 13, 2007, the Company filed another
supplement to the Companys Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling. On May 2, 2007, Mutual filed comments in
connection with the Companys supplemental submission.
These issues are pending. On July 27, 2007 and
January 24, 2008, Mutual filed two other Citizen Petitions
in which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the data provided in its
earlier submissions. These petitions were denied on
July 18, 2008.
Net sales of
Skelaxin®
were $400,998 in 2009 and $90,917 in the first quarter of 2010.
As of March 31, 2010, the Company had net intangible assets
related to
Skelaxin®
of $19,979. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010. The net
sales of
Skelaxin®
will decline significantly as a result of generic competition,
which will materially adversely affect the results of operations
and cash flows, unless the Company is successful in its legal
actions to remove generic competitors from the market. According
to IMS America, Ltd. weekly prescription data, for the week
ending April 23, 2010, generic competitors have garnered
just over 80% of the prescriptions in the metaxalone market. For
information regarding the
Skelaxin®
intangible assets, please see Note 7.
15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Avinza®
Actavis, Inc. (Actavis) filed an ANDA with the FDA
seeking permission to market generic versions of
Avinza®
at the 30 mg, 45 mg, 60 mg and 120 mg
dosages. U.S. Patent No. 6,066,339 (the
339 patent) is a formulation patent relating to
Avinza®
that is listed in the Orange Book and expires on
November 25, 2017. Actavis filed a Paragraph IV
certification challenging the validity and alleging
non-infringement of the 339 patent, and the Company and
Elan Pharma International LTD (EPI), the owner of
the 339 patent, filed suit on October 18, 2007 in the
U.S. District Court for the District of New Jersey to
defend the rights under the patent. Pursuant to the Hatch-Waxman
Act, the filing of the lawsuit against Actavis provided the
Company with an automatic stay of FDA approval of Actavis
ANDA for up to 30 months (unless the patent is held
invalid, unenforceable or not infringed) from no earlier than
September 4, 2007. On November 18, 2007, Actavis
answered the complaint and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on December 7, 2007. The initial scheduling
conference was held on March 11, 2008. Fact discovery is
largely complete and the parties continue to await a hearing
date for claim construction.
In November 2009, Actavis sent the Company and EPI a second
Paragraph IV certification adding the 75 mg and
90 mg dosages. The Company and EPI initiated another suit
against Actavis in New Jersey on December 15, 2009. On
January 12, 2010, Actavis answered the complaint and filed
counterclaims of non-infringement and invalidity. On
February 23, 2010, this case was consolidated with the
earlier-initiated suit.
Sandoz filed an ANDA with the FDA seeking permission to market
generic versions of Avinza at the 30 mg and 120 mg
dosages and provided the Company with a Paragraph IV
certification challenging the validity and alleging
non-infringement of the 339 patent. The Company and EPI
filed suit on July 21, 2009 in the U.S. District Court
for the District of New Jersey to defend the rights under the
patent. Pursuant to the Hatch-Waxman Act, the filing of the
lawsuit against Sandoz provided the Company with an automatic
stay of FDA approval of Sandozs ANDA for up to
30 months (unless the patent is held invalid, unenforceable
or not infringed) from no earlier than June 11, 2009.
Sandoz subsequently sent the Company and EPI a second
Paragraph IV certification adding the 45 mg,
60 mg, 75 mg and 90 mg dosages. The Company and
EPI initiated another suit against Sandoz in New Jersey on
September 1, 2009. On October 2, 2009, Sandoz answered
the complaints and filed counterclaims of non-infringement and
invalidity. The Company and EPI filed a reply on
October 22, 2009. The two cases were consolidated on
January 4, 2010. The parties are in the midst of fact
discovery.
The Company intends to vigorously defend its rights under the
339 patent. Net sales of
Avinza®
were $131,148 in 2009 and $23,196 in the first quarter of 2010.
As of March 31, 2010, the Company had net intangible assets
related to
Avinza®
of $207,761. If a generic form of
Avinza®
enters the market or if the Companys current estimates
regarding future cash flows adversely change, the Company may
have to write off a portion or all of these intangible assets,
and the Companys business, financial condition, results of
operations and cash flows could be otherwise materially
adversely affected.
EpiPen®
On November 11, 2008, the Company was granted
U.S. Patent 7,449,012 (the 012 patent)
covering the next generation autoinjector (NGA) for
use with epinephrine to be sold under the
EpiPen®
brand name. The 012 patent expires September 11,
2025. The 012 patent was listed in FDAs Orange Book
on July 17, 2009 under the EpiPen NDA. On July 21,
2009, the Company received a Paragraph IV certification
from Teva Pharmaceutical Industries Ltd. (Teva)
giving notice that it had filed an ANDA to commercialize an
epinephrine injectable product and challenging the validity and
alleging non-infringement of the 012 patent. On
August 28, 2009, the Company filed suit against Teva in the
U.S. District Court for the District of Delaware to defend
its rights under the 012 patent. On October 21, 2009,
Teva filed its answer asserting non-infringement and invalidity
of the 012 patent.
16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Embeda®
On November 17, 2008, Alpharma filed a declaratory judgment
action against Purdue Pharma L.P. (Purdue) in the
U.S. District Court for the Western District of Virginia,
seeking an order declaring that nine of Purdues patents
are invalid
and/or would
not be infringed by the commercialization of
Embeda®.
The complaint was served on March 12, 2009, and on
April 22, 2009 Purdue filed a motion requesting that the
court dismiss the action for lack of subject matter jurisdiction
or, alternatively, to transfer the action to the District of
Connecticut. On July 9, 2009, the court denied
Purdues motion to dismiss or transfer. On August 6,
2009, Purdue filed its answer and counterclaims, and filed a
motion for an order certifying the courts July 9 order for
immediate appeal. On August 26, 2009, the court denied
Purdues motion to certify for immediate appeal and issued
an order scheduling certain discovery and hearing dates. On
December 4, 2009, the Company was added as a plaintiff to
the lawsuit. On December 23, 2009, Purdue delivered an
unconditional and irrevocable covenant not to sue the Company
(or any of its affiliates, subsidiaries, parents, divisions,
successors and assigns) for infringement of eight of the nine
patents in the suit. On that day, the parties also filed a
Stipulation with the Court to dismiss the lawsuit with prejudice
with respect to these eight patents. The only patent remaining
in the case was U.S. Patent No. 6,696,088 (the
088 patent). On February 4, 2010, after
extensive briefing, the court held a claim construction hearing
on the 088 patent and is expected to issue its claim
construction ruling soon.
On February 9, 2010, the United States Patent &
Trademark Office issued U.S. Patent No. 7,658,939
(the 939 patent) to Purdue. The 939
patent is a continuation of the 088 patent. On the same
day, Purdue filed a patent infringement action against the
Company in the U.S. District Court for the District of New
Jersey, alleging infringement of the 939 patent by the
commercialization of
Embeda®.
On February 10, 2010, the Company filed a motion in the
U.S. District Court for the Western District of Virginia
seeking leave to amend its complaint to add declaratory judgment
counts of non-infringement and invalidity against the 939
patent.
On March 19, 2010, the Court in the Western District of
Virginia granted the Companys motion for leave to amend
its complaint adding the 939 patent to the existing
litigation. A trial date has been set for August 18, 2010,
for both the 088 and the 939 patents. On
April 2, 2010, Purdues action brought in the District
of New Jersey was dismissed.
Average
Wholesale Price Litigation
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of the Company,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in Federal court in the State of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (AWP) and fraudulently failed to
accurately report their best prices and their
average manufacturers prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits and
treble and punitive damages. The U.S. District Court for
the District of Massachusetts has been established as the
multidistrict litigation court for the case, In re:
Pharmaceutical Industry Average Wholesale Pricing Litigation
(the MDL Court).
Since the filing of the NYC case, 48 New York counties have
filed lawsuits against the pharmaceutical industry, including
the Company and Monarch. The allegations in all of these cases
are virtually the same as the allegations in the NYC case. All
of these lawsuits are currently pending in the MDL Court, except
for the Erie, Oswego and Schenectady County cases, which were
removed in October 2006 and remanded to the state of New York
Supreme Court in Erie County, New York state court in September
2007. Motions to dismiss were granted in part and denied in part
for all defendants in all NYC and county cases pending in the
MDL Court. The Erie motion to dismiss was granted in part and
denied in part by the state court before removal. Motions to
dismiss were filed in October 2007 in the Oswego and Schenectady
cases, and these cases were subsequently transferred to Erie
County for coordination with the Erie County case. A hearing on
these motions to dismiss occurred on March 15, 2010 and the
Court has taken the motions under advisement. It is not
anticipated that any trials involving the Company will be
17
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
set in any of these cases in 2010. On January 27, 2010, the
MDL Court granted partial summary judgment for the plaintiffs in
a case involving other pharmaceutical company defendants.
In January 2005, the State of Alabama filed a lawsuit in the
Circuit Court for Montgomery County, Alabama against 79
defendants, including the Company and Monarch. The four causes
of action center on the allegation that all defendants
fraudulently inflated the AWPs of their products. A motion to
dismiss was filed and denied by the Court, but the Court
required an amended complaint to be filed. The Company filed an
answer and counterclaim for return of rebates overpaid to the
state. Alabama filed a motion to dismiss the counterclaim, which
was granted. The Company appealed the dismissal. The Alabama
Supreme Court affirmed the dismissal. In a separate appeal of a
motion to sever denied by the trial court, the Alabama Supreme
Court severed all defendants into single-defendant cases. Trials
against AstraZeneca International, Novartis Pharmaceuticals,
SmithKline Beecham Corporation and Sandoz resulted in verdicts
for the State. These defendants appealed their verdicts. On
October 16, 2009, the Alabama Supreme Court reversed all of
the verdicts against AstraZeneca, Novartis and SmithKline
Beecham and rendered judgment in favor of these companies.
Alabama filed a petition to rehear in the Alabama Supreme Court,
which was denied in January 2010. A trial against Watson
Pharmaceuticals, Inc. in June 2009 resulted in a deadlocked
jury. In April 2009, the Court established various trial dates
for all defendants. The Company is scheduled for trial in
January 2011 but other scheduled cases have been continued or
reset for later dates following the Supreme Court decision.
In October 2005, the State of Mississippi filed a lawsuit in the
Chancery Court of Rankin County, Mississippi against the
Company, Monarch and 84 other defendants, alleging fourteen
causes of action. Many of those causes of action allege that all
defendants fraudulently inflated the AWPs and wholesale
acquisition costs of their products. A motion to dismiss the
criminal statute counts and a motion for more definite statement
were granted. Mississippi filed an amended complaint dismissing
the Company and Monarch from the lawsuit without prejudice.
These claims could be refiled.
Over half of the states have filed similar lawsuits but the
Company has not been named in any other case except Iowas,
which was instituted in October 2007. The Company filed a motion
to dismiss the Iowa complaint. On February 20, 2008, the
Iowa case was transferred to the MDL Court. The relief sought in
all of these cases is similar to the relief sought in the NYC
lawsuit. The MDL Court granted in part and denied in part the
Companys motion to dismiss, and the Company has filed its
answer. Discovery is proceeding in these cases. The Company
intends to defend all of the AWP lawsuits vigorously, but is
currently unable to predict the outcome or reasonably estimate
the range of potential loss.
See also AWP Litigation under the section
Alpharma Matters below.
Fen-Phen
Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multidistrict litigation court has been established in the
U.S. District Court for the Eastern District of
Pennsylvania, In re Fen-Phen Litigation. The plaintiffs
seek, among other things, compensatory and punitive damages
and/or
court-supervised medical monitoring of persons who have ingested
these products.
The Companys wholly-owned subsidiary, King Research and
Development, is a defendant in approximately
8 multi-plaintiff (approximately 26 plaintiffs) lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. These lawsuits have been filed in
various jurisdictions throughout the United States and in each
of these lawsuits King Research and Development, as the
successor to Jones Pharma Incorporated (Jones), is
one of many defendants, including manufacturers and other
distributors of these drugs. Although Jones
18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
did not at any time manufacture dexfenfluramine, fenfluramine or
phentermine, Jones was a distributor of a generic phentermine
product and, after its acquisition of Abana Pharmaceuticals, was
a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones distribution and sale of
Obenix®
or Jones generic phentermine product. King Research and
Developments insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntary
dismissals without the payment of settlement proceeds. In the
event that King Research and Developments insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 22 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other pharmaceutical companies have also
been sued. The Company was sued by approximately 1,000
plaintiffs, but most of those claims were voluntarily dismissed
or dismissed for lack of product identification. The remaining
22 lawsuits were filed in Alabama, Arkansas, Missouri,
Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court has been
established in the U.S. District Court for the Eastern
District of Arkansas, Western Division, In re: Prempro
Products Liability Litigation, and all of the
plaintiffs claims have been transferred and are pending in
that Court except for one lawsuit pending in Philadelphia,
Pennsylvania state court. Many of these plaintiffs allege that
the Company and other defendants failed to conduct adequate
research and testing before the sale of the products and
post-sale monitoring to establish the safety and efficacy of the
long-term hormone therapy regimen and, as a result, misled
consumers when marketing their products. Plaintiffs also allege
negligence, strict liability, design defect, breach of implied
warranty, breach of express warranty, fraud and
misrepresentation. Discovery of the plaintiffs claims
against the Company has begun but is limited to document
discovery. No trial has occurred in the hormone replacement
therapy litigation against the Company or any other defendants
except Wyeth/Pfizer/Upjohn. The trials against Pfizer/Wyeth have
resulted in verdicts for and against Pfizer/Wyeth, with several
verdicts against Wyeth reversed on post-trial motions.
Pfizer/Wyeth lost appeals in the Eighth Circuit from an adverse
jury verdict in the federal multidistrict litigation court and
in the Pennsylvania Court of Appeals. Pfizer/Upjohn has lost two
jury verdicts. One of these verdicts was later reversed, and the
other is being appealed. The Company does not expect to have any
trials set in the next year. The Company intends to defend these
lawsuits vigorously but is currently unable to predict the
outcome or to reasonably estimate the range of potential loss,
if any. The Company may have limited insurance for these claims.
The Company would have to assume defense of the lawsuits and be
responsible for damages, fees and expenses, if any, that are
awarded against it or for amounts in excess of the
Companys product liability coverage.
19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Alpharma
Matters
The following matters relate to our Alpharma subsidiary
and/or
certain of its subsidiaries.
Department
of Justice Investigation
As previously disclosed, Alpharma, acquired by the Company in
December 2008, received a subpoena from the U.S. Department of
Justice (DOJ) in February, 2007 in connection with
its investigation of alleged improper sales and marketing
practices related to the sale of the pain medicine
Kadian®.
The Company divested Alpharmas
Kadian®
assets to Actavis LLC simultaneously with the closing of the
acquisition of Alpharma.
In September 2009, the Company reached an agreement in principle
with the U.S. Attorneys Office and DOJ which would
resolve this investigation. The Company recorded a reserve of
$42,500 in connection with this development in the third quarter
of 2009 as an adjustment to the goodwill associated with the
purchase of Alpharma. Under the terms of the agreement in
principle, the Company began accruing interest on
October 1, 2009 at a rate of 3.125% per annum. During the
first quarter of 2010, Alpharma entered into a definitive
settlement agreement and paid $42,500 plus interest of $615 to
the DOJ, of which $8,876 plus interest of $128 is related to
certain states.
Chicken
Litter Litigation
Alpharma and one of its subsidiaries are two of multiple
defendants that have been named in several lawsuits that allege
that one of its animal health products causes chickens to
produce manure that contains an arsenical compound which, when
used as agricultural fertilizer by chicken farmers, degrades
into inorganic arsenic and may have caused a variety of diseases
in the plaintiffs (who allegedly live in close proximity to such
farm fields). These lawsuits were filed beginning on
December 16, 2003. Alpharma provided notice to its
insurance carriers and its primary insurance carriers have
responded by accepting their obligations to defend or pay
Alpharmas defense costs, subject to reservation of rights
to later reject coverage for these lawsuits. One of the carriers
has filed a declaratory judgment action in state court in which
it has sought a ruling concerning the allocation of its coverage
obligations to Alpharma among the several insurance carriers
and, to the extent Alpharma does not have full insurance
coverage, to Alpharma. Further, this declaratory judgment action
requests that the Court rule that certain of the carriers
policies provide no coverage because certain policy exclusions
allegedly operate to limit its coverage obligations under said
policies. The insurance carriers may take the position that
some, or all, of the applicable insurance policies contain
certain provisions that could limit coverage for future product
liability claims arising in connection with product sold on and
after December 16, 2003.
In addition to the potential for personal injury damages to the
approximately 155 plaintiffs, the plaintiffs are asking for
punitive damages and requesting that Alpharma be enjoined from
the future sale of the product at issue. In September 2006, in
the first trial, which was brought by three plaintiffs, the
Circuit Court of Washington County, Arkansas, Second Division
entered a jury verdict in favor of Alpharma. The plaintiffs
appealed the verdict, challenging certain pretrial expert
rulings; however, in May 2008, the Supreme Court of Arkansas
denied plaintiffs challenges. In its ruling, the Supreme
Court of Arkansas also overturned the trial courts grant
of summary judgment that had the effect of dismissing certain
poultry company co-defendants from the case. The case was tried
against the poultry company co-defendants in April and May 2009,
resulting in a verdict for the defendants. In July 2009, the
plaintiffs filed a notice of appeal of that verdict. It is
expected that the appeal of the case will be heard in 2010. No
additional cases have been set for trial. Subsequent cases may
be tried against both the poultry companies and Alpharma
together.
While the Company can give no assurance of the outcome of any
future trial in this litigation, it believes that it will be
able to continue to present credible scientific evidence that
its product is not the cause of any injuries the plaintiffs may
have suffered. There is also the possibility of an adverse
customer reaction to the allegations in these lawsuits, as well
as additional lawsuits in other jurisdictions where the product
has been sold. Worldwide sales of this product were
approximately $23,606 in 2009 and $7,176 in the first quarter of
2010.
20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
AWP
Litigation
Alpharma, and in certain instances one of its subsidiaries, are
defendants in connection with various elements of the litigation
described above under the heading Average Wholesale Price
Litigation, primarily related to sale of
Kadian®
capsules. At present, Alpharma is involved in proceedings in the
following courts:
|
|
|
|
|
Superior Court for the State of Alaska, Third Judicial District
of Anchorage;
|
|
|
|
Second Judicial Court in and for Leon County, Florida;
|
|
|
|
Circuit Court of Cook County, Illinois, County Department,
Chancery Division; and
|
|
|
|
Court of Common Pleas, for the Fifth Judicial District, State of
South Carolina, County of Richland.
|
In addition, Alpharmas New York and Iowa cases are pending
in the MDL Court discussed above. Mississippi and Texas cases
against Alpharma were dismissed without prejudice. The Company
expects the Florida case will be dismissed voluntarily.
These lawsuits vary with respect to the particular causes of
action and relief sought. The relief sought in these lawsuits
includes statutory causes of action including civil penalties
and treble damages, common law causes of action, declaratory and
injunctive relief, and punitive damages, including, in certain
lawsuits, disgorgement of profits. The Company believes it has
meritorious defenses and intends to vigorously defend its
positions in these lawsuits. Numerous other pharmaceutical
companies are defendants in similar lawsuits.
Environmental
Matters
In 2006, the Company contacted the U.S. Environmental
Protection Agency (EPA) to report past deviations
from the requirements of the state conditional major air
emissions operating permit relating to the Companys
operation of certain pollution control equipment at its Bristol,
Tennessee facility. In May 2009, the Company received an
information request from EPA pursuant to section 114 of the
Clean Air Act regarding the Companys historic air
emissions and its operation of certain pollution control
equipment (Information Request). In June 2009, the
Company provided EPA with its initial response to the
Information Request. The Company has subsequently provided
additional information to, and met with, EPA and the Tennessee
Department of Environment and Conservation. At this time, the
Company cannot predict or determine the outcome of this matter
or reasonably estimate the amount or range of amounts of fines
or penalties, if any, that might result from an adverse outcome.
|
|
10.
|
Accounting
Developments
|
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment requires greater transparency and additional
disclosures for transfers of financial assets and the
entitys continuing involvement with them and changes the
requirements for derecognizing financial assets. In addition,
this amendment eliminates the concept of a qualifying
special-purpose entity (QSPE). This amendment is
effective for financial statements issued for fiscal years
beginning after November 15, 2009. The Companys
adoption of this amendment did not have a material effect on its
financial statements.
In June 2009, the FASB also issued an amendment to the
accounting and disclosure requirements for the consolidation of
variable interest entities (VIEs). The elimination
of the concept of a QSPE, as discussed above, removes the
exception from applying the consolidation guidance within this
amendment. This amendment requires an enterprise to perform a
qualitative analysis when determining whether or not it must
consolidate a VIE. The amendment also requires an enterprise to
continuously reassess whether it must consolidate a VIE.
Additionally, the amendment requires enhanced disclosures about
an enterprises involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how
its involvement with VIEs impacts the enterprises
financial statements. Finally, an enterprise will be required to
disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective
for financial statements issued for fiscal
21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years beginning after November 15, 2009. The Companys
adoption of this amendment did not have a material effect on its
financial statements.
During the first quarter of 2010, the Companys effective
income tax rate was 75.3%. This rate varied from the statutory
rate of 35% due primarily to losses on foreign subsidiaries with
no tax benefit, stock compensation and state taxes.
During the first quarter of 2009, the Companys effective
income tax was a benefit of 36.1%. This rate is greater than the
statutory rate of 35% due primarily to benefits from research
credits, tax-exempt interest income and domestic manufacturing
deductions, which benefits were partially offset by state taxes.
The Companys business is classified into four reportable
segments: branded prescription pharmaceuticals, animal health,
Meridian Auto-Injector, and royalties and other. The branded
prescription pharmaceuticals segment includes a variety of
branded prescription products that are separately categorized
into neuroscience, hospital and legacy products. These branded
prescription products are aggregated because of the similarity
in regulatory environment, manufacturing processes, methods of
distribution and types of customer. The animal health business
is a global leader in the development, registration, manufacture
and marketing of medicated feed additives and water soluble
therapeutics primarily for poultry, cattle and swine. Meridian
Auto-Injector products are sold to both commercial and
government markets. The principal source of revenues in the
commercial market is the
EpiPen®
product, an epinephrine filled auto-injector which is primarily
prescribed for the treatment of severe allergic reactions and
which is primarily marketed, distributed and sold by Dey, L.P.
Government revenues in the Meridian Auto-Injector segment are
principally derived from the sale of nerve agent antidotes and
other emergency medicine auto-injector products marketed to the
U.S. Department of Defense and other federal, state and
local agencies, particularly those involved in homeland
security, as well as to approved foreign governments. Royalties
and other primarily include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments.
The Company primarily evaluates its segments based on segment
profit. Reportable segments were separately identified based on
revenues and segment profit. Segment profits are defined as
operating income (loss) before other expenses such as
depreciation, amortization, restructuring charges and expenses
associated with the acquisition of Alpharma. Additionally,
segment profits do not include general corporate expenses, which
are included in the Corporate line in the table
below. Prior year results have been conformed to the current
presentation.
22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
241,541
|
|
|
$
|
277,704
|
|
Animal Health
|
|
|
81,314
|
|
|
|
79,835
|
|
Meridian Auto-Injector
|
|
|
49,827
|
|
|
|
56,607
|
|
Royalties and other
|
|
|
8,644
|
|
|
|
16,147
|
|
Eliminations
|
|
|
(471
|
)
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
380,855
|
|
|
$
|
429,057
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals(1)
|
|
$
|
63,177
|
|
|
$
|
105,317
|
|
Animal Health(1)
|
|
|
17,463
|
|
|
|
33
|
|
Meridian Auto-Injector
|
|
|
23,841
|
|
|
|
26,885
|
|
Royalties and other
|
|
|
7,369
|
|
|
|
13,218
|
|
Corporate Costs
|
|
|
(26,848
|
)
|
|
|
(33,125
|
)
|
Acquisition related costs
|
|
|
|
|
|
|
(3,789
|
)
|
Depreciation and amortization
|
|
|
(57,275
|
)
|
|
|
(53,349
|
)
|
Restructuring charges
|
|
|
(262
|
)
|
|
|
(48,050
|
)
|
Other income (expense)
|
|
|
(9,402
|
)
|
|
|
(23,917
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
$
|
18,063
|
|
|
$
|
(16,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The segment profit for branded prescription pharmaceuticals and
Animal Health for the first quarter of 2009 includes additional
costs of $1,015 and $20,509, respectively, related to the mark
up of inventory upon acquisition of Alpharma, which the Company
recognized as the related inventory was sold. |
The following represents branded pharmaceutical revenues by the
Companys target markets:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
$
|
155,697
|
|
|
$
|
157,101
|
|
Hospital
|
|
|
39,955
|
|
|
|
51,959
|
|
Legacy:
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
28,150
|
|
|
|
44,968
|
|
Other
|
|
|
17,739
|
|
|
|
23,676
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded prescription pharmaceutical revenues
|
|
$
|
241,541
|
|
|
$
|
277,704
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Restructuring
Activities
|
First
Quarter of 2009 Action
On January 20, 2009, the U.S. District Court for the
Eastern District of New York issued an order ruling invalid two
patents relating to the Companys product
Skelaxin®.
In June 2009, the Court entered judgment against the Company.
The Company has appealed the judgment, and intends to vigorously
defend its interests. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010. The
Companys sales of
Skelaxin®
will decline significantly as a result of generic competition.
For additional information regarding
Skelaxin®
litigation, please see Note 9.
23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following the decision of the District Court, the Companys
senior management team conducted an extensive examination of the
Company and developed a restructuring initiative. Based on an
analysis of the Companys strategic needs, this initiative
included a reduction in sales, marketing and other personnel;
leveraging of staff; expense reductions and additional controls
over spending; and reorganization of sales teams.
The Company incurred restructuring charges of approximately
$50,000 associated with this restructuring plan related to
severance pay and other employee termination expenses. Almost
all of the restructuring charges were cash expenditures and were
substantially paid in the second quarter of 2009. The remaining
severance pay and other employee termination costs are expected
to be fully paid by the second quarter of 2010.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 380 members of our
sales force.
Fourth
Quarter of 2008 Action
As part of the acquisition of Alpharma, management developed a
restructuring plan to eliminate redundancies in operations
created by the acquisition. This plan includes a reduction in
personnel, staff leverage, reductions in duplicate expenses and
a realignment of research and development priorities.
The Company has estimated total costs of $71,106 associated with
this restructuring plan, $64,516 of which was included in the
liabilities assumed in the purchase price of Alpharma. The
restructuring plan includes employee termination costs
associated with a workforce reduction of 250 employees. The
restructuring plan also includes contract termination costs of
$16,652 as a result of the acquisition. All employee termination
costs are expected to be paid by the end of 2012. All contract
termination costs are expected to be paid by the end of 2018.
Third
Quarter of 2006 Action
During 2006, the Company decided to streamline its manufacturing
activities in order to improve operating efficiency and reduce
costs, including the decision to transfer the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility, which the Company expects to complete in
2010. As a result of these steps, the Company incurred
restructuring charges totaling approximately $16,500, of which
approximately $12,000 are associated with accelerated
depreciation and approximately $4,500 are associated with
employee termination costs. The employee termination costs are
expected to be fully paid in the third quarter of 2010.
A summary of the types of costs accrued and incurred are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Impact
|
|
|
Payments
|
|
|
Costs
|
|
|
2010
|
|
|
Third quarter of 2009 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
1,080
|
|
|
$
|
51
|
|
|
$
|
996
|
|
|
$
|
|
|
|
$
|
135
|
|
First quarter of 2009 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
314
|
|
|
|
18
|
|
|
|
283
|
|
|
|
|
|
|
|
49
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
Fourth quarter of 2008 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
16,177
|
|
|
|
(95
|
)
|
|
|
5,448
|
|
|
|
(353
|
)
|
|
|
10,987
|
|
Contract termination
|
|
|
9,193
|
|
|
|
459
|
|
|
|
724
|
|
|
|
(252
|
)
|
|
|
9,180
|
|
Other
|
|
|
182
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter of 2006 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
1,185
|
|
|
|
11
|
|
|
|
15
|
|
|
|
11
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,131
|
|
|
$
|
217
|
|
|
$
|
7,466
|
|
|
$
|
(639
|
)
|
|
$
|
21,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Condensed
Consolidated Statements of Operations. |
The restructuring charges in 2010 relate primarily to the
branded prescription pharmaceutical segment.
24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Stock-Based
Compensation
|
During the first quarter of 2010, the Company granted to certain
employees 650,370 RSAs, 452,530 LPUs with a one-year performance
cycle, 193,930 LPUs with a three-year performance cycle, 16,550
restricted stock units (RSUs), and 1,770,260
nonqualified stock options under its Incentive Plan.
The RSAs are grants of shares of common stock restricted from
sale or transfer for three years from grant date.
The LPUs are rights to receive common stock of the Company in
which the number of shares ultimately received depends on the
Companys performance over time. LPUs with a one-year
performance cycle, followed by a two-year restriction period,
will be earned based on 2010 operating targets. LPUs with a
three-year performance cycle will be earned based on
market-related performance targets over the years 2010 through
2012. At the end of the applicable performance period, the
number of shares of common stock awarded is either 0% or between
50% and 200% of a target number. The final performance
percentage on which the number of shares of common stock issued
is based, considering performance metrics established for the
performance period, will be determined by the Companys
Board of Directors or a committee of the Board at its sole
discretion.
RSUs represent the right to receive a share of common stock at
the expiration of a restriction period, generally three years
from grant, but may be restricted over other designated periods
as determined by the Companys Board of Directors or a
committee of the Board. The RSUs granted to non-employee
directors under the current Compensation Policy for Non-Employee
Directors have a restriction period that generally ends one year
after the date of the grant, unless a deferral election is made
in advance.
The nonqualified stock options were granted at option prices
equal to the fair market value of the common stock at the date
of grant and vest approximately in one-third increments on each
of the first three anniversaries of the grant date.
|
|
15.
|
Guarantor
Financial Statements
|
Each of the Companys U.S. subsidiaries (the
Guarantor Subsidiaries) guaranteed on a full,
unconditional and joint and several basis the Companys
performance under the $400,000 aggregate principal amount of the
Convertible Senior Notes.
There are no restrictions under the Companys current
financing arrangements on the ability of the Guarantor
Subsidiaries to distribute funds to the Company in the form of
cash dividends, loans or advances. The following combined
financial data provides information regarding the financial
position, results of operations and cash flows of the Guarantor
Subsidiaries for the $400,000 aggregate principal amount of the
Convertible Senior Notes (condensed consolidating financial
data). Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because
management has determined that such information would not be
material to the holders of the debt.
25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
201,115
|
|
|
$
|
36,836
|
|
|
$
|
233,812
|
|
|
$
|
|
|
|
$
|
471,763
|
|
|
$
|
277,603
|
|
|
$
|
30,779
|
|
|
$
|
236,930
|
|
|
$
|
|
|
|
$
|
545,312
|
|
Investments in debt securities
|
|
|
27,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,127
|
|
|
|
29,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,258
|
|
Marketable securities
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100
|
|
Accounts receivable, net
|
|
|
2,509
|
|
|
|
170,560
|
|
|
|
33,993
|
|
|
|
|
|
|
|
207,062
|
|
|
|
2,467
|
|
|
|
174,713
|
|
|
|
33,076
|
|
|
|
|
|
|
|
210,256
|
|
Inventories
|
|
|
42,451
|
|
|
|
114,626
|
|
|
|
33,956
|
|
|
|
(2,389
|
)
|
|
|
188,644
|
|
|
|
43,834
|
|
|
|
111,242
|
|
|
|
28,642
|
|
|
|
(1,427
|
)
|
|
|
182,291
|
|
Deferred income tax assets
|
|
|
29,735
|
|
|
|
49,207
|
|
|
|
254
|
|
|
|
|
|
|
|
79,196
|
|
|
|
30,828
|
|
|
|
52,597
|
|
|
|
250
|
|
|
|
|
|
|
|
83,675
|
|
Income tax receivable
|
|
|
19,369
|
|
|
|
(579
|
)
|
|
|
(532
|
)
|
|
|
|
|
|
|
18,258
|
|
|
|
17,983
|
|
|
|
(1,865
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
16,091
|
|
Prepaid expenses and other current assets
|
|
|
14,608
|
|
|
|
33,809
|
|
|
|
1,486
|
|
|
|
|
|
|
|
49,903
|
|
|
|
14,972
|
|
|
|
44,384
|
|
|
|
1,504
|
|
|
|
|
|
|
|
60,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
338,390
|
|
|
|
404,459
|
|
|
|
302,969
|
|
|
|
(2,389
|
)
|
|
|
1,043,429
|
|
|
|
419,045
|
|
|
|
411,850
|
|
|
|
300,375
|
|
|
|
(1,427
|
)
|
|
|
1,129,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
144,303
|
|
|
|
228,387
|
|
|
|
8,680
|
|
|
|
|
|
|
|
381,370
|
|
|
|
148,399
|
|
|
|
234,233
|
|
|
|
9,207
|
|
|
|
|
|
|
|
391,839
|
|
Intangible assets, net
|
|
|
|
|
|
|
721,270
|
|
|
|
33,991
|
|
|
|
|
|
|
|
755,261
|
|
|
|
|
|
|
|
759,583
|
|
|
|
34,556
|
|
|
|
|
|
|
|
794,139
|
|
Goodwill
|
|
|
|
|
|
|
467,613
|
|
|
|
|
|
|
|
|
|
|
|
467,613
|
|
|
|
|
|
|
|
467,613
|
|
|
|
|
|
|
|
|
|
|
|
467,613
|
|
Deferred income tax assets
|
|
|
(30,929
|
)
|
|
|
287,155
|
|
|
|
602
|
|
|
|
|
|
|
|
256,828
|
|
|
|
(26,551
|
)
|
|
|
290,104
|
|
|
|
609
|
|
|
|
|
|
|
|
264,162
|
|
Investments in debt securitiess
|
|
|
204,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,785
|
|
|
|
218,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,608
|
|
Other assets
|
|
|
36,481
|
|
|
|
22,763
|
|
|
|
340
|
|
|
|
|
|
|
|
59,584
|
|
|
|
32,368
|
|
|
|
23,795
|
|
|
|
333
|
|
|
|
|
|
|
|
56,496
|
|
Assets held for sale
|
|
|
|
|
|
|
5,890
|
|
|
|
|
|
|
|
|
|
|
|
5,890
|
|
|
|
|
|
|
|
5,890
|
|
|
|
|
|
|
|
|
|
|
|
5,890
|
|
Investments in subsidiaries
|
|
|
3,026,310
|
|
|
|
908,086
|
|
|
|
(109
|
)
|
|
|
(3,934,287
|
)
|
|
|
|
|
|
|
3,027,491
|
|
|
|
938,020
|
|
|
|
(88
|
)
|
|
|
(3,965,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,719,340
|
|
|
$
|
3,045,623
|
|
|
$
|
346,473
|
|
|
$
|
(3,936,676
|
)
|
|
$
|
3,174,760
|
|
|
$
|
3,819,360
|
|
|
$
|
3,131,088
|
|
|
$
|
344,992
|
|
|
$
|
(3,966,850
|
)
|
|
$
|
3,328,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
33,444
|
|
|
$
|
50,315
|
|
|
$
|
6,035
|
|
|
$
|
|
|
|
$
|
89,794
|
|
|
$
|
27,377
|
|
|
$
|
53,966
|
|
|
$
|
5,349
|
|
|
$
|
|
|
|
$
|
86,692
|
|
Accrued expenses
|
|
|
18,631
|
|
|
|
216,702
|
|
|
|
9,520
|
|
|
|
|
|
|
|
244,853
|
|
|
|
31,541
|
|
|
|
279,662
|
|
|
|
9,789
|
|
|
|
|
|
|
|
320,992
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
3,369
|
|
|
|
|
|
|
|
3,369
|
|
|
|
|
|
|
|
|
|
|
|
3,662
|
|
|
|
|
|
|
|
3,662
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
52,075
|
|
|
|
267,017
|
|
|
|
18,924
|
|
|
|
|
|
|
|
338,016
|
|
|
|
144,468
|
|
|
|
333,628
|
|
|
|
18,800
|
|
|
|
|
|
|
|
496,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
336,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,978
|
|
|
|
339,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,016
|
|
Other liabilities
|
|
|
66,601
|
|
|
|
47,499
|
|
|
|
14,138
|
|
|
|
|
|
|
|
128,238
|
|
|
|
59,884
|
|
|
|
48,579
|
|
|
|
14,908
|
|
|
|
|
|
|
|
123,371
|
|
Intercompany payable (receivable)
|
|
|
892,158
|
|
|
|
(927,927
|
)
|
|
|
35,769
|
|
|
|
|
|
|
|
|
|
|
|
906,685
|
|
|
|
(932,193
|
)
|
|
|
25,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,347,812
|
|
|
|
(613,411
|
)
|
|
|
68,831
|
|
|
|
|
|
|
|
803,232
|
|
|
|
1,450,053
|
|
|
|
(549,986
|
)
|
|
|
59,216
|
|
|
|
|
|
|
|
959,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,371,528
|
|
|
|
3,659,034
|
|
|
|
277,642
|
|
|
|
(3,936,676
|
)
|
|
|
2,371,528
|
|
|
|
2,369,307
|
|
|
|
3,681,074
|
|
|
|
285,776
|
|
|
|
(3,966,850
|
)
|
|
|
2,369,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,719,340
|
|
|
$
|
3,045,623
|
|
|
$
|
346,473
|
|
|
$
|
(3,936,676
|
)
|
|
$
|
3,174,760
|
|
|
$
|
3,819,360
|
|
|
$
|
3,131,088
|
|
|
$
|
344,992
|
|
|
$
|
(3,966,850
|
)
|
|
$
|
3,328,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
92,938
|
|
|
$
|
356,794
|
|
|
$
|
37,442
|
|
|
$
|
(114,109
|
)
|
|
$
|
373,065
|
|
|
$
|
95,149
|
|
|
$
|
397,356
|
|
|
$
|
30,477
|
|
|
$
|
(108,683
|
)
|
|
$
|
414,299
|
|
Royalty revenue
|
|
|
|
|
|
|
7,790
|
|
|
|
|
|
|
|
|
|
|
|
7,790
|
|
|
|
|
|
|
|
14,758
|
|
|
|
|
|
|
|
|
|
|
|
14,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
92,938
|
|
|
|
364,584
|
|
|
|
37,442
|
|
|
|
(114,109
|
)
|
|
|
380,855
|
|
|
|
95,149
|
|
|
|
412,114
|
|
|
|
30,477
|
|
|
|
(108,683
|
)
|
|
|
429,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
19,737
|
|
|
|
197,575
|
|
|
|
22,044
|
|
|
|
(112,302
|
)
|
|
|
127,054
|
|
|
|
26,930
|
|
|
|
209,395
|
|
|
|
23,101
|
|
|
|
(108,487
|
)
|
|
|
150,939
|
|
Selling, general and administrative
|
|
|
49,764
|
|
|
|
82,838
|
|
|
|
7,873
|
|
|
|
|
|
|
|
140,475
|
|
|
|
59,419
|
|
|
|
76,219
|
|
|
|
6,685
|
|
|
|
|
|
|
|
142,323
|
|
Research and development
|
|
|
2,184
|
|
|
|
24,714
|
|
|
|
1,426
|
|
|
|
|
|
|
|
28,324
|
|
|
|
1,609
|
|
|
|
24,327
|
|
|
|
1,320
|
|
|
|
|
|
|
|
27,256
|
|
Depreciation and amortization
|
|
|
6,174
|
|
|
|
50,200
|
|
|
|
901
|
|
|
|
|
|
|
|
57,275
|
|
|
|
4,857
|
|
|
|
47,946
|
|
|
|
546
|
|
|
|
|
|
|
|
53,349
|
|
Restructuring charges
|
|
|
2
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
13,504
|
|
|
|
34,546
|
|
|
|
|
|
|
|
|
|
|
|
48,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
77,861
|
|
|
|
355,587
|
|
|
|
32,244
|
|
|
|
(112,302
|
)
|
|
|
353,390
|
|
|
|
106,319
|
|
|
|
392,433
|
|
|
|
31,652
|
|
|
|
(108,487
|
)
|
|
|
421,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
15,077
|
|
|
|
8,997
|
|
|
|
5,198
|
|
|
|
(1,807
|
)
|
|
|
27,465
|
|
|
|
(11,170
|
)
|
|
|
19,681
|
|
|
|
(1,175
|
)
|
|
|
(196
|
)
|
|
|
7,140
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
279
|
|
|
|
50
|
|
|
|
80
|
|
|
|
|
|
|
|
409
|
|
|
|
1,449
|
|
|
|
267
|
|
|
|
1,072
|
|
|
|
|
|
|
|
2,788
|
|
Interest expense
|
|
|
(7,701
|
)
|
|
|
(988
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
(8,736
|
)
|
|
|
(22,066
|
)
|
|
|
(961
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
(23,103
|
)
|
Loss on investments
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(872
|
)
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823
|
)
|
Other, net
|
|
|
93
|
|
|
|
137
|
|
|
|
(433
|
)
|
|
|
|
|
|
|
(203
|
)
|
|
|
(441
|
)
|
|
|
(99
|
)
|
|
|
(2,239
|
)
|
|
|
|
|
|
|
(2,779
|
)
|
Equity in earnings (loss) of subsidiaries
|
|
|
4,461
|
|
|
|
2,760
|
|
|
|
(20
|
)
|
|
|
(7,201
|
)
|
|
|
|
|
|
|
12,618
|
|
|
|
7,810
|
|
|
|
(20
|
)
|
|
|
(20,408
|
)
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(2,093
|
)
|
|
|
7,557
|
|
|
|
(5,464
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,391
|
)
|
|
|
3,748
|
|
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(5,833
|
)
|
|
|
9,516
|
|
|
|
(5,884
|
)
|
|
|
(7,201
|
)
|
|
|
(9,402
|
)
|
|
|
(10,654
|
)
|
|
|
10,765
|
|
|
|
(3,620
|
)
|
|
|
(20,408
|
)
|
|
|
(23,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
9,244
|
|
|
|
18,513
|
|
|
|
(686
|
)
|
|
|
(9,008
|
)
|
|
|
18,063
|
|
|
|
(21,824
|
)
|
|
|
30,446
|
|
|
|
(4,795
|
)
|
|
|
(20,604
|
)
|
|
|
(16,777
|
)
|
Income tax expense (benefit)
|
|
|
4,775
|
|
|
|
7,871
|
|
|
|
948
|
|
|
|
|
|
|
|
13,594
|
|
|
|
(11,102
|
)
|
|
|
5,984
|
|
|
|
(937
|
)
|
|
|
|
|
|
|
(6,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,469
|
|
|
$
|
10,642
|
|
|
$
|
(1,634
|
)
|
|
$
|
(9,008
|
)
|
|
$
|
4,469
|
|
|
$
|
(10,722
|
)
|
|
$
|
24,462
|
|
|
$
|
(3,858
|
)
|
|
$
|
(20,604
|
)
|
|
$
|
(10,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
18,877
|
|
|
$
|
(12,301
|
)
|
|
$
|
(8,377
|
)
|
|
$
|
(1,801
|
)
|
|
$
|
(22,649
|
)
|
|
$
|
49,858
|
|
|
$
|
(15,875
|
)
|
|
$
|
11,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to restricted cash
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(38
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(65
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
16,810
|
|
|
|
|
|
|
|
|
|
|
|
16,810
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Purchases of property, plant and equipment
|
|
|
(4,344
|
)
|
|
|
(3,361
|
)
|
|
|
(88
|
)
|
|
|
(7,793
|
)
|
|
|
(4,681
|
)
|
|
|
(2,099
|
)
|
|
|
(112
|
)
|
|
|
(6,892
|
)
|
Proceeds from the sale of
Kadian®
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Alpharma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,104
|
)
|
|
|
(56,602
|
)
|
|
|
|
|
|
|
(69,706
|
)
|
Acquisition of
Avinza®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Forward foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,406
|
|
|
|
5,406
|
|
Purchases of intellectual property and product rights
|
|
|
|
|
|
|
(504
|
)
|
|
|
|
|
|
|
(504
|
)
|
|
|
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
12,463
|
|
|
|
16,208
|
|
|
|
(88
|
)
|
|
|
28,583
|
|
|
|
(9,824
|
)
|
|
|
(59,276
|
)
|
|
|
5,294
|
|
|
|
(63,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
742
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Net (payments) proceeds related to stock-based award activity
|
|
|
(3,905
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,905
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
Payments on debt
|
|
|
(92,261
|
)
|
|
|
|
|
|
|
(293
|
)
|
|
|
(92,554
|
)
|
|
|
(48,022
|
)
|
|
|
(385,227
|
)
|
|
|
|
|
|
|
(433,249
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,220
|
)
|
Intercompany
|
|
|
(12,404
|
)
|
|
|
2,150
|
|
|
|
10,254
|
|
|
|
|
|
|
|
(119,091
|
)
|
|
|
116,338
|
|
|
|
2,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(107,828
|
)
|
|
|
2,150
|
|
|
|
9,961
|
|
|
|
(95,717
|
)
|
|
|
(170,297
|
)
|
|
|
(268,889
|
)
|
|
|
2,753
|
|
|
|
(436,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
(4,614
|
)
|
|
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,514
|
)
|
|
|
(14,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(76,488
|
)
|
|
|
6,057
|
|
|
|
(3,118
|
)
|
|
|
(73,549
|
)
|
|
|
(202,770
|
)
|
|
|
(278,307
|
)
|
|
|
(22,342
|
)
|
|
|
(503,419
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
277,603
|
|
|
|
30,779
|
|
|
|
236,930
|
|
|
|
545,312
|
|
|
|
401,657
|
|
|
|
289,996
|
|
|
|
248,559
|
|
|
|
940,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
201,115
|
|
|
$
|
36,836
|
|
|
$
|
233,812
|
|
|
$
|
471,763
|
|
|
$
|
198,887
|
|
|
$
|
11,689
|
|
|
$
|
226,217
|
|
|
$
|
436,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) our audited
consolidated financial statements and related notes which are
included in our Annual Report on
Form 10-K
for the year ended December 31, 2009; and (b) our
unaudited condensed consolidated financial statements and
related notes which are included in this Quarterly Report on
Form 10-Q.
Please see the sections entitled Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2009, and Risk
Factors and A Warning About Forward-Looking
Statements in this Quarterly Report on
Form 10-Q
for a discussion of the uncertainties, risks and assumptions
associated with these statements.
Our
Business
We are a vertically integrated pharmaceutical company that
performs basic research and develops, manufactures, markets and
sells branded prescription pharmaceutical products and animal
health products. By vertically integrated, we mean
that we have the following capabilities:
|
|
|
|
|
research and development
|
|
|
|
manufacturing
|
|
|
|
packaging
|
|
|
|
quality control and assurance
|
|
|
|
distribution
|
|
|
|
sales and marketing
|
|
|
|
business development
|
|
|
|
regulatory management
|
Branded prescription pharmaceutical products are innovative
products sold under a brand name that have, or previously had,
some degree of market exclusivity. Our branded prescription
pharmaceuticals include neuroscience products (primarily pain
medicines), hospital products, and legacy brands, all of which
are for use in humans. Our auto-injector business manufactures
acute care medicines for use in humans that are delivered using
an auto-injector. Our animal health business is focused on
medicated feed additives (MFAs) and water-soluble
therapeutics primarily for poultry, cattle, and swine.
Our corporate strategy is focused on specialty markets,
particularly specialty-driven branded prescription
pharmaceutical markets. We believe our target markets have
significant potential, and our organization is aligned to focus
on these markets. Our growth in specialty markets is achieved
through both acquisitions and organic growth. Our strategy
focuses on growth through the acquisition of novel branded
prescription pharmaceutical products and technologies that we
believe complement the commercial footprint we have established
in the neuroscience and hospital markets. We strive to be a
leader in developing and commercializing innovative,
clinically-differentiated therapies and technologies in these
target, specialty-driven markets. We may also seek company
acquisitions that add commercialized products or products in
development, technologies or sales and marketing capabilities to
our existing platforms or that otherwise complement our
operations. We also have a commitment to research and
development and advancing the products and technologies in our
development pipeline.
We work to achieve organic growth by maximizing the potential of
our currently marketed products through sales and marketing and
product life-cycle management. By product life-cycle
management, we mean the extension of the economic life of
products, including seeking and obtaining necessary governmental
approvals, by securing from the U.S. Food and Drug
Administration (FDA) additional approved uses for
our products, developing and producing different strengths,
producing different package sizes, developing new dosage forms,
and developing new product formulations.
We market our branded prescription pharmaceutical products,
primarily through a dedicated sales force, to general/family
practitioners, internal medicine physicians, neurologists, pain
specialists, surgeons and hospitals across the United States and
in Puerto Rico.
Through a team of internal sales professionals, our
auto-injector business markets a portfolio of acute care
auto-injector products to the pre-hospital emergency services
market, which includes U.S. federal, state and local
governments, public health services, emergency medical personnel
and first responders and approved foreign governments.
29
Our animal health products of our wholly-owned subsidiary
Alpharma, LLC (Alpharma) are marketed through a
staff of trained sales and technical service and marketing
employees, many of whom are veterinarians and nutritionists.
Sales offices are located in the U.S., Europe, Canada, Mexico,
South America and Asia. Elsewhere, our animal health products
are sold primarily through the use of distributors and other
third-party sales companies.
Recent
Developments
Acurox®
Tablets
Acurox®
Tablets, a patented, orally administered, immediate release
tablet containing oxycodone HCl as its sole active analgesic
ingredient, has a proposed indication for the relief of moderate
to severe pain.
Acurox®
uses Acura Pharmaceuticals Inc.s (Acura)
patented
Aversion®
Technology, which is designed to deter misuse and abuse by
intentional swallowing of excess quantities of tablets,
intravenous injection of dissolved tablets and nasal snorting of
crushed tablets. Attempts to extract oxycodone from an
Acurox®
Tablet by dissolving it in liquid result in the formation of a
viscous gel which is intended to limit the ability to inject the
drug intravenously. Crushing an
Acurox®
Tablet for the purposes of nasal snorting releases an ingredient
that is intended to cause nasal irritation and thereby
discourage this method of misuse and abuse. Swallowing excessive
numbers of
Acurox®
Tablets releases niacin in quantities that are intended to cause
unpleasant and undesirable side effects.
On June 30, 2009, the FDA issued a Complete Response Letter
regarding the New Drug Application (NDA) for
Acurox®
Tablets. The Complete Response Letter raises issues regarding
the potential abuse deterrent benefits of
Acurox®.
In early September 2009, we and Acura met with the FDA to
discuss the Complete Response Letter. The FDA, Acura and we
agreed to submit the NDA to an FDA advisory committee to
consider the evidence to support the potential abuse deterrent
effects of
Acurox®
Tablets when compared to other currently marketed short-acting
oxycodone opioid products. On April 22, 2010, the FDA held
an advisory committee meeting to review the NDA related to
Acurox®.
The advisory committee voted that they did not have sufficient
evidence to support the approval of the NDA for
Acurox®
Tablets for the treatment of moderate to severe pain. The
addition of niacin to
Acurox®
was central to the deliberations. The advisory committee did not
believe that the benefits of niacin outweighed the potential
risks for a broad treatment population. The FDA is not bound by
the advisory committees recommendation, but may take its
advice into consideration when evaluating the NDA for
Acurox®
Tablets.
Acurox®
Tablets (without niacin)
Acura and King plan to develop and submit an NDA for
Acurox®
(oxycodone HC1) Tablets (without niacin) intended to relieve
moderate to severe pain and introduce limits and impediments to
potential abuse via nasal snorting of crushed tablets and
intravenous injection of dissolved tablets. At the
April 22, 2010 advisory committee meeting, the FDA cited no
concerns with the snorting and intravenous abuse limiting
features of the current
Acurox®
Tablets formulation. The Companies expect to submit an NDA for
Acurox®
Tablets (without niacin) in early 2011.
Acura and King also plan to develop and submit NDAs for
two additional immediate release opioid analgesic products
utilizing Acuras proprietary
Aversion®
Technology;
Vycavert®
(hydrocodone bitartrate/acetaminophen) Tablets and
Acuracet®
(oxycodone HCl/acetaminophen) Tablets. Like
Acurox®
Tablets (without niacin) these additional product candidates are
patent protected compositions comprising a mixture of active and
inactive ingredients intended to relieve pain and introduce
limits and impediments to nasal and intravenous abuse.
Department
of Justice Investigation
As previously disclosed, Alpharma, acquired by us in December
2008, received a subpoena from the Department of Justice
(DOJ) in February 2007 in connection with its
investigation of alleged improper sales and marketing practices
related to the sale of the pain medicine
Kadian®.
We divested Alpharmas
Kadian®
assets to Actavis LLC simultaneously with the closing of the
acquisition of Alpharma.
In September 2009, we reached an agreement in principle with the
U.S. Attorneys Office and DOJ which would resolve
this investigation. We recorded a reserve of $42.5 million
in connection with this development in the third quarter of 2009
as an adjustment to the goodwill associated with the purchase of
Alpharma. During the first quarter of 2010, Alpharma entered
into a definitive settlement agreement and paid
$42.5 million plus interest of $0.6 million to DOJ, of
which $8.9 million plus interest of $0.1 million is related
to certain states.
30
Skelaxin®
On January 20, 2009, the U.S. District Court for the
Eastern District of New York issued an order ruling invalid two
patents related to
Skelaxin®.
In June 2009, the Court entered judgment against King. We have
appealed the judgment and plan to vigorously defend our
interests. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010, one of
which is a generic product sold by CorePharma, LLC
(CorePharma). Net sales of
Skelaxin®
will decline significantly as a result of generic competition.
According to IMS America, Ltd. (IMS) weekly
prescription data, for the week ending April 23, 2010,
generic competitors have garnered just over 80% of the
prescriptions in the metaxalone market. In January 2008, we
entered into an agreement with CorePharma, granting CorePharma a
license to launch an authorized generic version of
Skelaxin®
in December 2012, or earlier under certain conditions.
For additional information on the
Skelaxin®
litigation, please see Note 9, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Patient
Protection and Affordable Care Act
On March 23, 2010, the Patient Protection and Affordable
Care Act (PPACA) was signed into law. We expect that
the new legislation will increase Medicaid rebates paid by us in
the future, primarily due to an increase in Medicaid rebate
rates, changes to the calculation of Medicaid rebates for new
formulations of existing products, and an expansion of Medicaid
rebates to products supplied to enrollees of Medicaid managed
care organizations. While the increase in Medicaid rebate rates
and the changes to the calculation of Medicaid rebates for new
formulations of existing products were effective on
January 1, 2010 and are therefore reflected in the first
quarter 2010 provision for rebates, the expansion of the
Medicaid program to enrollees of Medicaid managed care
organizations was not effective until March 23, 2010.
Therefore, we anticipate an additional increase in Medicaid
rebates in the second quarter of 2010. For the full year of
2010, we expect Medicaid rebates to increase by approximately
$15.0 million as a result of the PPACA.
In addition, the PPACA will impose an annual fee on
pharmaceutical manufacturers beginning in 2011. The fee will be
payable no later than September 30 of each applicable year and
will be allocated to pharmaceutical manufacturers based on
relative market share.
|
|
II.
|
RESULTS
OF OPERATIONS
|
Three
Months Ended March 31, 2010 and 2009
Revenues
The following table summarizes total revenues by operating
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
241,541
|
|
|
$
|
277,704
|
|
|
$
|
(36,163
|
)
|
|
|
(13.0
|
)%
|
Animal Health
|
|
|
81,314
|
|
|
|
79,835
|
|
|
|
1,479
|
|
|
|
1.9
|
|
Meridian Auto-Injector
|
|
|
49,827
|
|
|
|
56,607
|
|
|
|
(6,780
|
)
|
|
|
(12.0
|
)
|
Royalties and other
|
|
|
8,173
|
|
|
|
14,911
|
|
|
|
(6,738
|
)
|
|
|
(45.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
380,855
|
|
|
$
|
429,057
|
|
|
$
|
(48,202
|
)
|
|
|
(11.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The following table summarizes our deductions from gross
revenues:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Gross Revenues
|
|
$
|
470,145
|
|
|
$
|
507,044
|
|
Commercial Rebates
|
|
|
15,929
|
|
|
|
15,459
|
|
Medicare Part D Rebates
|
|
|
3,765
|
|
|
|
2,539
|
|
Medicaid Rebates
|
|
|
10,940
|
|
|
|
11,623
|
|
Chargebacks
|
|
|
28,222
|
|
|
|
28,176
|
|
Returns
|
|
|
10,757
|
|
|
|
2,883
|
|
Trade Discounts/Other
|
|
|
19,677
|
|
|
|
17,307
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
380,855
|
|
|
$
|
429,057
|
|
|
|
|
|
|
|
|
|
|
Gross revenues decreased in the first quarter of 2010 compared
to the first quarter of 2009 primarily due to market competition
with several key products in the branded prescription
pharmaceuticals segment discussed below, and decreases in
revenues of the Meridian Auto-Injector and Royalties and other
segments.
Based on inventory data provided to us by our customers, we
believe that wholesale inventory levels of
Skelaxin®,
Thrombin-JMI®,
Flector®
Patch,
Avinza®,
Embeda®
and
Levoxyl®
are at or below normalized levels as of March 31, 2010. We
estimate that wholesale and retail inventories of our products
as of March 31, 2010 represent gross revenues of
approximately $120.0 million to $130.0 million.
The following tables provide the activity and ending balances
for our significant deductions from gross revenues:
Accrual
for Rebates, including Administrative Fees (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at January 1, net of prepaid amounts
|
|
$
|
44,439
|
|
|
$
|
58,129
|
|
Current provision related to sales made in current period
|
|
|
30,431
|
|
|
|
28,512
|
|
Current provision related to sales made in prior periods
|
|
|
203
|
|
|
|
1,109
|
|
Alpharma acquisition
|
|
|
(124
|
)
|
|
|
1,772
|
|
Rebates paid
|
|
|
(29,580
|
)
|
|
|
(34,482
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$
|
45,369
|
|
|
$
|
55,040
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial rebates and Medicaid and Medicare
rebates.
Accrual
for Returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at January 1
|
|
$
|
30,345
|
|
|
$
|
33,471
|
|
Current provision
|
|
|
10,757
|
|
|
|
2,883
|
|
Actual returns
|
|
|
(9,729
|
)
|
|
|
(4,646
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
31,373
|
|
|
$
|
31,708
|
|
|
|
|
|
|
|
|
|
|
32
Accrual
for Chargebacks (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at January 1
|
|
$
|
10,593
|
|
|
$
|
9,965
|
|
Current provision
|
|
|
28,222
|
|
|
|
28,176
|
|
Actual chargebacks
|
|
|
(28,589
|
)
|
|
|
(27,244
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
10,226
|
|
|
$
|
10,897
|
|
|
|
|
|
|
|
|
|
|
Branded
Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Branded prescription pharmaceuticals revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skelaxin®
|
|
$
|
90,917
|
|
|
$
|
100,599
|
|
|
$
|
(9,682
|
)
|
|
|
(9.6
|
)%
|
Thrombin-JMI®
|
|
|
36,932
|
|
|
|
47,339
|
|
|
|
(10,407
|
)
|
|
|
(22.0
|
)
|
Flector®
Patch
|
|
|
33,532
|
|
|
|
16,776
|
|
|
|
16,756
|
|
|
|
99.9
|
|
Avinza®
|
|
|
23,196
|
|
|
|
38,980
|
|
|
|
(15,784
|
)
|
|
|
(40.5
|
)
|
Embeda®
|
|
|
9,075
|
|
|
|
|
|
|
|
9,075
|
|
|
|
|
|
Levoxyl®
|
|
|
15,355
|
|
|
|
19,572
|
|
|
|
(4,217
|
)
|
|
|
(21.5
|
)
|
Other
|
|
|
32,534
|
|
|
|
54,438
|
|
|
|
(21,904
|
)
|
|
|
(40.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
241,541
|
|
|
$
|
277,704
|
|
|
$
|
(36,163
|
)
|
|
|
(13.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skelaxin®
Net sales of
Skelaxin®
decreased in the first quarter of 2010 from the first quarter of
2009 primarily due to a decrease in prescriptions, partially
offset by price increases taken in the second quarter of 2009
and the first quarter of 2010. Total prescriptions for
Skelaxin®
decreased approximately 24.9% in the first quarter of 2010 from
the first quarter of 2009 according to IMS monthly prescription
data primarily due to a decrease in promotional efforts.
Following the January 2009 court order, we completed a
restructuring initiative that reduced our promotional efforts
with respect to
Skelaxin®.
For additional information regarding the restructuring
initiative, please see
Skelaxin®
within the Liquidity and Capital Resources section
below. As a result of generic competition, we expect net sales
of
Skelaxin®
will decrease significantly in the last three quarters of 2010.
Thrombin-JMI®
Net sales of
Thrombin-JMI®
decreased in the first quarter of 2010 compared to the first
quarter of 2009 primarily due to market competition. The first
competing product entered the market in the fourth quarter of
2007 and another entered the market in the first quarter of
2008. We expect net sales of our
Thrombin-JMI®
product to decrease in 2010 as a result of competition.
Flector®
Patch
Net sales of
Flector®
Patch increased in the first quarter of 2010 from the first
quarter of 2009 primarily due to a significant reduction in
wholesale inventory levels in the first quarter of 2009, and
price increases taken in the second quarter of 2009 and the
first quarter of 2010, partially offset by a decrease in
prescriptions.
Flector®
Patch was part of the acquisition of Alpharma at the end of
December 2008. At the time of acquisition, the wholesale
inventory level of
Flector®
Patch exceeded our normal levels. During the first quarter of
2009, we reduced these inventories to a level consistent with
our other promoted products. As a result, net sales of
Flector®
Patch were lower than prescription demand in the first quarter
of 2009. Alpharma began selling the
Flector®
Patch in January 2008. Total prescriptions for
Flector®
Patch decreased approximately 3.3% in the first quarter of 2010
compared to the first quarter of 2009 according to IMS monthly
prescription data.
33
Avinza®
Net sales of
Avinza®
decreased in the first quarter of 2010 compared to the first
quarter of 2009 primarily due to a decrease in prescriptions and
an increase in wholesale inventory levels in the first quarter
of 2009, partially offset by a price increase taken in the
fourth quarter of 2009. Total prescriptions for
Avinza®
decreased approximately 26.8% in the first quarter of 2010
compared to the first quarter of 2009 according to IMS monthly
prescription data. We expect net sales of
Avinza®
to decrease in 2010 compared to 2009.
For a discussion regarding the risk of potential generic
competition for
Avinza®,
please see Note 9, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Embeda®
In August 2009, the FDA approved
Embeda®
(morphine sulfate and naltrexone hydrochloride) Extended Release
Capsules, a long-acting Schedule II opioid analgesic for
the management of moderate to severe pain when a continuous,
around-the-clock
opioid analgesic is needed for an extended period of time. We
began selling
Embeda®
in late September 2009, and we anticipate net sales of
Embeda®
will increase significantly in 2010. During the first quarter of
2010, we received approval of two patents on the product and
listed these in the FDAs Orange Book. These patents expire
in June 2027.
On October 8, 2009, we received a warning letter from the
FDA, Division of Drug Marketing, Advertising, and Communications
(DDMAC) regarding certain materials used to announce
the commercial launch of
Embeda®.
The letter indicated these materials were false or misleading
because they omitted and minimized the risks associated with the
use of
Embeda®,
failed to present the limitations to its approved indication,
and presented misleading claims. We ceased the dissemination of
these materials and took steps to conform other materials we
currently utilize with
Embeda®
to the guidance set forth in the warning letter. On
October 16, 2009, we responded to the warning letter,
providing DDMAC with a list of materials that were discontinued
and a comprehensive plan of action to appropriately disseminate
corrective messages to those that received the original
materials. We met with members of the FDA on December 22,
2009 to discuss the warning letter. On March 26, 2010, we
issued a corrective press release to address the issues raised
in the warning letter and DDMAC closed the case.
During January 2010, we submitted to DDMAC for pre-approval
proposed revised marketing materials for
Embeda®.
Levoxyl®
Net sales of
Levoxyl®
decreased in the first quarter of 2010 compared to the first
quarter of 2009 primarily due to increases in wholesale
inventory levels in 2009 and a decrease in prescriptions. Total
prescriptions for
Levoxyl®
decreased approximately 9.8% in the first quarter of 2010
compared to the first quarter of 2009 according to IMS monthly
prescription data. We anticipate net sales for this product will
decline in 2010 due to decreasing prescriptions.
Other
Our other branded prescription pharmaceutical products are not
promoted through our sales force and prescriptions for many of
our products included in this category are declining. Net sales
of other branded pharmaceutical products were lower in the first
quarter of 2010 compared to the first quarter of 2009 primarily
due to lower net sales of
Cytomel®
and a decrease in prescriptions.
In April 2009, a third party entered the market with a generic
substitute for
Cytomel®.
As a result of the entry of generic competition, net sales of
Cytomel®
declined in the first quarter of 2010 and we expect net sales of
Cytomel®
to continue to decline in the future. Net sales of
Cytomel®
were $5.3 million in the first quarter of 2010 and were
$13.9 million in the first quarter of 2009.
As a result of generic competition for
Cytomel®
and declining demand for many other products included in this
category, we anticipate net sales of other branded prescription
pharmaceutical products will continue to decline in 2010.
Animal
Health
Revenues of the Animal Health segment were consistent in the
first quarter of 2010 compared to the first quarter of 2009.
34
Meridian
Auto-Injector
Revenues from our Meridian Auto-Injector segment decreased in
the first quarter of 2010 compared to the first quarter of 2009
primarily due to lower unit sales of products sold to government
entities.
Revenues from the Meridian Auto-Injector segment fluctuate based
on the buying patterns of Dey, L.P. and government customers.
With respect to auto-injector products sold to government
entities, demand for these products is affected by the cyclical
nature of procurements as well as response to domestic and
international events. Demand for
EpiPen®
is seasonal as a result of its use in the emergency treatment of
allergic reactions for both insect stings or bites, more of
which occur in the warmer months, and food allergies, for which
demand increases in the months preceding the start of a new
school year. Most of our
EpiPen®
sales are based on our supply agreement with Dey, L.P., which
markets, distributes and sells the product worldwide, except for
Canada where it is marketed, distributed and sold by us. Total
prescriptions for
EpiPen®
in the United States increased approximately 6.5% in the first
quarter of 2010 compared to the first quarter of 2009 according
to IMS monthly prescription data.
Royalties
and other
Revenues from royalties are derived primarily from payments we
receive based on sales of
Adenoscan®.
We are not responsible for the marketing of this product.
On April 10, 2008, CV Therapeutics, Inc. and Astellas
Pharma US, Inc. (Astellas US) announced that the FDA
approved regadenoson injection, an A2A adenosine receptor
agonist product that competes with
Adenoscan®.
Regadenoson has been commercialized by Astellas US. Astellas US
is also responsible for the marketing and sale of
Adenoscan®
pursuant to agreements we have with Astellas US. With the
commercial launch of regadenoson, sales of Adenoscan and our
royalty revenue have declined and may continue to decline.
However, our agreements with Astellas US provide for minimum
royalty revenue payments to us of $40.0 million per year
for three years (beginning June 1, 2008 and ending
May 31, 2011). Therefore, we will continue to receive
royalties on the sale of
Adenoscan®
through expiration of the patents covering the product, although
the minimum guaranteed portion of the royalty payments would
terminate upon certain events, including a finding of invalidity
or unenforceability of the patents related to
Adenoscan®.
In October 2007, we entered into an agreement with Astellas US
and a subsidiary of Teva Pharmaceutical Industries Ltd.
providing Teva with the right to launch a generic version of
Adenoscan®
pursuant to a license in September 2012 or earlier under certain
conditions.
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Cost of revenues, exclusive of depreciation and amortization
|
|
$
|
127,054
|
|
|
$
|
150,939
|
|
|
$
|
(23,885
|
)
|
|
|
(15.8
|
)%
|
Selling, general and administrative
|
|
|
140,475
|
|
|
|
142,323
|
|
|
|
(1,848
|
)
|
|
|
(1.3
|
)
|
Research and development
|
|
|
28,324
|
|
|
|
27,256
|
|
|
|
1,068
|
|
|
|
3.9
|
|
Depreciation and amortization
|
|
|
57,275
|
|
|
|
53,349
|
|
|
|
3,926
|
|
|
|
7.4
|
|
Restructuring charges
|
|
|
262
|
|
|
|
48,050
|
|
|
|
(47,788
|
)
|
|
|
(99.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
353,390
|
|
|
$
|
421,917
|
|
|
$
|
(68,527
|
)
|
|
|
(16.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
Cost of revenues decreased in the first quarter of 2010 versus
the first quarter of 2009 primarily due to the decrease of a
special item related to the acquisition of Alpharma, as
described below, partially offset by costs associated with the
addition of
Embeda®,
which we began selling in late September 2009, and an increase
in the
Skelaxin®
royalty rate.
35
The royalty rate on
Skelaxin®
increased in the second quarter of 2009 due to the achievement
of certain regulatory milestones under our agreement with
Mutual. For additional information on the Mutual agreement,
please see Other within the Liquidity and
Capital Resources section below.
Special items are those particular material income or expense
items that our management believes are not related to our
ongoing, underlying business, are not recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and inventory valuation adjustment charges;
charges resulting from the early extinguishments of debt; asset
impairment charges; expenses of drug recalls; and gains and
losses resulting from the divestiture of assets. We believe the
identification of special items enhances an analysis of our
ongoing, underlying business and an analysis of our financial
results when comparing those results to that of a previous or
subsequent like period. However, it should be noted that the
determination of whether to classify an item as a special item
involves judgments by us.
At the time of the acquisition of Alpharma, we valued the
inventory that was acquired based on the accounting requirements
for business combinations. As a result, we increased the
carrying value of the
Flector®
Patch and Animal Health inventory by approximately
$42.1 million. During the first quarter of 2009, the cost
of revenues reflects a charge of $21.5 million related to
the sale of this marked up inventory.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2010 vs. 2009
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Selling, general and administrative
|
|
$
|
140,475
|
|
|
$
|
138,534
|
|
|
$
|
1,941
|
|
|
|
1.4
|
%
|
Acquisition related costs
|
|
|
|
|
|
|
3,789
|
|
|
|
(3,789
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
140,475
|
|
|
$
|
142,323
|
|
|
$
|
(1,848
|
)
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 36.9% and 33.2% in the first
quarter of 2010 and the first quarter of 2009, respectively.
Total selling, general and administrative expenses decreased in
the first quarter of 2010 compared to the first quarter of 2009
primarily due to a decrease in expenses resulting from the
integration of Alpharma, a restructuring initiative related to
Skelaxin®,
and a reduction in special charges, partially offset by an
increase in marketing due to the launch of
Embeda®.
Alpharma was purchased on December 29, 2008. The
integration of Alpharma was substantially completed by the end
of the first quarter of 2009. During the first quarter of 2009,
therefore, selling, general and administrative costs included
costs associated with Alpharma corporate and pharmaceutical
management division employees and related activities.
Following the January 2009 court order ruling invalid two
patents relating to
Skelaxin®,
our senior management team conducted an extensive examination of
our company and implemented a restructuring initiative. The
initiative included, based on an analysis of our strategic
needs: a reduction in sales, marketing and other personnel;
leveraging of staff; expense reductions and additional controls
over spending; and reorganization of sales teams.
We incurred a special charge in the first quarter of 2010 of
$1.7 million related to a litigation settlement offer and a
special charge of $3.8 million in the first quarter of 2009
for costs related to the acquisition and integration of Alpharma.
Research
and Development Expense
Research and development represents expense associated with the
ongoing development of investigational drugs and product
life-cycle management projects in our research and development
pipeline. These expenses increased due to the timing of costs
incurred on our current research and development projects. For a
discussion regarding recent research and development activities,
please see Recent Developments above.
36
Depreciation
and Amortization Expense
Depreciation and amortization expense increased in the first
quarter of 2010 from the first quarter of 2009 primarily due to
an increase in amortization expense associated with
Skelaxin®.
Depreciation and amortization expense in the first quarter of
2009 includes special items of $1.0 million due to
accelerated depreciation on certain assets.
In addition, certain generic companies have challenged the
patent covering
Avinza®.
For additional information, please see Note 9,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. If a generic
version of
Avinza®
enters the market or if our current estimates regarding future
cash flows adversely change, we may have to write off a portion
or all of the intangible assets associated with this product.
Other
Operating Expenses
We incurred restructuring charges of $48.1 million in 2009
primarily due to our restructuring initiative related to
Skelaxin®.
For additional information on the first quarter 2009
restructuring event, please see Note 13,
Restructuring Activities. in Part I,
Item 1, Financial Statements.
Non-Operating
Items
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
409
|
|
|
$
|
2,788
|
|
Interest expense
|
|
|
(8,736
|
)
|
|
|
(23,103
|
)
|
Loss on investment
|
|
|
(872
|
)
|
|
|
(823
|
)
|
Other, net
|
|
|
(203
|
)
|
|
|
(2,779
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(9,402
|
)
|
|
|
(23,917
|
)
|
Income tax expense (benefit)
|
|
|
13,594
|
|
|
|
(6,055
|
)
|
Interest
Income
Interest income decreased during the first quarter of 2010
compared to the first quarter of 2009 primarily due to a lower
average balance of cash, cash equivalents and investments in
debt securities in the first quarter of 2010 compared to the
first quarter of 2009, and a decrease in interest rates. Cash
and cash equivalents decreased in the first quarter of 2009 due
to the payment of the Alpharma Convertible Senior Notes. In
addition, redemptions of our auction rate securities of
approximately $145.9 million during 2009 and the first
quarter of 2010 were used to reduce long-term debt.
Interest
Expense
Interest expense decreased in the first quarter of 2010 compared
to the first quarter of 2009 primarily due to a decrease in
borrowings. Our December 29, 2008 acquisition of Alpharma
was funded with available cash on hand, borrowings of
$425.0 million under the Senior Secured Revolving Credit
Facility, and borrowings of $200.0 million under a Senior
Secured Term Facility. We made payments of $918.0 million
related to long-term debt during 2009, which consisted of
$200.0 million related to the Senior Secured Term Facility,
$332.7 million related to the Senior Secured Revolving
Credit Facility, and $385.2 million related to the Alpharma
Convertible Senior Notes. In addition, during the first quarter
of 2010, the remaining outstanding borrowings of
$92.3 million under the Senior Secured Revolving Credit
Facility were paid in full.
Special items affecting other income (expense) included the
following:
|
|
|
|
|
The liability and equity components of the $400,000
11/4% Convertible
Senior Notes due April 1, 2026 (the Convertible
Senior Notes) have been separately accounted for in a
manner that reflects our nonconvertible debt borrowing rate at
the date of issuance. The debt component is being amortized
through March 31, 2013,
|
37
|
|
|
|
|
which is reflected as an increase in interest expense. Interest
expense in the first quarter of 2010 and 2009 reflects non-cash
interest of $4.7 million and $4.4 million,
respectively, due to the accretion of the debt component of the
Convertible Senior Notes.
|
|
|
|
|
|
A loss of $0.9 million and $0.8 million in the first
quarter of 2010 and 2009, respectively, related to our
investments in debt securities.
|
Income
Tax Expense
During the first quarter of 2010, our effective income tax rate
was 75.3%. This rate varied from the statutory rate of 35% due
primarily to losses on foreign subsidiaries with no tax benefit,
stock compensation and state taxes.
During the first quarter of 2009, our effective income tax rate
was a benefit of 36.1%. This rate is greater than the statutory
rate of 35% due primarily to benefits from research credits,
tax-exempt interest income and domestic manufacturing
deductions, which benefits were partially offset by state taxes.
Liquidity
and Capital Resources
General
We believe that existing balances of cash, cash equivalents,
cash generated from operations and our existing revolving credit
facility are sufficient to finance our current operations and
working capital requirements on both a short-term and long-term
basis. However, we cannot predict the amount or timing of our
need for additional funds. We cannot provide assurance that
funds will be available to us when needed on favorable terms, or
at all.
We plan to enter into a new $500.0 million five-year Senior
Secured Revolving Credit Facility in the second quarter of 2010
and terminate the existing $475.0 million Senior Secured
Revolving Credit Facility entered into April 19, 2007 and
amended December 5, 2008. In connection with the
acquisition of Alpharma on December 29, 2008, we borrowed
$425.0 million in principal under the Senior Secured
Revolving Credit Facility which was fully paid by the end of the
first quarter of 2010. The existing Senior Secured Revolving
Credit Facility allows for borrowings of up to
$150.0 million, as the commitment under this facility was
reduced, in accordance with the terms of the facility, as we
paid down the borrowings related to the Alpharma acquisition.
Investments
in Debt Securities
As of March 31, 2010, our investments in debt securities
consisted solely of tax-exempt auction rate securities and did
not include any mortgage-backed securities or any securities
backed by corporate debt obligations. The tax-exempt auction
rate securities that we hold are long-term variable rate bonds
tied to short-term interest rates that are intended to reset
through an auction process generally every seven, 28 or
35 days. Our investment policy requires us to maintain an
investment portfolio with a high credit quality. Accordingly,
our investments in debt securities were limited to issues which
were rated AA or higher at the time of purchase.
In the event that we attempt to liquidate a portion of our
holdings through an auction and are unable to do so, we term it
an auction failure. On February 11, 2008, we
began to experience auction failures. As of March 31, 2010,
all our investments in auction rate securities, with a total par
value of $264.1 million, have experienced multiple failed
auctions. In the event of an auction failure, the interest rate
on the security is reset according to the contractual terms in
the underlying indenture. As of May 3, 2010, we have
received all scheduled interest payments associated with these
securities.
We will be unable to liquidate these securities until a
successful auction occurs, the issuer calls or restructures the
underlying security, the underlying security matures or is
purchased by a buyer outside the auction process. Based on the
frequency of auction failures and the lack of market activity,
current market prices are not available for determining the fair
value of these investments. As a result, we have measured
$260.3 million in par value of our investments in debt
securities and the UBS put right discussed below, or 36.8% of
the assets that we have measured at fair value, using
unobservable inputs, which are classified as Level 3
measurements. For additional information regarding this, please
see Note 3, Fair Value Measurements, in
Part I, Item 1, Financial Statements.
38
As of March 31, 2010, there were cumulative unrealized
holding losses of $25.5 million recorded in accumulated
other comprehensive income (loss) on the Condensed Consolidated
Balance Sheet associated with investments in debt securities
with a par value of $223.0 million classified as available
for sale. All of these investments in debt securities have been
in continuous unrealized loss positions for greater than twelve
months. As of March 31, 2010, we believed the decline was
temporary and it was probable that the par amount of these
auction rate securities would be collectible under their
contractual terms.
During the first quarter of 2010, we sold certain auction rate
securities associated with student loans with a par value of
$8.0 million for $7.4 million to the issuer and
realized a loss of $0.6 million in the Condensed
Consolidated Statements of Operations. We have not sold any
other investments in debt securities below par value during the
periods presented in the accompanying Condensed Consolidated
Statements of Operations.
During the fourth quarter of 2008, we accepted an offer from UBS
Financial Services, Inc. (UBS) providing us the
right to sell to UBS at par value certain auction rate
securities during the period from June 30, 2010 to
July 2, 2012 (the right). At March 31,
2010 and December 31, 2009 we held auction rate securities
related to this offer with a par value of $26.1 million and
$32.5 million, respectively. We have elected the fair value
option to account for this right. As a result, gains and losses
associated with this right are recorded in other income
(expense) in the Condensed Consolidated Statements of
Operations. The value of the right to sell certain auction rate
securities to UBS was estimated considering the present value of
future cash flows, the fair value of the auction rate security
and counterparty risk. As of March 31, 2010 and
December 31, 2009, the fair value of the right to sell the
auction rate securities to UBS at par was $2.4 million and
$3.2 million, respectively. With respect to this right, we
recognized an unrealized loss of $0.8 million during the
first quarter of 2010 and an unrealized loss of
$0.6 million during the first quarter of 2009 in other
income (expense) in the Condensed Consolidated Statements of
Operations.
In addition, during the fourth quarter of 2008, we reclassified
the auction rate securities that are included in this right from
available-for-sale
securities to trading securities. As of March 31, 2010 and
December 31, 2009, the fair value of the investments in
debt securities classified as trading was $23.4 million and
$29.3 million, respectively. During the first quarter of
2010 and the first quarter of 2009, we recognized unrealized
gains of $0.6 million and unrealized losses of
$0.3 million, respectively, in other income (expense) in
the Condensed Consolidated Statements of Operations.
As of March 31, 2010, we had unrealized holding gains of
$1.8 million associated with a security that was previously
impaired, as it was determined that the losses in previous
periods were
other-than-temporary.
As of March 31, 2010, we had approximately
$264.1 million, in par value, invested in tax-exempt
auction rate securities which consisted of $150.5 million
associated with student loans backed by the Federal Family
Education Loan Program (FFELP), $87.6 million associated
with municipal bonds in which performance is supported by bond
insurers and $26.0 million associated with student loans
collateralized by loan pools which equal at least 200% of the
bond issue.
As of March 31, 2010, we classified $27.1 million of
auction rate securities as current assets and
$204.8 million as long-term assets.
Skelaxin®
As previously disclosed, we are involved in multiple legal
proceedings over patents relating to our product
Skelaxin®.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two of these
patents. In June 2009, the Court entered judgment against us. We
have appealed the judgment and intend to vigorously defend our
interests. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010. Net
sales of
Skelaxin®
will decline significantly as a result of generic competition.
For additional information regarding
Skelaxin®
litigation, please see Note 9, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Following the decision of the District Court in January 2009, we
conducted an extensive examination of the company and developed
a restructuring initiative. Based on an analysis of our
strategic needs, this initiative included: a reduction in
branded prescription pharmaceutical sales, marketing and other
personnel; leveraging of staff; expense reductions and
additional controls over spending; and reorganization of sales
teams.
39
We incurred total restructuring costs of approximately
$50.0 million, almost all of which was paid during the
second quarter of 2009. These costs relate to severance pay and
other employee termination expenses. For additional information,
please see Note 13, Restructuring Activities in
Part I, Item 1, Financial Statements.
Kadian®
In connection with the acquisition of Alpharma, we and Alpharma
executed a consent order (the Consent Order) with
the U.S. Federal Trade Commission. The Consent Order
required us to divest the assets related to Alpharmas
branded oral long-acting opioid analgesic drug
Kadian®
to Actavis Elizabeth, L.L.C., (Actavis LLC). In
accordance with the Consent Order, effective upon the
acquisition of Alpharma, on December 29, 2008, we divested
the
Kadian®
product to Actavis LLC. Actavis LLC is entitled to sell
Kadian®
as a branded or generic product. Prior to this divestiture,
Actavis LLC supplied
Kadian®
to Alpharma.
Actavis LLC will pay a purchase price of up to an aggregate of
$127.5 million in cash based on the achievement of certain
Kadian®
quarterly gross profit-related milestones for the period
beginning January 1, 2009 and ending June 30, 2010.
The maximum purchase price payment associated with each calendar
quarter is as follows:
|
|
|
|
|
Maximum Purchase
|
|
|
Price Payment
|
|
First Quarter 2009
|
|
$30.0 million
|
Second Quarter 2009
|
|
25.0 million
|
Third Quarter 2009
|
|
25.0 million
|
Fourth Quarter 2009
|
|
20.0 million
|
First Quarter 2010
|
|
20.0 million
|
Second Quarter 2010
|
|
7.5 million
|
None of the quarterly payments above, when combined with all
prior payments made by Actavis LLC, can exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis LLC and its affiliates for the
period beginning on January 1, 2009 and ending on the last
day of such calendar quarter. Any quarterly purchase price
payment that is not paid by Actavis LLC due to the application
of such provision will be carried forward to the next calendar
quarter, increasing the maximum quarterly payment in the
subsequent quarter. However, the cumulative purchase price
payable by Actavis LLC will not exceed the lesser of
(a) $127.5 million and (b) the gross profits from
the sale of
Kadian®,
as determined by the agreement, in the United States by Actavis
LLC and its affiliates for the period from January 1, 2009
through June 30, 2010. At the time of the divestiture, we
recorded a receivable of $115.0 million reflecting the
present value of the estimated future purchase price payments
from Actavis LLC. There was no gain or loss recorded as a result
of the divestiture. In accordance with the agreement, quarterly
payments are received one quarter in arrears. During the first
quarter of 2010, we received $20.0 million from Actavis LLC
related to gross profit from sales during the fourth quarter of
2009.
Alpharma
As part of the integration of Alpharma, management developed a
restructuring initiative to eliminate redundancies in operations
created by the acquisition. This initiative included, based on
an analysis of our strategic needs: a reduction in sales,
marketing and other personnel; leveraging of staff; expense
reductions and additional controls over spending; and
reorganization of sales teams.
We estimated total costs of approximately $71.1 million
associated with this restructuring plan, almost all of which are
cash-related costs. All employee termination costs are expected
to be paid by the second quarter of 2012. All contract
termination costs are expected to be paid by the end of 2018.
For additional information, please see Note 13,
Restructuring Activities, in Part I,
Item 1, Financial Statements.
During the first quarter of 2009, we paid $385.2 million to
redeem the Convertible Senior Notes of Alpharma outstanding at
the time of the acquisition and at December 31, 2008. For
additional information, please see Alpharma Convertible
Senior Notes in Note 8, Long-Term Debt in
Part I, Item 1, Financial Statements.
40
Senior
Secured Revolving Credit Facility
On April 19, 2007, we entered into a new
$475.0 million five-year Senior Secured Revolving Credit
Facility (Revolving Credit Facility), as amended on
December 5, 2008. The Revolving Credit Facility matures in
April 2012 or in September 2011 if the Convertible Senior Notes
have not been refinanced.
In connection with the acquisition of Alpharma on
December 29, 2008, we borrowed $425.0 million in
principal amount under the Revolving Credit Facility.
During 2009 and the first quarter of 2010, we made payments of
$332.7 million and $92.3 million, respectively, on the
Revolving Credit Facility, $203.2 million in excess of the
required amounts, which represented full payment of all
borrowings under the Revolving Credit Facility. The average
interest rate on borrowings under the Revolving Credit Facility
was 5.3% in the first quarter of 2010. The availability under
the Revolving Credit Facility was $150.0 million as of
April 30, 2010. As of April 30, 2010, the remaining
undrawn commitment amount under the Revolving Credit Facility
totals approximately $146.9 million after giving effect to
outstanding letters of credit totaling approximately
$3.1 million.
If we should undertake future borrowings under the Revolving
Credit Facility, we would be required to make annual prepayments
equal to 50% of our annual excess cash flows, which could be
reduced to 25% under certain conditions. In addition, we would
be required to make prepayments upon the occurrence of certain
events, such as an asset sale, the issuance of debt or equity or
the liquidation of auction rate securities.
We have the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Revolving
Credit Facility.
For additional discussion regarding the Revolving Credit
Facility, please see Senior Secured Revolving Credit
Facility within the Certain Indebtedness and Other
Matters section below.
CorePharma,
LLC
In June 2008, we entered into a Product Development Agreement
with CorePharma to collaborate in the development of new
formulations of metaxalone that we currently market under the
brand name
Skelaxin®.
Under the agreement, we and CorePharma granted each other
non-exclusive cross-licenses to certain pre-existing
intellectual property. Any intellectual property created as a
result of the agreement will belong to us and we will grant
CorePharma a non-exclusive, royalty-free license to use this
newly created intellectual property with any product not
containing metaxalone. In the second quarter of 2008, we made a
non-refundable cash payment of $2.5 million to CorePharma.
Under the terms of the agreement, we will reimburse CorePharma
for the cost to complete the development activities incurred
under the agreement, subject to a cap. In addition, we could be
required to make milestone payments based on the achievement and
success of specified development activities and the achievement
of specified net sales thresholds of such formulations, as well
as royalty payments based on net sales.
Acura
Pharmaceuticals, Inc.
In October 2007, we entered into a License, Development and
Commercialization Agreement with Acura to develop and
commercialize certain opioid analgesic products utilizing
Acuras
Aversion®
Technology in the United States, Canada and Mexico. The
agreement provides us with an exclusive license for
Acurox®
Tablets and another opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides us with an
option to license all future opioid analgesic products developed
utilizing Acuras
Aversion®
Technology. In May 2008 and December 2008, we exercised our
options for third and fourth immediate-release opioid products
under the agreement. In connection with the exercise of the
options, we paid non-refundable option exercise fees to Acura of
$3.0 million for each option.
Under the terms of the agreement, we made a non-refundable cash
payment of $30.0 million to Acura in December 2007. In
addition, we will reimburse Acura for all research and
development expenses incurred beginning from September 19,
2007 for
Acurox®
Tablets and all research and development expenses related to
future products after the exercise of our option to an exclusive
license for each future product. We may make additional
non-refundable cash milestone payments to Acura based on the
successful achievement of certain
41
clinical and regulatory milestones for
Acurox®
Tablets and for each other product developed under the
agreement. In June 2008, we made a milestone payment of
$5.0 million associated with positive top-line results from
the Phase III clinical trial evaluating
Acurox®
Tablets. We will also make an additional $50.0 million
non-refundable cash milestone payment to Acura in the first year
that the aggregate net sales of all products developed under the
agreement exceeds $750.0 million. In addition, we will make
royalty payments to Acura ranging from 5% to 25% based on the
level of combined annual net sales of all products developed
under the agreement.
Avinza®
In September 2006, we entered into a definitive asset purchase
agreement and related agreements with Ligand to acquire rights
to
Avinza®
(morphine sulfate long-acting).
Avinza®
is a long-acting formulation of morphine and is indicated as a
once-daily treatment for moderate to severe pain in patients who
require continuous opioid therapy for an extended period of time.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty through November 2017 and assume payment of
Ligands royalty obligations to third parties. We paid
Ligand a royalty of 15% of net sales of
Avinza®
until October 2008. Subsequent royalty payments to Ligand are
based upon calendar year net sales of
Avinza®
as follows:
|
|
|
|
|
If calendar year net sales are less than $200.0 million,
the royalty payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200.0 million,
then the royalty payment will be 10% of all net sales up to
$250.0 million, plus 15% of net sales greater than
$250.0 million.
|
Patient
Protection and Affordable Care Act
On March 23, 2010, the Patient Protection and Affordable
Care Act (PPACA) was signed into law. We expect that
the new legislation will increase Medicaid rebates paid by us in
the future, primarily due to an increase in Medicaid rebate
rates, changes to the calculation of Medicaid rebates for new
formulations of existing products, and an expansion of Medicaid
rebates to products supplied to enrollees of Medicaid managed
care organizations. We anticipate higher Medicaid rebates in
future periods. For the full year of 2010, we expect rebates to
increase by approximately $15.0 million as a result of the
PPACA.
In addition, the PPACA will impose an annual fee on
pharmaceutical manufacturers beginning in 2011. The fee will be
payable no later than September 30 of each applicable year and
will be allocated to pharmaceutical manufacturers based on
relative market share.
Other
In March 2006, we acquired the exclusive right to market,
distribute and sell
EpiPen®
throughout Canada and certain other assets from Allerex
Laboratory LTD (Allerex). Under the terms of the
agreements, the initial purchase price was approximately
$23.9 million, plus acquisition costs of approximately
$0.7 million. As an additional component of the purchase
price, we pay Allerex an earn-out equal to a percentage of
future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, we increase intangible assets by the amount of
the accrual. As of March 31, 2010, we have incurred a total
of $12.7 million for these earn-out payments. The aggregate
amount of these payments will not exceed $13.2 million.
In December 2005, we entered into a cross-license agreement with
Mutual related to
Skelaxin®.
Under the terms of the agreement, each of the parties has
granted the other a worldwide license to certain intellectual
property, including patent rights and know-how, relating to
metaxalone. As of January 1, 2006, we began paying
royalties to Mutual on net sales of products containing
metaxalone. This royalty increased in the fourth quarter of 2006
and the second quarter of 2009 due to the achievement of certain
milestones. The royalty percentage we pay to Mutual is currently
in the low-double-digit and could potentially increase by an
additional 10% depending on the achievement of certain
regulatory and commercial milestones in the future. In the event
certain specified net sales levels are not achieved, the royalty
could be reduced to a lower double-digit or single-digit rate.
No increases in the royalty rate are presently anticipated. The
royalty we pay to Mutual is in addition to the royalty we pay to
Elan Corporation, plc on our current formulation of metaxalone,
Skelaxin®.
42
During the fourth quarter of 2005, we entered into a strategic
alliance with Pain Therapeutics to develop and commercialize
Remoxy®
and other opioid painkillers. Under the strategic alliance, we
made an upfront cash payment of $150.0 million in December
2005 and made a milestone payment of $5.0 million in July
2006 to Pain Therapeutics. In August 2008, we made milestone
payments totaling $20.0 million. In addition, we may pay
additional milestone payments of up to $125.0 million in
cash based on the successful clinical and regulatory development
of
Remoxy®
and other opioid products. This amount includes
$15.0 million upon FDA approval of
Remoxy®.
In March 2009, we exercised rights under our Collaboration
Agreement with Pain Therapeutics and assumed sole control and
responsibility for the development of
Remoxy®.
This includes all communications with the FDA regarding
Remoxy®
and ownership of the
Remoxy®
NDA. We are responsible for research and development expenses
related to this alliance subject to certain limitations set
forth in the agreement. After regulatory approval and
commercialization of
Remoxy®
or other products developed through this alliance, we will pay a
royalty of 15% of the cumulative net sales up to
$1.0 billion and 20% of the cumulative net sales over
$1.0 billion.
Patent
Challenges
Certain generic companies have challenged patents on
Skelaxin®,
Avinza®
and
EpiPen®.
For additional information, please see Note 9,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. Generic versions
of
Skelaxin®
entered the market early in the second quarter of 2010. Net
sales of
Skelaxin®
will decline significantly as a result of generic competition,
which will materially adversely affect the results of operations
and cash flows. If a generic version of
Avinza®
or
EpiPen®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Cash
Flows
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(1,801
|
)
|
|
$
|
11,334
|
|
Our net cash from operations was lower in the first quarter of
2010 than in the first quarter of 2009 primarily due to a
decrease in net sales of several key branded prescription
pharmaceutical products and payment of $42.5 million to the
DOJ. Please see the section above entitled Results of
Operations for a discussion of net sales.
During the first quarter of 2010, we made a payment of
$42.5 million, plus interest of $0.6 million, to the
DOJ. For additional information related to the DOJ settlement,
please see Note 9, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
In addition, we made cash payments related to the
Skelaxin®
and Alpharma restructuring actions during the first quarter of
2009 and the first quarter of 2010 which reduced operating cash
flows. For information regarding the restructuring actions,
please see Note 13, Restructuring Activities in
Part I, Item 1, Financial Statements.
43
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the three months ended
March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, net of allowance
|
|
$
|
1,866
|
|
|
$
|
16,726
|
|
Inventories
|
|
|
(7,663
|
)
|
|
|
(20,345
|
)
|
Prepaid expenses and other current assets
|
|
|
(9,873
|
)
|
|
|
1,437
|
|
Accounts payable
|
|
|
5,469
|
|
|
|
(45,471
|
)
|
Accrued expenses and other liabilities
|
|
|
(70,725
|
)
|
|
|
(18,853
|
)
|
Income taxes payable
|
|
|
(905
|
)
|
|
|
(9,552
|
)
|
Deferred revenue
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
Other assets
|
|
|
(4,614
|
)
|
|
|
988
|
|
Deferred taxes
|
|
|
11,650
|
|
|
|
(5,135
|
)
|
|
|
|
|
|
|
|
|
|
Total changes from operating assets and liabilities and deferred
taxes
|
|
$
|
(75,965
|
)
|
|
$
|
(81,375
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Net cash provided by (used in) investing activities
|
|
$
|
28,583
|
|
|
$
|
(63,806
|
)
|
Our cash flows from investing activities for the first quarter
of 2010 were primarily due to net sales of our investments in
debt securities of $16.8 million, and proceeds related to
the sale of
Kadian®
of $20.0 million, partially offset by capital expenditures
of $7.8 million. Our cash flows from investing activities for
the first quarter of 2009 were primarily due to payments
associated with Alpharma employee stock-based awards in
connection with our acquisition of Alpharma.
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2010 of
approximately $40.0 million to $50.0 million, which
will be funded with cash from operations. The principal capital
expenditures are anticipated to include costs associated with
the preparation of our facilities to manufacture new products as
they emerge from our research and development pipeline.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Net cash used in financing activities
|
|
$
|
(95,717
|
)
|
|
$
|
(436,433
|
)
|
Our cash flows from financing activities for the first quarter
of 2010 and the first quarter of 2009 are primarily related to
payments on long-term debt. During the first quarter of 2010, we
made payments of $92.3 million on the Revolving Credit
Facility, which represented full payment of all outstanding
borrowings. During the first quarter of 2009, we paid
$385.2 million to redeem the Alpharma Convertible Senior
Notes. In addition, we paid $32.1 million on the Senior
Secured Revolving Credit Facility and $15.9 million on the
Senior Secured Term Facility.
Certain
Indebtedness and Other Matters
Convertible
Senior Notes
The Convertible Senior Notes, issued in 2006, are unsecured
obligations and are guaranteed by each of our domestic
subsidiaries on a joint and several basis. The Convertible
Senior Notes accrue interest at an initial rate of
11/4%.
Beginning with the six-month interest period that commences on
April 1, 2013, we will pay additional
44
interest during any six-month interest period if the average
trading price of the Convertible Senior Notes during the five
consecutive trading days ending on the second trading day
immediately preceding the first day of such six-month period
equals 120% or more of the principal amount of the Convertible
Senior Notes. Interest is payable on April 1 and October 1 of
each year.
On or after April 5, 2013, we may redeem for cash some or
all of the Convertible Senior Notes at any time at a price equal
to 100% of the principal amount of the Convertible Senior Notes
to be redeemed, plus any accrued and unpaid interest, and
liquidated damages, if any, up to but excluding the date fixed
for redemption. Holders may require us to purchase for cash some
or all of their Convertible Senior Notes on April 1, 2013,
April 1, 2016 and April 1, 2021, or upon the
occurrence of a fundamental change, at 100% of the principal
amount of the Convertible Senior Notes to be purchased, plus any
accrued and unpaid interest, and liquidated damages, if any, up
to but excluding the purchase date.
Senior
Secured Revolving Credit Facility
On April 19, 2007, we entered into a new
$475.0 million five-year Revolving Credit Facility, as
amended on December 5, 2008. The Revolving Credit Facility
matures in April 2012 or in September 2011 if the Convertible
Senior Notes have not been refinanced.
In connection with our acquisition of Alpharma on
December 29, 2008, we borrowed $425.0 million in
principal. As of December 31, 2009, $92.3 million was
outstanding under the Revolving Credit Facility. During the
first quarter of 2010, all borrowings under the Revolving Credit
Facility were fully paid. As of March 31, 2010, there were
no outstanding borrowings under the Revolving Credit Facility
and letters of credit totaled $3.1 million.
In connection with the borrowings, we incurred approximately
$22.2 million of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date.
As discussed above, we have repaid our borrowings under the
Revolving Credit Facility. Should we undertake future borrowings
we would have the right, without penalty (other than customary
breakage costs), to prepay any borrowing under the Revolving
Credit Facility and, subject to certain conditions, we could be
required to make mandatory prepayments. For additional
discussion regarding the Revolving Credit Facility, please see
Liquidity and Capital Resources Senior Secured
Revolving Credit Facility above.
Our borrowings under the Revolving Credit Facility bear interest
at annual rates that, at our option, will be either:
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a base rate generally defined as the sum of (i) the greater
of (a) the prime rate of Credit Suisse and (b) the
federal funds effective rate plus 0.5% and
(ii) 4.0%; or
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an adjusted rate generally defined as the sum of (i) the
product of (a) LIBOR (by reference to the British Banking
Association Interest Settlement Rates) and (b) a fraction,
the numerator of which is one and the denominator of which is
the number one minus certain maximum statutory reserves for
Eurocurrency liabilities and (ii) 5.0%.
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Interest on our borrowings is payable quarterly, in arrears, for
base rate loans and at the end of each interest rate period (but
not less often than quarterly) for LIBO rate loans. We are
required to pay an unused commitment fee on the difference
between committed amounts and amounts actually borrowed under
the Revolving Credit Facility equal to 0.5% per annum. We are
required to pay a letter of credit participation fee based upon
the aggregate face amount of outstanding letters of credit equal
to 5.0% per annum.
The Revolving Credit Facility requires us to meet certain
financial tests, including, without limitation:
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maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50:1 to 3.25:1 (depending on dates and the
occurrence of certain events relating to certain
patents); and
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maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75:1 to 4.00:1 (depending on dates and
the occurrence of certain events relating to certain patents).
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As of March 31, 2010, we were in compliance with these
covenants.
45
In addition, the Revolving Credit Facility contains certain
covenants that, among other things, restrict additional
indebtedness, liens and encumbrances, sale and leaseback
transactions, loans and investments, acquisitions, dividends and
other restricted payments, transactions with affiliates, asset
dispositions, mergers and consolidations, prepayments,
redemptions and repurchases of other indebtedness, capital
expenditures and other matters customarily restricted in such
agreements. The Revolving Credit Facility contains customary
events of default, including, without limitation, payment
defaults, breaches of representations and warranties, covenant
defaults, cross-defaults to certain other material indebtedness
in excess of specified amounts, certain events of bankruptcy and
insolvency, certain ERISA events, judgments in excess of
specified amounts, certain impairments to the guarantees, and
change in control.
The Revolving Credit Facility requires us to pledge as
collateral substantially all of our assets, including 100% of
the equity of our U.S. subsidiaries and 65% of the equity
of any material foreign subsidiaries. Our obligations under this
facility are unconditionally guaranteed on a senior basis by all
of our U.S. subsidiaries.
The Revolving Credit Facility requires us to maintain hedging
agreements that will fix the interest rates on 50% of our
outstanding long-term debt for a period of not less than two
years.
Impact
of Inflation
We have experienced only moderate raw material and labor price
increases in recent years. In general, the price increases we
have passed along to our customers have offset inflationary
pressures.
Recently
Issued Accounting Standards
For information regarding recently issued accounting standards,
please see Note 10, Accounting Developments, in
Part I, Item 1, Financial Statements.
Critical
Accounting Policies and Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to inherent imprecision.
In the case of impairment testing, changes in estimates of
future cash flows could result in a material impairment charge
and, whether they result in an immediate impairment charge,
could result prospectively in a reduction in the estimated
remaining useful life of tangible or intangible assets, which
could be material to the financial statements.
Other significant estimates include accruals for Medicaid,
Medicare, and other rebates, returns and chargebacks, allowances
for doubtful accounts, the fair value of our investments in debt
securities, and estimates used in applying the revenue
recognition policy.
We are subject to risks and uncertainties that may cause actual
results to differ from the related estimates, and our estimates
may change from time to time in response to actual developments
and new information.
The significant accounting estimates that we believe are
important to aid in fully understanding our reported financial
results include the following:
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Intangible assets, goodwill, and other long-lived
assets. When we acquire product rights in
conjunction with either business or asset acquisitions, we
allocate an appropriate portion of the purchase price to
intangible assets, goodwill and other long-lived assets. The
purchase price is allocated to products, acquired
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46
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research and development, if any, and other intangibles using
the assistance of valuation consultants. We estimate the useful
lives of the assets by factoring in the characteristics of the
products such as: patent protection, competition by products
prescribed for similar indications, estimated future
introductions of competing products, and other issues. The
factors that drive the estimate of the life of the asset are
inherently uncertain. We use a straight-line method of
amortization for our intangible assets.
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We review our property, plant and equipment and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. We review our goodwill for possible impairment
annually, during the first quarter, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. In any event, we evaluate the remaining useful
lives of our intangible assets each reporting period to
determine whether events and circumstances warrant a revision to
the remaining period of amortization. This evaluation is
performed through our quarterly evaluation of intangibles for
impairment. We review our intangible assets for possible
impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. In
evaluating goodwill for impairment, we estimate the fair value
of our individual business reporting units on a discounted cash
flow basis. Assumptions and estimates used in the evaluation of
impairment may affect the carrying value of long-lived assets,
which could result in impairment charges in future periods. Such
assumptions include projections of future cash flows and, in
some cases, the current fair value of the asset. In addition,
our depreciation and amortization policies reflect judgments on
the estimated useful lives of assets.
We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture or supply of materials,
the publication of negative results of studies or clinical
trials, new legislation or regulatory proposals.
The gross carrying amount and accumulated amortization as of
March 31, 2010 are as follows:
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Gross
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Carrying
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Accumulated
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Net Book
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Amount
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Amortization
|
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Value
|
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|
(In thousands)
|
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Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
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$
|
290,133
|
|
|
$
|
82,372
|
|
|
$
|
207,761
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|
Skelaxin®
|
|
|
288,049
|
|
|
|
268,070
|
|
|
|
19,979
|
|
Sonata®
|
|
|
61,961
|
|
|
|
61,961
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|
|
|
|
|
Flector®
Patch
|
|
|
130,000
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|
|
|
14,773
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|
|
|
115,227
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Neuroscience
|
|
|
770,143
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|
|
|
427,176
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|
|
|
342,967
|
|
|
|
|
|
|
|
|
|
|
|
|
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Synercid®
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|
70,959
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|
|
|
49,330
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|
|
|
21,629
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Other hospital
|
|
|
8,442
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|
|
|
6,808
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|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
79,401
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|
|
|
56,138
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|
|
|
23,263
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Bicillin®
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|
92,350
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|
|
|
35,897
|
|
|
|
56,453
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Other legacy products
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|
324,035
|
|
|
|
281,966
|
|
|
|
42,069
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Legacy products
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|
416,385
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|
|
|
317,863
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|
|
|
98,522
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|
|
|
|
|
|
|
|
|
|
|
|
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Total Branded
|
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|
1,265,929
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|
|
801,177
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|
|
|
464,752
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|
|
|
|
|
|
|
|
|
|
|
|
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Animal Health
|
|
|
169,923
|
|
|
|
12,041
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|
|
|
157,882
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|
Meridian Auto-Injector
|
|
|
184,206
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|
|
|
51,789
|
|
|
|
132,417
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|
Royalties and other
|
|
|
3,731
|
|
|
|
3,521
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|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total intangible assets
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|
$
|
1,623,789
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|
|
$
|
868,528
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|
|
$
|
755,261
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|
|
|
|
|
|
|
|
|
|
|
|
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47
The amounts for impairments and amortization expense for the
three months ended March 31, 2010 and 2009 are as follows:
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Three Months Ended
|
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|
Three Months Ended
|
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|
|
March 31, 2010
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|
March 31, 2009
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|
|
|
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Amortization
|
|
|
|
|
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Amortization
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|
|
|
Impairments
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|
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Expense
|
|
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Impairments
|
|
|
Expense
|
|
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|
(In thousands)
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|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
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|
$
|
|
|
|
$
|
6,775
|
|
|
$
|
|
|
|
$
|
6,638
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|
Skelaxin®
|
|
|
|
|
|
|
23,247
|
|
|
|
|
|
|
|
20,041
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|
Flector®
Patch
|
|
|
|
|
|
|
2,955
|
|
|
|
|
|
|
|
2,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
32,977
|
|
|
|
|
|
|
|
29,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
|
|
|
|
1,442
|
|
|
|
|
|
|
|
1,484
|
|
Other hospital
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
|
|
|
|
1,518
|
|
|
|
|
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
925
|
|
Other legacy products
|
|
|
|
|
|
|
1,430
|
|
|
|
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
|
|
|
|
2,355
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|
|
|
|
|
|
|
2,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Branded
|
|
|
|
|
|
|
36,850
|
|
|
|
|
|
|
|
33,549
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
|
|
|
|
2,408
|
|
|
|
|
|
|
|
2,408
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
2,168
|
|
|
|
|
|
|
|
2,035
|
|
Royalties and other
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
41,437
|
|
|
$
|
|
|
|
$
|
38,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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The remaining patent amortization period compared to the
remaining amortization period for trademarks and product rights
associated with significant products is as follows:
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Remaining Life at March 31, 2010
|
|
Skelaxin®
|
|
3 months
|
Avinza®
|
|
7 years 8 months
|
Synercid®
|
|
3 years 9 months
|
Bicillin®
|
|
15 years 3 months
|
Flector®
Patch
|
|
9 years 9 months
|
|
|
|
|
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Inventories. Our inventories are valued at the
lower of cost or market value. We evaluate our entire inventory
for short-dated or slow-moving product and inventory commitments
under supply agreements based on projections of future demand
and market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we make
a provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time
such losses are evident rather than at the time goods are
actually sold. We maintain supply agreements with some of our
vendors which contain minimum purchase requirements. We estimate
future inventory requirements based on current facts and trends.
Should our minimum purchase requirements under supply
agreements, or if our estimated future inventory requirements
exceed actual inventory quantities that we will be able to sell
to our customers, we record a charge in costs of revenues.
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Accruals for rebates, returns and
chargebacks. We establish accruals for returns,
chargebacks, Medicaid, Medicare and commercial rebates in the
same period we recognize the related sales. The accruals reduce
revenues and are included in accrued expenses. At the time a
rebate or chargeback payment is made or a product return is
received, which occurs with a delay after the related sale, we
record a reduction to accrued expenses and, at the end of each
quarter, adjust accrued expenses for differences between
estimated and actual payments. Due to estimates and assumptions
inherent in determining the amount of returns, chargebacks and
rebates, the actual amount of product returns and claims for
chargebacks and rebates may be different from our estimates.
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48
Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily on
historical sales and return rates. We also consider the level of
inventory of our products in the distribution channel. We base
our estimate of our Medicaid rebate, Medicare rebate and
commercial rebate accruals on estimates of usage by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates, and the terms of our
commercial and regulatory rebate obligations. We base our
estimate of our chargeback accrual on our estimates of the level
of inventory of our products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
products in the distribution channel is based primarily on data
provided by our three key wholesalers under inventory management
agreements.
Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves.
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Investments in debt securities. Prior to the
end of the first quarter of 2008, we undertook investments in
debt securities. Tax-exempt auction rate securities are
long-term variable rate bonds tied to short-term interest rates
that are reset through an auction process generally every seven,
28 or 35 days. On February 11, 2008, we began to
experience auction failures with respect to our investments in
auction rate securities. All of our investments in auction rate
securities have experienced multiple failed auctions. We will
not be able to liquidate these securities until a successful
auction occurs, the issuer calls or restructures the underlying
security, the underlying security matures or it is purchased by
a buyer outside the auction process. Based on the frequency of
auction failures and the lack of market activity, current market
prices are not available for determining the fair value of these
investments. As a result, we measure these investments using
unobservable inputs.
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The fair value of investments in debt securities is based on a
trinomial discount model. This model considers the probability
at the valuation date of three potential occurrences for each
auction event through the maturity date of the security. The
three potential outcomes for each auction are
(i) successful auction/early redemption, (ii) failed
auction and (iii) issuer default. Inputs in determining the
probabilities of the potential outcomes include, but are not
limited to, the securitys collateral, credit rating,
insurance, issuers financial standing, contractual
restrictions on disposition and the liquidity in the market. The
fair value of each security is determined by summing the present
value of the probability-weighted future principal and interest
payments determined by the model. The discount rate is
determined as the loss-adjusted required rate of return using
public information such as spreads or near-risk free to risk
free assets. The expected term is based on our estimate of
future liquidity as of the balance sheet date.
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Revenue recognition. Revenue is recognized
when title and risk of loss are transferred to customers,
collection of sales is reasonably assured, and we have no
further performance obligations. This is generally at the time
products are received by the customer. Accruals for estimated
returns, rebates and chargebacks, determined based on historical
experience, reduce revenues at the time of sale and are included
in accrued expenses. Medicaid and certain other governmental
pricing programs involve particularly difficult interpretations
of relevant statutes and regulatory guidance, which are complex
and, in certain respects, ambiguous. Moreover, prevailing
interpretations of these statutes and guidance can change over
time. We launched
Embeda®
in late September 2009. We have recognized revenue on
Embeda®
in a manner consistent with our other products, as described
above, which is generally at the time the product is received by
the customer. We believe
Embeda®
has similar characteristics of certain of our other
pharmaceutical products such that we can reliably estimate
expected returns of the product. Royalty revenue is recognized
based on a percentage of sales (namely, contractually
agreed-upon
royalty rates) reported by third parties.
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49
A WARNING
ABOUT FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information which
are based on forecasts of future results and estimates of
amounts that are not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of
terms and phrases, such as anticipate,
believe, could, estimate,
expect, intend, may,
plan, predict, project,
will and other similar terms and phrases, including
references to assumptions. These statements are contained in the
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations sections, as well as other sections of this
report. You should not unduly rely on our forward-looking
statements.
Forward-looking statements in this report include, but are not
limited to, those regarding:
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expectations regarding the outcome of various pending legal
proceedings including the
Skelaxin®,
Avinza®
and
EpiPen®
patent challenges, litigation, and other legal proceedings
described in this report;
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expectations regarding the enforceability and effectiveness of
product-related patents, including, in particular, patents
related to
Skelaxin®,
Avinza®,
EpiPen®
and
Adenoscan®;
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the potential of, including anticipated net sales and
prescription trends for, our branded prescription pharmaceutical
products, particularly
Skelaxin®,
Avinza®,
Thrombin-JMI®,
Flector®
Patch,
Embeda®,
Levoxyl®
and
Cytomel®;
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expected trends and projections with respect to particular
products, reportable segment and income and expense line items;
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the adequacy of our liquidity and capital resources and our
ability to enter into borrowing arrangements in the future;
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anticipated capital expenditures;
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the development, approval and successful commercialization of
Remoxy®,
Acurox®
Tablets,
CorVuetm
and other products;
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the cost of and the successful execution of our growth and
restructuring strategies;
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anticipated developments and expansions of our business;
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our plans for the manufacture of some of our products, including
products manufactured by third parties;
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the potential costs, outcomes and timing of research, clinical
trials and other development activities involving pharmaceutical
products, including, but not limited to, the timing or outcomes
of regulatory processes or the magnitude and timing of potential
payments to third parties in connection with development
activities;
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the development of product line extensions;
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the expected timing of the initial marketing of certain products;
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products developed, acquired or in-licensed that may be
commercialized;
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our intent, beliefs or current expectations, primarily with
respect to our future operating performance;
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expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates;
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expectations regarding our financial condition and liquidity as
well as future cash flows and earnings; and
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expectations regarding our ability to liquidate our holdings of
auction rate securities and the temporary nature of unrealized
losses recorded in connection with some of those securities.
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These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to be materially different from those contemplated by
our forward-looking statements. These known and unknown risks,
uncertainties and other factors are described in detail in the
Risk Factors section and in other sections of this
report.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
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We are exposed to market risk for changes in the market values
of some of our investments (Investment Risk), the
effect of interest rate changes (Interest Rate Risk)
and the effect of changes in foreign currency exchange rates
(Foreign Currency Exchange Rate Risk). At
March 31, 2010, we held derivative financial instruments
associated with the Convertible Senior Notes. There have been no
material changes in our exposure to these items since our
disclosure under Item 7A of our Annual Report on
Form 10-K
for the year ended December 31, 2009, except that we fully
repaid all borrowings under the Revolving Credit Facility in the
first quarter of 2010, which carried a variable rate of interest.
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Item 4.
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Controls
and Procedures
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As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to reasonably
ensure that information required to be disclosed and filed under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified, and that management will be
timely alerted to material information required to be included
in our periodic reports filed with the SEC.
There were no changes in our internal control over financial
reporting that occurred during the quarter ended March 31,
2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
51
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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The information required by this Item is incorporated by
reference to Note 9, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
We have disclosed a number of material risks under Item 1A
of our annual report on
Form 10-K
for the year ended December 31, 2009, which we filed with
the Securities and Exchange Commission on February 26,
2010. Please also see the additional risk factor below.
Net
sales of
Skelaxin®
will decline significantly as the result of competition from
generic products.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two
Skelaxin®
patents. In June 2009, the Court entered judgment against the
Company. The Company has appealed and intends to vigorously
defend its interests. Generic versions of
Skelaxin®
entered the market early in the second quarter of 2010. The
Companys net sales of
Skelaxin®
will decline significantly as a result of this generic
competition.
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Exhibit
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Number
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Description
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10
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.1*(1)
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Form of Option Certificate and Nonstatutory Stock Option
Agreement
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10
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.2*(1)
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Form of Restricted Stock Certificate and Restricted Stock Grant
Agreement
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10
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.3*(1)
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Form of Long-Term Performance Unit Award Agreement
One-Year Performance Cycle
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10
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.4*(1)
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Form of Long-Term Performance Unit Award Agreement
Three-Year Performance Cycle
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10
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.5
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Settlement Agreement, dated as of March 16, 2010, by and
among the U.S. Department of Justice on behalf of the
Office of Inspector General of the Department of Health and
Human Services; the TRICARE Management Activity; the
U.S. Office of Personnel Management; Alpharma Inc.;
Alpharma Pharmaceuticals LLC; Debra Parks; and King
Pharmaceuticals, Inc., as guarantor.
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31
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.1
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Certificate of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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31
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.2
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Certificate of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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32
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.1
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Certificate of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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32
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.2
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Certificate of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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* |
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Denotes management contract or compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to Kings Current Report on
Form 8-K,
dated March 23, 2010. |
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KING PHARMACEUTICALS, INC.
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By:
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/s/ Brian
A. Markison
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Brian A. Markison
President and Chief Executive Officer
Date: May 5, 2010
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By:
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/s/ Joseph
Squicciarino
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Joseph Squicciarino
Chief Financial Officer
Date: May 5, 2010
53