10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number
001-15875
King Pharmaceuticals,
Inc.
Exact name of registrant as
specified in its charter
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Tennessee
State or other jurisdiction
of
incorporation or organization
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54-1684963
I.R.S. Employer
Identification No.
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501 Fifth Street
Bristol, Tennessee
Address of Principal
Executive Offices
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37620
Zip
Code
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Registrants telephone number, including area code:
(423) 989-8000
Securities registered under Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
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New York Stock Exchange
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Securities registered under Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See 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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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of June 30,
2008 was $2,565,169,935. The number of shares of Common Stock,
no par value, outstanding at February 24, 2009 was
246,490,681.
Documents
Incorporated by Reference:
Certain information required in Part III of this Annual
Report on
Form 10-K
is incorporated
by reference from the registrants Proxy Statement for its
2009 annual meeting of shareholders.
PART I
King Pharmaceuticals, Inc. was incorporated in the State of
Tennessee in 1993. Our direct wholly-owned subsidiaries are
Alpharma Inc.; Meridian Medical Technologies, Inc.; Monarch
Pharmaceuticals, Inc.; King Pharmaceuticals Research and
Development, Inc.; Parkedale Pharmaceuticals, Inc.; and Monarch
Pharmaceuticals Ireland Limited.
Our principal executive offices are located at 501 Fifth
Street, Bristol, Tennessee 37620. Our telephone number is
(423) 989-8000
and our facsimile number is
(423) 274-8677.
Our website is www.kingpharm.com, where you may view our
Corporate Code of Conduct and Ethics (Code). To the
extent permitted by U.S. Securities and Exchange Commission
(SEC) and New York Stock Exchange (NYSE)
regulations, we intend to disclose information as to any
amendments to the Code and any waivers from provisions of the
Code for our principal executive officer, principal financial
officer, and certain other officers by posting the information
on our website, to the extent such matters arise. We make
available through our website, free of charge, our annual
reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and any amendments, as well as other documents, as soon as
reasonably practicable after their filing with the SEC. These
filings are also available to the public through the Internet at
the website of the SEC, at www.sec.gov. You may also read and
copy any document that we file at the SECs Public
Reference Room located at 100 F Street, NE,
Washington, DC 20549. Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room.
Our Chief Executive Officer, Brian A. Markison, submitted to the
NYSE an Annual Chief Executive Officer Certification on June 9,
2008, pursuant to Section 303A.12 of the NYSEs
listing standards, certifying that he was not aware of any
violation by King of the NYSEs corporate governance
listing standards as of that date.
King is a vertically integrated 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:
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research and development
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distribution
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manufacturing
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sales and marketing
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packaging
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business development
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quality control and assurance
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regulatory management
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Our branded prescription pharmaceuticals include neuroscience
products (primarily pain medicines), hospital products, and
legacy brands. The 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
accordingly. Our growth in specialty markets is achieved through
organic growth and acquisitions.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management. By product life-cycle management, we
mean the extension of the economic life of a product, including
seeking and gaining necessary related governmental approvals, by
such means as:
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securing from the U.S. Food and Drug Administration, which
we refer to as the FDA, additional approved uses
(indications) for our products;
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developing and producing different strengths;
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producing different package sizes;
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developing new dosage forms; and
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developing new product formulations.
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Our strategy also focuses on growth through the acquisition of
novel branded prescription pharmaceutical products in various
stages of development and the acquisition of prescription
pharmaceutical technologies, particularly those products and
technologies that we believe have significant market potential
and complement the commercial footprint we have established in
the neuroscience and hospital markets. Using our internal
resources and a disciplined business development process, 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 products or products in
development, technologies or sales and marketing capabilities to
our existing platforms or that otherwise complement our
operations. We also work to achieve organic growth by continuing
to develop investigational drugs, as we have a commitment to
research and development and advancing the products and
technologies in our development pipeline.
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. Branded prescription pharmaceutical products are
innovative products sold under a brand name that have, or
previously had, some degree of market exclusivity.
Our animal health products are marketed through a staff of
trained sales and technical service and marketing employees,
many of whom are veterinarians and nutritionists. We have sales
offices 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.
Business
Segments
Our business consists of four main segments: a specialty-driven
branded prescription pharmaceuticals business, our global animal
health business, our Meridian auto-injector business, and
royalties.
Segment
Net Revenues Summary
The following table summarizes net revenues by operating segment
(in thousands), almost all of which were derived from activities
within the United States. Note that the table does not include
net revenues for the animal health segment or the
Flector®
Patch product within the branded prescription pharmaceuticals
segment since these are part of Alpharma Inc.
(Alpharma), a company we acquired at the end of
December 2008.
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For the Years Ended December 31,
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2008
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2007
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2006
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Branded Prescription Pharmaceuticals
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$
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1,263,488
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$
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1,857,813
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$
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1,724,701
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Meridian Auto-Injector
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218,448
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183,860
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164,760
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Royalties
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79,442
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82,589
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80,357
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Contract Manufacturing
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1,327
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9,201
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16,501
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Other
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2,356
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3,419
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2,181
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Total
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$
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1,565,061
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$
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2,136,882
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$
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1,988,500
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For information regarding profit and loss and total assets
associated with each segment, see Note 20, Segment
Information in Part IV, Item 15(a)(1)
Financial Statements.
Branded
Prescription Pharmaceuticals Segment
We market a variety of branded prescription pharmaceutical
products that are divided into the following categories:
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neuroscience (including
Skelaxin®,
Avinza®
and
Flector®
Patch),
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hospital (including
Thrombin-JMI®),
and
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legacy products (including
Altace®,
Levoxyl®,
Cytomel®
and
Bicillin®).
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Our branded prescription pharmaceutical products are generally
in high-volume markets and we believe they are well known for
their treatment indications. Branded prescription pharmaceutical
products represented approximately 81% of our total net revenues
for the year ended December 31, 2008 and approximately 87% for
each of the years ended December 31, 2007 and 2006.
Some of our branded prescription pharmaceutical products are
described below:
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Product
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Product Description and Indication
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Neuroscience
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Products in this category are primarily marketed to
primary care physicians, neurologists, orthopedic surgeons and
pain specialists.
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Skelaxin®
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A muscle relaxant tablet indicated for the relief of
discomfort associated with acute, painful musculoskeletal
conditions.
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Flector®
Patch
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A topical non-steroidal anti-inflammatory patch for
the treatment of acute pain due to minor strains, sprains and
contusions.
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Avinza®
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A long-acting formulation of morphine indicated as a
once-daily treatment for moderate to severe pain in patients who
require continuous, around the clock opioid therapy for an
extended period of time.
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Hospital
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Products in this category are primarily marketed to
hospitals.
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Thrombin-JMI®
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A chromatographically purified topical (bovine)
thrombin solution indicated as an aid to hemostasis whenever
oozing blood and minor bleeding from capillaries and small
venules is accessible.
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Legacy Products
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Products in this category are not actively promoted
through our sales force and many have generic competition.
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Altace®
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An oral administration indicated for the treatment
of hypertension and reduction of the risk of stroke, myocardial
infarction (heart attack) and death from cardiovascular causes
in patients 55 and over with either a history of coronary artery
disease, stroke or peripheral vascular disease or with diabetes
and one other cardiovascular risk factor (such as elevated
cholesterol levels or cigarette smoking).
Altace®
is also indicated in stable patients who have demonstrated
clinical signs of congestive heart failure after sustaining an
acute myocardial infarction.
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Levoxyl®
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Color-coded, potency-marked tablets indicated for
thyroid hormone replacement or supplemental therapy for
hypothyroidism.
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Cytomel®
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A tablet indicated in the medical treatment of
hypothyroidism.
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Bicillin®
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A penicillin-based antibiotic suspension for deep
muscular injection indicated for the treatment of infections due
to penicillin-G-susceptible microorganisms.
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Net sales of certain of our branded prescription pharmaceutical
products for the year ended December 31, 2008 are set forth
below.
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Net Sales
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Neuroscience
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Skelaxin®
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$
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446.2
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Avinza®
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135.5
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Hospital
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Thrombin-JMI®
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$
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254.6
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Legacy Branded
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Altace®
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$
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166.4
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Levoxyl®
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73.1
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Cytomel®
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51.1
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Bicillin®
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50.5
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Flector®
Patch was added to our portfolio of branded prescription
pharmaceutical products as a result of our acquisition of
Alpharma at the end of December 2008, and accordingly sales from
the
Flector®
Patch in 2008 are not included in the table above or our
financial results provided elsewhere in this report.
Animal
Health Segment
Our animal health business is a global leader in the
development, registration, manufacture and marketing of MFAs and
water soluble therapeutics, primarily for poultry, cattle and
swine. Our MFAs and water soluble products are anti-infective
animal health products that are added to the feed and water of
livestock and poultry. This market is comprised of three primary
categories: antibiotics, anticoccidials and antibacterials. This
business was part of Alpharma. Because we acquired Alpharma at
the end of December 2008, the animal health segment is not
included in the financial results provided in this report.
Some of our animal health products are described below:
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Product
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Product Description and Indication
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Antibiotic Products
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Products in this category are used primarily in
poultry, swine and cattle to prevent and/or treat diseases and
maintain health.
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Albac®
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A bacitracin-based MFA used to prevent and/or treat
diseases, maintain health and/or improve feed efficiency.
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Aureomycin®,
Aureomycin®-
combination products,
Aurofac®
and
Chlormax®
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Feed-grade antibiotics containing chlortetracycline
used in combination with an antibacterial to prevent and/or
treat diseases, maintain health and/or improve feed efficiency.
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BMD®
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A bacitracin-based MFA used to prevent and/or treat
diseases and maintain health.
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Anticoccidial Products
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Products in this category are used primarily in
poultry and cattle to prevent coccidiosis, a condition caused by
an intestinal parasite that affects the health of the animal.
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Bio-Cox®
and
Cygro®
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MFAs used to prevent and control coccidiosis in
poultry.
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Bovatec®
and
Avatec®
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MFAs used to prevent and control coccidiosis in
cattle and poultry and to maintain health and improve feed
efficiency in cattle.
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Deccox®
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An MFA used to prevent and control coccidiosis in
poultry, cattle and calves.
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Robenz®
and
Cycostat®
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Used to prevent coccidiosis in poultry and rabbits.
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Product
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Product Description and Indication
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Rofenaid®
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Used to control disease in poultry.
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Antibacterial Products
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Products in this category are used to prevent
disease in poultry and swine.
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3-Nitro®
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An MFA used to treat disease and improve feed
efficiency in poultry and swine.
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Histostat®
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An MFA used to prevent disease in chickens and
turkeys.
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In addition to our antibiotic, anticoccidial and antibacterial
products, we also sell water soluble vitamins, minerals and
electrolytes that are used as nutritional supplements primarily
for poultry, cattle and swine.
Meridian
Auto-Injector Segment
Our Meridian Auto-Injector segment manufactures and markets
pharmaceutical products that are delivered using an
auto-injector. An auto-injector is a pre-filled, pen-like device
that allows a patient or caregiver to automatically inject a
precise drug dosage quickly, easily, safely and reliably.
Auto-injectors are a convenient, disposable, one-time use drug
delivery system designed to improve the medical and economic
value of injectable drug therapies. We pioneered the development
and are a manufacturer of auto-injectors for the
self-administration of injectable drugs. Our auto-injector
products currently consist of a variety of acute care medicines.
The commercial pharmaceutical business of our Meridian segment
consists of
EpiPen®,
an auto-injector filled with epinephrine for the emergency
treatment of anaphylaxis resulting from severe or allergic
reactions to insect stings or bites, foods, drugs and other
allergens, as well as idiopathic or exercise-induced anaphylaxis.
Our Meridian Auto-Injector segment also includes pharmaceutical
products that are sold primarily to the U.S. Department of
Defense (DoD) under an Industrial Base Maintenance
Contract which is terminable by the DoD at its convenience.
These products include the nerve agent antidotes
AtroPen®
and
ComboPen®,
and the Antidote Treatment Nerve Agent Auto-injector, which we
refer to as the ATNAA.
AtroPen®
is an atropine-filled auto-injector and
ComboPen®
consists of an atropine-filled auto-injector and a
pralidoxime-filled auto-injector. The ATNAA utilizes a dual
chambered auto-injector and injection process to administer
atropine and pralidoxime, providing an improved, more efficient
means of delivering these nerve agent antidotes. Other products
sold to the DoD include a diazepam-filled auto-injector for the
treatment of seizures and a morphine-filled auto-injector for
pain management.
Royalties
Segment
We developed a currently marketed adenosine-based product,
Adenoscan®,
for which we receive royalty revenues.
Adenoscan®
is a sterile, intravenous solution of adenosine administered
intravenously as an adjunct to imaging agents used in cardiac
stress testing of patients who are unable to exercise
adequately. Specifically, we are party to an agreement under
which Astellas Pharma US, Inc. (Astellas)
manufactures and markets
Adenoscan®
in the United States and Canada in exchange for royalties
through the duration of the patents. We have licensed exclusive
rights to other third-party pharmaceutical companies to
manufacture and market
Adenoscan®
in certain countries other than the United States and Canada in
exchange for royalties.
Royalties received by us from sales of
Adenoscan®
outside of the United States and Canada are shared equally with
Astellas. Astellas, on its own behalf and ours, obtained a
license to additional intellectual property rights for
intravenous adenosine in cardiac imaging and the right to use
intravenous adenosine as a cardioprotectant in combination with
thrombolytic therapy, balloon angioplasty and coronary bypass
surgery. For additional information on our royalty agreements
and anticipated competition, please see the section below
entitled Intellectual Property.
6
Recent
Developments
Acquisition
of Alpharma Inc.
On December 29, 2008, we completed our acquisition of all
the outstanding common shares of Alpharma at a price of $37.00
per share in cash, for an aggregate purchase price of
approximately $1.6 billion.
As a result of the transaction, Alpharma is now a wholly-owned
subsidiary of King. The acquisition was funded with available
cash on hand, borrowings of $425.0 million under our Senior
Secured Revolving Credit Facility, as amended on
December 5, 2008 (the Revolving Credit
Facility), and borrowings of $200.0 million under a
term loan.
Alpharma has a growing branded prescription pharmaceutical
franchise in the U.S. pain market with its
Flector®
Patch (diclofenac epolamine topical patch) 1.3% and a pipeline
of new pain medicines led by
Embedatm,
a formulation of long-acting morphine that is designed to
provide controlled pain relief and deter certain common methods
of misuse an4d abuse. Alpharma is also a leading provider of
MFAs for food-production animals, principally poultry, cattle
and swine.
We believe our acquisition of Alpharma is particularly
significant because it strengthens our portfolio and development
pipeline of pain management products and increases our
capabilities and expertise in this important market. The
development pipeline provides us with both near-term and
long-term revenue opportunities and the animal health business
further diversifies our revenue base. As a result, we believe
this acquisition creates a stronger foundation for sustainable,
long-term growth for our Company.
Contemporaneous with our acquisition of Alpharma and in
accordance with a consent order with the U.S. Federal Trade
Commission, we divested the rights to Alpharmas
Kadian®
(morphine sulfate long-acting) to Actavis Elizabeth, L.L.C.
Pursuant to the divestiture, we will receive from Actavis
Elizabeth future quarterly payments 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.
Potential
Generic Substitution for
Skelaxin®
On January 20, 2009, the U.S. District Court for the
Eastern District of New York issued an Order ruling invalid
United States Patent Nos. 6,407,128 and 6,683,102, two patents
relating to
Skelaxin®,
our branded muscle relaxant. The Order was issued without
benefit of a hearing in response to Eon Labs motion for
summary judgment. Upon the entry of an appropriate judgment, we
plan to appeal and vigorously defend our interests. Invalidation
of these two patents would likely lead to generic versions of
Skelaxin®
entering the market sooner than previously expected and would
likely cause our net sales of
Skelaxin®
to decline significantly.
Following the decision of the District Court, our senior
management team conducted an extensive examination of our
company and developed a restructuring initiative designed to
partially offset the potential decline in Skelaxin sales in the
event that a generic competitor enters the market. Based on an
analysis of our strategic needs, this initiative includes: a
reduction in sales, marketing and other personnel; leveraging of
staff; expense reductions and additional controls over spending;
and reorganization of sales teams. Our animal health activities
are not affected by the restructuring.
On January 29, 2009, our management approved the
restructuring initiative, effective immediately. Pursuant to
this initiative, we will reduce our workforce by approximately
520 positions, including approximately 380 field sales
positions. This reduction, which we expect to be substantially
complete by late March 2009, represents approximately 17% of our
current workforce after taking into account a previous reduction
in workforce following our acquisition of Alpharma.
We estimate that, in connection with the restructuring
initiative, we will incur total restructuring costs of between
$50 million and $55 million, all of which are expected
to be paid during the first half of 2009. These costs all relate
to severance pay and other employee termination expenses.
7
Also, in January 2008, we entered into an agreement with
CorePharma, LLC (CorePharma) granting CorePharma a
license to launch an authorized generic version of
Skelaxin®
in December 2012 or earlier under certain conditions.
Branded
Prescription Pharmaceuticals Development
Advances
Embedatm
The
Embedatm
New Drug Application (NDA) was submitted to the FDA
in June 2008. Utilizing proprietary technology,
Embedatm,
which contains long-acting morphine pellets, each with a
sequestered core of naltrexone, an opioid antagonist, has a
proposed indication for the management of moderate to severe
pain when a continuous, around-the-clock opioid analgesic is
needed for an extended period of time. The formulation is
designed to work such that if taken as directed, the morphine
would relieve pain while the sequestered naltrexone would pass
through the body with no intended clinical effect. If
Embedatm
capsules are crushed or chewed, however, the naltrexone would be
released, mitigating the euphoric effect that might otherwise be
caused by the morphine under these circumstances. We acquired
Embedatm
on December 29, 2008 as part of our acquisition of
Alpharma. In December 2008, the FDA informed us that it is
continuing its review of the
Embedatm
NDA.
Remoxy®
The
Remoxy®
NDA was submitted to the FDA in June 2008. In December 2008, our
partner Pain Therapeutics, Inc. (PTI) received a
Complete Response Letter from the FDA with respect to the NDA
for
Remoxy®,
requiring additional
non-clinical
information to support approval. We are working with PTI to
complete an assessment of the Complete Response Letter and
prepare a written response. We together with PTI plan to meet
with the FDA during the second quarter of 2009 to discuss our
response, following which we expect to have a better
understanding of the additional steps and the time required to
obtain approval.
Remoxy®
is a unique long-acting formulation of oral oxycodone with a
proposed indication for the management of moderate to severe
pain when a continuous, around-the-clock, opioid analgesic is
needed for an extended period of time. This formulation uses the
Oradurtm
platform technology which provides a unique physical barrier
that is designed to provide controlled pain relief and resist
certain common methods used to extract the opioid more rapidly
than intended as can occur with products currently on the
market. Common methods used to cause a rapid extraction of an
opioid include crushing, chewing and dissolution in alcohol.
These methods are typically used to cause failure of the
controlled release dosage form, resulting in dose
dumping of oxycodone, or the immediate release of the
active drug.
Acurox®
Tablets
An NDA for
Acurox®
(oxycodone HCl/niacin) Tablets was submitted to the FDA in
December 2008.
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 the patented
Aversion®
Technology of Acura Pharmaceuticals, Inc.
(Acura), 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 results in the formation
of a viscous gel which is intended to sequester the opioid and
deter I.V. injection. 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 that may
potentially deter this method of misuse and abuse.
CorVuetm
(binodenoson) for injection
In December 2008, we submitted an NDA for
CorVuetm
to the FDA.
CorVuetm
is a cardiac pharmacologic stress SPECT (single-photon-emission
computed tomographic) imaging agent with a proposed indication
for use in patients with or at risk for coronary artery disease
who are unable to perform a cardiac exercise stress test. In the
NDA, we are requesting FDA approval of
CorVuetm
as an adjunct to non-invasive myocardial
8
perfusion imaging tests to detect perfusion abnormalities in
patients with known or suspected coronary artery disease.
T-62
In December 2008, we initiated a Phase II clinical trial
program evaluating the efficacy and safety of T-62, our
investigational oral drug formulation for the treatment of
neuropathic pain. T-62, a new chemical entity, is an adenosine
A1 allosteric enhancer that is intended to increase the
effectiveness of the bodys endogenous adenosine to treat
neuropathic pain. The Phase II clinical trial is a
multicenter, randomized, double-blind, placebo-controlled study
assessing the analgesic efficacy and safety of T-62 in subjects
with postherpetic neuralgia and its associated pain. The study
is expected to enroll approximately 130 patients in up to
20 study centers and will evaluate two doses of T-62 and placebo
utilizing a parallel design. Each patient will complete a
7-day
screening period, a
28-day
treatment period, and a
14-day
post-treatment period.
Branded
Prescription Pharmaceuticals Promoted Portfolio
Developments
Avinza®
New mandates of the Food and Drug Administration Amendments Act
of 2007 (FDAAA) authorize the FDA to require a risk evaluation
and mitigation strategy (REMS) as part of the new drug approval
process if the agency believes that it is needed to ensure that
a proposed new drugs benefits outweigh its risks. The law
also authorizes the agency to require a REMS for certain drugs
approved before FDAAA was signed into law. A REMS can include a
Medication Guide, Patient Package Insert, a communication plan,
elements to ensure safe use and an implementation schedule, and
must include a timetable for assessment of the REMS. Elements to
ensure safe use include requiring that: healthcare providers
have particular training or be certified, pharmacies,
practitioners or healthcare settings that dispense the drug be
specially certified, the drug be dispensed to patients only in
certain healthcare settings, the drug be dispensed to patients
with evidence of safe use conditions, each patient be subject to
certain monitoring,
and/or each
patient using the drug be enrolled in a registry.
On February 6, 2009, the FDA sent a letter to the 16
manufacturers of previously approved, currently marketed
long-acting opioid drug products, including us as manufacturer
of
Avinza®,
indicating that this class of drugs will be required to have a
REMS. FDA has determined that a REMS is required to ensure that
the benefits outweigh the risks of: 1) use of certain
opioid products in non-opioid tolerant individuals;
2) abuse; and 3) overdose, both accidental and
intentional. The agency has announced its intention to consult
all relevant stakeholders, including manufacturers, pharmacies,
healthcare practitioners, patient groups and others in
developing this
class-wide
REMS of long-acting opioids. In the first of a series of such
meetings, the FDA has invited those companies that market the
affected opioid drugs to meet with the agency on March 3,
2009 to discuss development of such a
class-wide
REMS.
King currently has a Risk Management Program (RMP) in place for
Avinza®
consisting of an Appropriate Use and Communication Program,
Monitoring and Surveillance, Research and Evaluation.
Kings Risk Management Team (RMT) meets every 6 weeks
to review data collected on any reported misuse, abuse and
diversion of
Avinza®.
It is not possible at this time to determine whether or in what
way the consideration of a
class-wide
REMS for all long-acting opioids will change the elements of
Kings current risk management program for
Avinza®
or how any such changes might affect the marketing or sales of
Avinza®.
As discussed elsewhere in this report, King has NDAs for two
long-acting opioid products,
Embedatm
and
Remoxy®,
under review by the FDA. Both of these applications include
comprehensive proposals for REMS for those products. It is not
possible at this time to determine what, if any, effect the
FDAs ongoing process for developing
class-wide
REMS for previously approved, currently marketed long-acting
opioids will have on the FDAs review timeline of the
pending NDAs for
Embedatm
and/or
Remoxy®,
or their future market potential.
9
Thrombin-JMI®
Beginning in the fourth quarter of 2007,
Thrombin-JMI®,
our bovine thrombin product, faced new competition. A human
thrombin product entered the market in the fourth quarter of
2007 and a recombinant human thrombin entered the market during
the first quarter of 2008.
Sonata®
In June 2008, a third party entered the market with a generic
substitute for
Sonata®
following the expiration of our patent covering
Sonata®.
Industries
The global human pharmaceutical and animal health industries are
highly competitive and each includes a variety of participants,
including large and small branded pharmaceutical companies,
specialty and niche-market human pharmaceutical
and/or
animal health companies, biotechnology firms, large and small
research and drug development organizations, and generic drug
manufacturers. These participants compete on a number of bases,
including technological innovation, clinical efficacy, safety,
convenience or ease of administration and cost-effectiveness. In
order to promote their products, industry participants devote
considerable resources to advertising, marketing and sales force
personnel, distribution mechanisms and relationships with
medical and research centers, physicians, patient advocacy and
support groups, veterinarians, commercial animal food
manufacturers, wholesalers and integrated cattle, swine and
poultry producers.
The human pharmaceutical industry is affected by the following
factors, among others:
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the aging of the patient population, including diseases specific
to the aging process and demographic factors, including obesity,
diabetes, cardiovascular disease, and patient and physician
demand for products that meet chronic or unmet medical needs;
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technological innovation, both in drug discovery and corporate
processes;
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merger and acquisition activity whereby pharmaceutical companies
acquire one another, biotechnology companies, or particular
products;
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cost containment and downward price pressure from managed care
organizations and governmental entities, both in the United
States and in other countries;
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increasing drug development, manufacturing and compliance costs
for pharmaceutical producers;
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the actions of generic pharmaceutical companies and challenges
to patent protection and sales exclusivity;
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more frequent product liability litigation;
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increased governmental scrutiny of the healthcare sector,
including issues of patient safety, cost, efficacy and
reimbursement/insurance matters; and
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the cost of advertising and marketing, including
direct-to-consumer advertising on television and in print.
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The animal health industry is affected by the following factors,
among others:
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technological innovation, both in drug discovery and corporate
processes;
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merger and acquisition activity whereby animal health companies
acquire one another, biotechnology companies, or particular
products;
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cost containment and downward price pressure;
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increased drug development, manufacturing and compliance costs
for producers of animal health products;
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more frequent product liability litigation; and
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increased governmental scrutiny of the sector, including
governmental restrictions on the use of antibiotics in certain
food-producing animals.
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Sales and
Marketing
Branded
Prescription Pharmaceuticals
The commercial operations organization for our branded
prescription pharmaceuticals business, which includes sales and
marketing, is based in Bridgewater, New Jersey. We have a sales
force consisting of approximately 720 employees in the
United States and Puerto Rico. We distribute our branded
prescription pharmaceutical products primarily through wholesale
pharmaceutical distributors. These products are ordinarily
dispensed to the public through pharmacies as a result of
prescriptions written by physicians and other licensed
practitioners. Our marketing and sales promotions for branded
prescription pharmaceutical products principally target
general/family practitioners, internal medicine physicians,
neurologists, pain specialists, surgeons and hospitals through
detailing and sampling to encourage physicians to prescribe our
products. The sales force is supported by telemarketing and
direct mail, as well as by advertising in trade publications and
representation at regional and national medical conventions. We
identify and target physicians using data available from
suppliers of prescriber prescription data. The marketing and
distribution of these products in foreign countries generally
requires the prior registration of the products in those
countries. In those situations when we seek to sell one of our
branded prescription pharmaceutical products in a market outside
of the United States, we generally enter into distribution
agreements with companies with established marketing and
distribution capabilities in those territories since we do not
have a distribution network in place for distribution outside
the United States, Canada and Puerto Rico.
Similar to other pharmaceutical companies, our principal
customers for our branded prescription pharmaceutical products
are wholesale pharmaceutical distributors. The wholesale
distributor network for branded prescription pharmaceutical
products has in recent years been subject to increasing
consolidation, which has increased our, and other industry
participants, customer concentration. In addition, the
number of independent drug stores and small chains has decreased
as retail consolidation has occurred. For the year ended
December 31, 2008, approximately 72% of our gross sales
were attributable to three key wholesalers: McKesson Corporation
(30%), Cardinal/Bindley (28%), and Amerisource Bergen
Corporation (14%).
Meridian
Auto-Injector
We have a supply agreement with Dey, L.P., in which we granted
Dey the exclusive right to market, distribute, and sell
EpiPen®
worldwide. The supply agreement expires December 31, 2015.
In March 2006, we acquired substantially all of the assets of
Allerex Laboratory LTD. The primary asset purchased from Allerex
was the exclusive right to market and sell
EpiPen®
throughout Canada. We also obtained from Dey, L.P. an extension
of those exclusive rights to market and sell
EpiPen®
in Canada through 2015. Accordingly, through a limited team of
sales professionals, we market
EpiPen®
to allergists, pediatricians, internal medicine physicians,
general practitioners and pharmacists across Canada.
Through a team of inside sales professionals, we market 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 agencies,
emergency medical personnel and first responders.
Animal
Health
Our animal health products are marketed through a staff of
approximately 100 technically trained sales and technical
service and marketing employees, many of whom are veterinarians
and nutritionists. We have sales offices 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. Sales are
made principally to commercial animal feed manufacturers,
wholesalers and integrated cattle, swine and poultry producers.
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Although the customer base for our animal health products is not
significantly concentrated, consolidation is taking place.
Accordingly, as consolidation continues, our animal health
business may become more dependent on certain individual
customers.
Manufacturing
Branded
Prescription Pharmaceuticals and Meridian Auto-Injector
Segments
We manufacture certain of our own branded prescription
pharmaceutical products at facilities located in Bristol,
Tennessee; Rochester, Michigan; Middleton, Wisconsin; and St.
Petersburg, Florida. Our Meridian Auto-Injector manufacturing
facility is located in St. Louis, Missouri. These facilities
have manufacturing, packaging, laboratory, office and warehouse
space. We are licensed by the Drug Enforcement Agency, which we
refer to as the DEA, a division of the Department of
Justice, to procure and produce controlled substances. We
maintain an operational excellence program utilizing Six Sigma
and lean manufacturing techniques to identify and execute
cost-saving and process-improvement initiatives.
We are capable of producing a broad range of dosage forms,
including injectables, tablets and capsules, creams and
ointments. We believe this manufacturing versatility allows us
to pursue drug development and product line extensions more
efficiently. However, currently many of our product lines,
including
Skelaxin®,
Thrombin-JMI®,
Avinza®,
Flector®
Patch and
Synercid®
are manufactured for us by third parties. Our branded
prescription pharmaceutical and Meridian Auto-Injector
facilities generally operate at moderate capacity utilization
rates except for the Bristol facility that currently has a low
level of capacity utilization. Although the capacity utilization
at our Bristol facility was lower in 2008 than in previous
years, we expect that the capacity utilization at that location
will increase in future years. We are transferring the
production of
Levoxyl®
from our St. Petersburg facility to our Bristol facility.
Following the transfer, which we expect to complete in 2009, we
will close our St. Petersburg facility. In addition, we plan to
increase some of the utilization at our Bristol facility by
manufacturing some of the new products we expect to emerge from
our pipeline in the near future.
In addition to manufacturing, we have fully integrated
manufacturing support systems including quality assurance,
quality control, regulatory management and logistics. We believe
that these support systems enable us to maintain high standards
of quality for our products and simultaneously deliver reliable
goods to our customers on a timely basis.
We require a supply of quality raw materials and components to
manufacture and package drug products. Generally, we have not
had difficulty obtaining raw materials and components from
suppliers. Currently, we rely on more than 500 suppliers to
deliver the necessary raw materials and components for our
products.
Animal
Health Segment
We produce our animal health products in several manufacturing
facilities, including those located in Chicago Heights,
Illinois, which contains a modern fermentation and recovery
plant; Shenzhou, China; Yantai, China; Longmont, Colorado, which
produces the majority of our soluble antibiotics and vitamins;
Willow Island, West Virginia, which produces unblended
chlortetracycline (CTC) and lasalocid; Van Buren,
Arkansas, which blends
Bio-Cox®;
Salisbury, Maryland, which blends
Avatec®
and
Bovatec®;
and Eagle Grove, Iowa, which formulates
Aureomycin®
products. Process improvement and manufacturing development is
performed primarily at the Chicago Heights and Willow Island
facilities. In addition, we make significant use of third-party
facilities. Our animal health facilities generally operate at
moderate capacity utilization rates except the Chicago Heights
and Willow Island facilities, which currently have a high level
of capacity utilization, and the Yantai facility, which
currently has a low level of capacity utilization.
Research
and Development
Branded
Prescription Pharmaceuticals and Meridian Auto-Injector
Segments
We are engaged in the development of chemical compounds,
including new chemical entities, which provide us with strategic
pipeline opportunities for the commercialization of new branded
prescription
12
pharmaceutical products. In addition to developing new chemical
compounds, we pursue strategies to enhance the value of existing
products by developing new uses, formulations, and drug delivery
technology that may provide additional benefits to patients and
improvements in the quality and efficiency of our manufacturing
processes.
We invest in research and development because we believe it is
important to our long-term growth. We presently employ
approximately 100 people in research and development,
including pre-clinical and toxicology experts, pharmaceutical
formulation scientists, clinical development experts, medical
affairs personnel, regulatory affairs experts, data
scientists/statisticians and project managers.
We outsource a substantial portion of our non-critical research
and development activities. This approach provides us with
substantial flexibility and allows high efficiency while
minimizing internal fixed costs. Utilizing this approach, we
supplement our internal efforts by collaborating with
independent research organizations, including educational
institutions and research-based pharmaceutical and biotechnology
companies, and contracting with other parties to perform
research in their facilities. We use the services of physicians,
hospitals, medical schools, universities, and other research
organizations worldwide to conduct clinical trials to establish
the safety and efficacy of new products. We seek investments in
external research and technologies that hold the promise to
complement and strengthen our own research efforts. These
investments can take many forms, including in-licensing
arrangements, development agreements, joint ventures and the
acquisition of products in development.
Drug development is time-consuming and expensive. Only a small
percentage of chemical compounds discovered by researchers prove
to be both medically effective and safe enough to become an
approved medicine. The process from discovery to regulatory
approval typically takes 10 to 15 years or longer. Drug
candidates can fail at any stage of the process, and even
late-stage product candidates frequently fail to receive
regulatory approval.
Clinical trials are conducted in a series of sequential phases,
with each phase designed to address a specific research
question. In Phase I clinical trials, researchers test a new
drug or treatment in a small group of people to evaluate the
drugs safety, determine a safe dosage range and identify
side effects. In Phase II clinical trials, researchers give
the drug or treatment to a larger population to assess
effectiveness and to further evaluate safety. In Phase III
clinical trials, researchers give the drug or treatment to an
even larger population to confirm its effectiveness, monitor
side effects, compare it to commonly used treatments and collect
information that will allow the drug or treatment to be used
safely. The results of Phase III clinical trials are
pivotal for purposes of obtaining FDA approval of a new product.
Phase IV clinical trials are typically conducted after FDA
approval in order to broaden the understanding of the safety and
efficacy of a drug as utilized in actual clinical practice or to
explore alternative or additional uses.
Our development projects, including those for which we have
collaboration agreements with third parties, include the
following:
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Embedatm,
a novel formulation of long-acting morphine with a proposed
indication for the management of moderate to severe chronic
pain, is specifically designed to resist certain common methods
of misuse and abuse associated with long-acting morphine
products that are currently available. The NDA for
Embedatm
was submitted to the FDA in June 2008. In December 2008, the FDA
informed us that it is continuing its review of the
Embedatm
NDA.
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Remoxy®,
a novel formulation of long-acting oxycodone with a proposed
indication for the treatment of moderate to severe chronic pain,
is specifically designed to resist certain common methods of
misuse and abuse associated with long-acting oxycodone products
that are currently available. In December 2008, the FDA issued a
Complete Response Letter with respect to the NDA for
Remoxy®,
requiring additional non-clinical information to support
approval of the product. We are working with our partner, Pain
Therapeutics, Inc., to complete our assessment of the Complete
Response Letter and prepare a written response. We together with
PTI plan to meet with the FDA during the second quarter of 2009
to discuss our response, following which we expect to have a
better understanding of the additional steps and the time
required to obtain approval.
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Acurox®
Tablets, a novel formulation of immediate release oxycodone with
a proposed indication for the treatment of moderate to severe
pain, is specifically designed to deter certain common methods
of misuse and abuse associated with immediate release oxycodone
products that are currently available. Our partner, Acura,
submitted the NDA for
Acurox®
in December 2008 and requested priority review.
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CorVuetm
(binodenoson) is our next generation cardiac pharmacologic
stress-imaging agent. We submitted an NDA to the FDA in December
2008.
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Ketoprofen in
Transfersome®
gel, our topical non-steroidal anti-inflammatory drug, entered
Phase III clinical trials in the second quarter of 2008.
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Vanquixtm,
a diazepam-filled auto-injector with a proposed indication for
the treatment of acute, repetitive epileptic seizures, is
currently in Phase III clinical trials.
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T-62, an investigational drug for the treatment of neuropathic
pain, is currently in Phase II clinical trials.
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Eladur®,
an investigational transdermal bupivacaine patch for the
treatment of pain associated with postherpetic neuralgia, is
currently in Phase II clinical trials.
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Oxycodone NT, a novel formulation of long-acting oxycodone for
the treatment of moderate to severe chronic pain, is currently
in early stages of clinical development. Oxycodone NT is
specifically designed to resist certain common methods of misuse
and abuse associated with long-acting oxycodone products that
are currently available.
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Hydrocodone NT, a novel formulation of long-acting hydrocodone
for treatment of
moderate-to-severe
chronic pain, is currently in early stages of clinical
development. Hydrocodone NT is specifically designed to resist
certain common methods of misuse and abuse associated with
long-acting hydrocodone products that are currently available.
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Our research and development expenses totaled
$145.2 million in 2008 compared to $149.4 million in
2007 and $143.6 million in 2006, excluding research and
development in-process at the time of acquisition of a product.
These amounts also exclude research and development expenses
incurred by Alpharma since it was not acquired until the end of
December 2008. In-process research and development expenses were
$598.5 million for the year ended December 31, 2008,
$35.3 million for the year ended December 31, 2007 and
$110.0 million for the year ended December 31, 2006.
In-process research and development represents the actual cost
of acquiring rights to branded prescription pharmaceutical
projects in development from third parties, which costs we
expense at the time of acquisition. The in-process research and
development expenses in 2008 primarily relate to our acquisition
of Alpharma on December 29, 2008.
Animal
Health Segment
Our product portfolio enhancement initiatives with respect to
our animal health business focus on activities complementary to
in-licensing
and co-developing technology through third parties and expanding
the geographic reach of our current product line with new
registrations in new jurisdictions. In addition, we conduct
technical product development activities at our Willow Island,
West Virginia, Chicago Heights, Illinois and Bridgewater, New
Jersey facilities, as well as through contract research
organizations and independent research facilities. We presently
employ approximately 20 research and development professionals
in our animal health business.
Government
Regulation
Branded
Prescription Pharmaceuticals and Meridian Auto-Injector
Segments
Our business and our products are subject to extensive and
rigorous regulation. Our existing and investigational products
are subject to pre-market approval requirements. New drugs are
approved under, and are subject to, the Food, Drug and Cosmetics
Act (FDC Act) and related regulations. Biological
drugs are
14
subject to both the FDC Act and the Public Health Service Act,
which we refer to as the PHS Act, and related
regulations. Biological drugs are licensed under the PHS Act.
At the federal level, we are principally regulated by the FDA as
well as by the DEA, the Consumer Product Safety Commission, the
Federal Trade Commission (FTC), the Occupational
Safety and Health Administration, and the
U.S. Environmental Protection Agency (EPA). The
FDC Act, the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other
things, the development, testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of branded prescription pharmaceutical
products.
The processes by which regulatory approvals are obtained from
the FDA to market and sell a new product are complex, require a
number of years and involve the expenditure of substantial
resources. Compounds or potential new products that appear
promising in development can prove unsuccessful and fail to
receive FDA approval, fail to receive approval of specific
anticipated indications, be substantially delayed, or receive
unfavorable product labeling (including limitations on
indications or stringent safety warnings), each of which can
materially affect the commercial value of the product.
Additional factors that may materially affect the success
and/or
timing of regulatory approval of a new product, and its
commercial potential, include the regulatory filing strategies
employed, the timing of and delays in FDA review, and the
intervention by third parties in the approval process through
administrative or judicial means.
When we acquire the right to market an existing approved branded
prescription pharmaceutical product, both we and the former
application holder are required to submit certain information to
the FDA. This information, if adequate, results in the transfer
of marketing rights to us. We are also required to report to the
FDA, and sometimes acquire prior approval from the FDA for,
certain changes in an approved NDA or Biologics Licensing
Application, as set forth in the FDAs regulations. When
advantageous, we transfer the manufacture of acquired branded
prescription pharmaceutical products to other manufacturing
facilities, which may include manufacturing assets we own, after
regulatory requirements are satisfied. In order to transfer
manufacturing of acquired products, the prospective new
manufacturing facility must demonstrate, through the filing of
information with the FDA, that it can manufacture the product in
accordance with current Good Manufacturing Practices, referred
to as cGMPs, and the specifications and conditions
of the approved marketing application. There can be no assurance
that the FDA will grant necessary approvals in a timely manner,
if at all.
The FDA also mandates that drugs be manufactured, packaged and
labeled in conformity with cGMPs at all times. In complying with
cGMPs, manufacturers must continue to expend time, money and
effort in production, record keeping and quality control to
ensure that the products meet applicable specifications and
other requirements to ensure product safety and efficacy.
The FDA and other government agencies periodically inspect drug
manufacturing facilities to ensure compliance with applicable
cGMP and other regulatory requirements. Failure to comply with
these statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, recall of product or seizure of
product. We must report adverse experiences associated with the
use of our products by patients to the FDA. The FDA could impose
market restrictions on us such as labeling changes or product
removal as a result of significant reports of unexpected, severe
adverse experiences. Product approvals may be withdrawn if we
fail to comply with regulatory requirements or if there are
problems with the safety or efficacy of the product.
The federal government has extensive enforcement powers over the
activities of pharmaceutical manufacturers, including the
authority to withdraw product approvals at any time, commence
actions to seize and prohibit the sale of unapproved or
non-complying products, halt manufacturing operations that are
not in compliance with cGMPs, and impose or seek injunctions,
voluntary or involuntary recalls, and civil monetary and
criminal penalties. A restriction or prohibition on sales or
withdrawal of approval of products marketed by us could
materially adversely affect our business, financial condition or
results of operations.
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Certain of the branded prescription pharmaceutical products we
manufacture and sell are controlled substances as
defined in the Controlled Substances Act and related federal and
state laws. These laws establish certain security, licensing,
record keeping, reporting and personnel requirements
administered by the DEA and state authorities. The DEA has dual
missions of law enforcement and regulation. The former deals
with the illicit aspects of the control of abusable substances
and the equipment and raw materials used in making them. The DEA
shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice.
The DEAs regulatory responsibilities are concerned with
the control of licensed manufacturers, distributors and
dispensers of controlled substances, the substances themselves
and the equipment and raw materials used in their manufacture
and packaging in order to prevent these articles from being
diverted into illicit channels of commerce. We maintain
appropriate licenses and certificates with the DEA and
applicable state authorities in order to engage in the
development, manufacturing and distribution of pharmaceutical
products containing controlled substances.
The distribution and promotion of pharmaceutical products is
subject to the Prescription Drug Marketing Act
(PDMA), a part of the FDC Act, which regulates
distribution activities at both the federal and state levels.
Under the PDMA and its implementing regulations, states are
permitted to require registration of manufacturers and
distributors who provide pharmaceuticals even if these
manufacturers or distributors have no place of business within
the state. States are also permitted to adopt regulations
limiting the distribution of product samples to licensed
practitioners, and in most states, distributing samples of
controlled substances to licensed practitioners is prohibited.
The PDMA also imposes extensive licensing, personnel record
keeping, packaging, labeling, product handling, storage and
security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions of samples.
A number of states have passed laws specifically designed to
track and regulate specified activities of pharmaceutical
companies. Other states and the federal government presently
have pending legislation that will have similar effects. Some of
these state laws require the tracking and reporting of
advertising or marketing activities and spending within the
state. Others limit spending on items provided to healthcare
providers or state officials.
Animal
Health Segment
Our animal health business and products are subject to extensive
and rigorous regulation by federal, state, local and foreign
agencies. Additionally, our operations are subject to complex
federal, state, local and foreign laws and regulations
concerning the environment and occupational and health safety.
Animal drugs must be reviewed and receive registration from the
FDA for marketing in the United States and approval or
registration by similar regulatory agencies in other countries,
most notably those in Canada, the European Union, Asia and Latin
America. Regulatory approvals for products to be used in food
producing animals are complex due to, among other things, the
possible impact on humans. Government regulation of our animal
health products includes detailed inspections of, and controls
over, testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, reporting, approval, advertising,
promotion, sale and distribution.
Approval also must be granted in the United States for the use
of an animal drug in combination with other animal drugs in
feeds. Such combination approval generally requires the
cooperation of other manufacturers to consent to authorize the
FDA to refer to such manufacturers New Animal Drug
Application (or NADA) in support of our regulatory submissions.
This consent is necessary to obtain approval from the FDA for
the use of an animal drug in combination with other animal drugs
in feeds. To date, we have been successful in obtaining the
cooperation of third parties to seek combination approval for
many products, which extends the reach and potential market
share of such products.
Environmental
Matters
Our operations are subject to numerous and increasingly
stringent federal, state, local and foreign environmental laws
and regulations concerning, among other things, the generation,
handling, storage,
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transportation, treatment and disposal of toxic and hazardous
substances and the discharge of pollutants into the air and
water. Environmental permits and controls are required for some
of our operations and these permits are subject to modification,
renewal and revocation by the issuing authorities. We believe
that our facilities are in substantial compliance with our
permits and environmental laws and regulations and do not
believe that future compliance with current environmental laws
will have a material adverse effect on our business, financial
condition or results of operations. Our environmental capital
expenditures and costs for environmental compliance were
immaterial in 2008 and 2007, but may increase in the future as a
result of changes in environmental laws and regulations or as a
result of increased manufacturing activities at any of our
facilities.
Competition
Branded
Prescription Pharmaceuticals and Meridian Auto-Injector
Segments
We compete with numerous other pharmaceutical companies,
including large, global pharmaceutical companies, for the
acquisition of products and technologies in later stages of
development. We also compete with other pharmaceutical companies
for currently marketed products and product line acquisitions.
Additionally, our products are subject to competition from
products with similar qualities. Our branded prescription
pharmaceutical products may be subject to competition from
alternate therapies during the period of patent protection and
thereafter from generic equivalents. The manufacturers of
generic products typically do not bear the related research and
development costs and consequently are able to offer such
products at considerably lower prices than the branded
equivalents. There are, however, a number of factors which
enable some products to remain profitable once patent protection
has ceased. These include the establishment of a strong brand
image with the prescriber or the consumer, supported by the
development of a broader range of alternative formulations than
the manufacturers of generic products typically supply.
Some of our branded prescription pharmaceutical products
currently face competition from generic substitutes and others
may face competition from generic substitutes in the future. For
a manufacturer to launch a generic substitute, it must prove to
the FDA that the branded prescription pharmaceutical product and
the generic substitute are therapeutically equivalent.
The FDA requires that generic applicants claiming invalidity or
non-infringement of patents listed by a NDA holder give the NDA
holder notice each time an abbreviated new drug application
(ANDA) which claims invalidity or non-infringement
of listed patents is either submitted or amended. If the NDA
holder files a patent infringement suit against the generic
applicant within 45 days of receiving such notice, the FDA
is barred (or stayed) from approving the ANDA for 30 months
unless specific events occur sooner. To avoid multiple
30-month
stays for the same branded drug, the relevant provisions of the
Hatch-Waxman Act (21 U.S.C. §§ 355(j)(2) and
(5)) indicate that a
30-month
stay will only attach to patents that are listed in the
FDAs Approved Drug Products with Therapeutic
Equivalence Evaluations, which we refer to as the
FDAs Orange Book, at the time an ANDA is
originally filed. Although the ANDA filer is still required to
certify against a newly listed patent, and the NDA holder can
still bring suit based upon infringement of that patent, such a
suit will not trigger an additional
30-month
stay of FDA approval of the ANDA.
Patents that claim a composition of matter relating to a drug or
certain methods of using a drug are required to be listed in the
FDAs Orange Book. The FDAs regulations prohibit
listing of certain types of patents. Thus, some patents that may
issue are not eligible for listing in the FDAs Orange Book
and thus not eligible for protection by a
30-month
stay of FDA approval of the ANDA.
Animal
Health Segment
Our animal health products compete in a highly competitive
global market on the basis of brand name, customer service and
price. Some of our competitors in the animal health industry
offer a wide range of products with various therapeutic and
production enhancing qualities. Some of the principal
competitors include Eli Lilly and Company (Elanco), Pennfield,
Phibro Animal Health, Novartis and Huvepharma. Given
17
our strong market position in MFAs and experience in obtaining
requisite FDA approvals for combination claims, we believe we
have a competitive advantage in marketing MFAs under the FDA
approved combination clearances. No assurances can be given,
however, that third parties will continue to cooperate in
seeking combination approval for our products and we expect
additional entrants in the generic MFA market in the future.
More than half of our animal health products are sold in the
U.S. and we have a growing presence in Europe, Mexico,
Canada, South America and Asia.
Intellectual
Property
Patents,
Licenses and Proprietary Rights
The protection of discoveries in connection with our development
activities is critical to our business. The patent positions of
pharmaceutical companies, including ours, are uncertain and
involve legal and factual questions which can be difficult to
resolve. We seek patent protection in the United States and
selected foreign countries where and when appropriate.
Skelaxin®
has three method-of-use patents listed in the FDAs Orange
Book, two of which expire in December 2021 and the last of which
expires in February 2026. On January 20, 2009, the
U.S. District Court for the Eastern District of New York
issued an Order ruling invalid United States Patent Nos.
6,407,128 and 6,683,102, two patents relating to
Skelaxin®,
our branded muscle relaxant. The Order was issued without
benefit of a hearing in response to Eon Labs motion for
summary judgment. We plan to appeal, upon the entry of an
appropriate judgment, and we intend to vigorously defend our
interests. In addition, in January 2008, we entered into an
agreement with CorePharma providing it with a license to launch
an authorized generic version of
Skelaxin®
in December 2012 or earlier under certain conditions.
Avinza®
has a formulation patent listed in the FDAs Orange Book
that expires in November 2017.
Flector®
Patch has a formulation patent listed in the FDAs Orange
Book that expires in April 2014.
We own the intellectual property rights associated with
Meridians dual-chambered auto-injector and injection
process, which include a patent in the United States that
expires in April 2010.
We receive royalties on sales of
Adenoscan®,
a product that we developed. We own one patent on
Adenoscan®
with an expiration date of May 2009. We also have certain rights
tied to another patent covering this product which does not
expire until 2015. In October 2007, we entered into an agreement
with Astellas 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.
In addition to the intellectual property for the currently
marketed products described above, we also have created,
acquired or licensed intellectual property related to various
products currently under development. For example, in connection
with our collaborative agreement with Pain Therapeutics, Inc.,
we have acquired an exclusive license (subject to preexisting
license rights granted by Pain Therapeutics) to certain
intellectual property rights related to opioid formulations,
including
Remoxy®,
which is currently in development for the treatment of moderate
to severe chronic pain. In connection with our collaborative
agreement with Acura Pharmaceuticals, Inc., we have acquired a
license to intellectual property rights related to the
Aversion®
Technology platform. We acquired exclusive rights to patents
related to
CorVuetm.
We acquired certain intellectual property rights from Mutual
Pharmaceutical Company, Inc. related to metaxalone, the active
pharmaceutical ingredient in
Skelaxin®.
As part of our acquisition of Alpharma, we have acquired rights
to intellectual property related to several products in
development. For example, we obtained rights to intellectual
property related to
Embedatm.
In connection with a collaboration agreement with IDEA AG, we
obtained rights to intellectual property related to
Transfersome®
gel technology. Finally, in connection with a collaboration
agreement with Durect, we obtained rights to a bupivacaine patch
(Eladur®).
We also rely upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop and sustain
our competitive position. There can be no assurance that others
will not
18
independently develop substantially equivalent proprietary
technology and techniques or otherwise gain access to our trade
secrets or disclose the technology or that we can adequately
protect our trade secrets.
Trademarks
We sell our branded products under a variety of trademarks. We
believe that we have valid proprietary interests in all
currently used trademarks, including those for our principal
branded prescription pharmaceutical and animal health products
registered in the United States and selected foreign countries
where and when appropriate.
Backlog
There was no material backlog as of February 26, 2009.
Directors and Executive Officers
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Name
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Age
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Position with the Company
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Brian A. Markison
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49
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President, Chief Executive Officer and Chairman of the Board of
Directors
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Earnest W. Deavenport, Jr.
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70
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Director
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Elizabeth M. Greetham
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59
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Director
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Philip A. Incarnati
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54
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Director
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Gregory D. Jordan, Ph.D.
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57
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Director
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R. Charles Moyer, Ph.D.
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63
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Director
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D. Greg Rooker
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61
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Director
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Ted G. Wood
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71
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Lead Independent Director
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Joseph Squicciarino
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Chief Financial Officer
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Stephen J. Andrzejewski
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43
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Chief Commercial Officer
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Frederick Brouillette, Jr.
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Corporate Compliance Officer
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Eric J. Bruce
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President, Alpharma Animal Health
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Dr. Eric G. Carter
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Chief Science Officer
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James W. Elrod
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Chief Legal Officer, Secretary
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James E. Green
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49
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Executive Vice President, Corporate Affairs
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Directors
Brian A. Markison was elected as Chairman of the Board in
May 2007. He has been President and Chief Executive Officer and
a director since July 2004. He joined King as Chief Operating
Officer in March 2004. Mr. Markison served in various
positions with Bristol-Myers Squibb beginning in 1982, most
recently as President of Bristol-Myers Squibbs Oncology,
Virology and Oncology Therapeutics Network businesses. Between
1998 and 2001, he served variously as Senior Vice President,
Neuroscience/Infectious Disease; President,
Neuroscience/Infectious Disease/Dermatology; and Vice President,
Operational Excellence and Productivity. He also held various
sales and marketing positions. Mr. Markison is a member of
the Board of Directors of Immunomedics, Inc., a publicly held
corporation. He graduated from Iona College in 1982 with a
Bachelor of Science degree.
Earnest W. Deavenport, Jr. has served as a director
since May 2000. In 2002, he retired as Chairman of the Board and
Chief Executive Officer of Eastman Chemical Company, Kingsport,
Tennessee, where he was employed in various capacities since
1960. He was Chairman of the National Association of
Manufacturers in 1998 and is currently a member of the National
Academy of Engineering. Mr. Deavenport is also a member of
the boards of directors of Zep, Inc. and Regions Financial
Corporation, each a publicly-held company. Mr. Deavenport
graduated from the Massachusetts Institute of Technology with a
Master of Science degree in Management in 1985 and from
Mississippi State University with a Bachelor of Science degree
in Chemical Engineering in 1960.
19
Elizabeth M. Greetham has served as a director since
November 2003. She retired as the Chief Executive Officer and
President of ACCL Financial Consultants Ltd. in December 2007.
From 1998 until 2004 she was a director of DrugAbuse Sciences,
Inc. and served as its Chief Executive Officer from August 2000
until 2004 and as Chief Financial Officer and Senior Vice
President, Business Development from April 1999 to August 2000.
Prior to joining DrugAbuse Sciences, Inc., Ms. Greetham was
a portfolio manager with Weiss, Peck & Greer, an
institutional investment management firm, where she managed the
WPG Life Sciences Funds, L.P., which invests in select
biotechnology stocks. She was previously a consultant to F.
Eberstadt & Co. In total, Ms. Greetham has over
25 years of experience as a portfolio manager and health
care analyst in the United States and Europe. Ms. Greetham
earned a Master of Arts (Honours) degree in Economics from the
University of Edinburgh, Scotland in 1971.
Philip A. Incarnati has served as a director of King
since November 2006. He has served as President and Chief
Executive Officer of McLaren Health Care Corporation, an
integrated health care system, since 1989. Before joining
McLaren, Mr. Incarnati held top-level executive positions
with the Wayne State University School of Medicine, Detroit
Receiving Hospital and University Health Center, and Horizon
Health System. Mr. Incarnati also serves on the board of
Medical Staffing Network, Inc., a publicly-traded company, and
on the boards of two privately-held companies, PHNS, Inc. and
Reliant Renal Care Inc. Mr. Incarnati earned both a
Bachelors Degree and a Masters Degree in management
and finance from Eastern Michigan University (EMU). He has been
a member of the EMU Board of Regents since 1992, when he was
appointed by former Michigan Governor John Engler, serving as
its Chairman from 1995 until 2005.
Gregory D. Jordan, Ph.D. has served as a director
since June 2001. He has served as President of King College in
Bristol, Tennessee since 1997, having joined the King College
faculty in 1980. He received his Bachelor of Arts degree from
Belhaven College in 1973; his Master of Arts and Divinity
degrees from Trinity Evangelical Divinity School in 1976 and
1977, respectively; his Doctorate in Hebraic and Cognate Studies
from Hebrew Union College Jewish Institute of Religion in 1987;
and his Master of Business Administration degree from the
Babcock Graduate School of Management at Wake Forest University
in 2004.
R. Charles Moyer, Ph.D. has served as a
director since December 2000. Dr. Moyer presently serves as
Dean of the College of Business at the University of Louisville.
He is Dean Emeritus of the Babcock Graduate School of Management
at Wake Forest University, having served as Dean from 1996 until
his retirement from this position in August 2003, and as a
professor from 1988 until 2005. Dr. Moyer held the GMAC
Insurance Chair of Finance at Wake Forest University. Prior to
joining the faculty at Wake Forest in 1988, Dr. Moyer was
Finance Department Chairman at Texas Tech University.
Dr. Moyer earned his Doctorate in Finance and Managerial
Economics from the University of Pittsburgh in 1971, his Master
of Business Administration degree from the University of
Pittsburgh in 1968 and his Bachelor of Arts degree in Economics
from Howard University in 1967.
D. Greg Rooker has served as a director since
October 1997. Mr. Rooker is the former owner and President
of Family Community Newspapers of Southwest Virginia, Inc.,
Wytheville, Virginia, which consisted of six community
newspapers and a national monthly motor sports magazine. He
retired from this position in 2000. He is a co-founder of The
Jason Foundation and Brain Injury Services of SWVA, Inc., each a
non-profit organization providing services to brain injury
survivors. Mr. Rooker serves as Secretary/Treasurer of The
Jason Foundation and as a member of the Board of Directors of
Brain Injury Services of SWVA, Inc. Mr. Rooker graduated
from Northwestern University with a degree in Journalism in 1969.
Ted G. Wood has served as a director since August 2003
and as Lead Independent Director since May 2007. Mr. Wood
was the Non-Executive Chairman from May 2004 until May 2007. He
is retired from The United Company in Bristol, Virginia, where
he served as Vice Chairman from January 2003 until August 2003.
He previously served as President of the United Operating
Companies from 1998 to 2002. Mr. Wood was previously a
director of King from April 1997 to May 2000. From 1992 to 1993,
he was President of Boehringer Mannheim Pharmaceutical
Corporation in Rockville, Maryland. From 1993 to 1994, he was
President of KV Pharmaceutical Company in St. Louis,
Missouri. From 1975 to 1991, he was employed by SmithKline
Beecham Corporation where he served as President of Beecham
Laboratories from 1988 to 1989 and Executive Vice President of
SmithKline from 1990 to 1991. Mr. Wood is also a member of
the board of
20
directors of Alpha Natural Resources, Inc., a publicly-held
corporation. He graduated from the University of Kentucky with a
Bachelor of Science degree in Commerce in 1960. In 1986 he
completed the Advanced Management Program at Harvard University.
Executive
Officers
Joseph Squicciarino has served as Kings Chief
Financial Officer since June 2005. Prior to joining King, he was
Chief Financial Officer North America for Revlon,
Inc. since March 2005. From February 2003 until March 2005 he
served as Chief Financial Officer International for
Revlon International, Inc. He held the position of Group
Controller Pharmaceuticals Europe, Middle East,
Africa with Johnson & Johnson from October 2001 until
October 2002. He held a variety of positions with the
Bristol-Myers Squibb Company and its predecessor, the Squibb
Corporation, from 1979 until 2001, including Vice President
Finance, International Medicines; Vice President Finance, Europe
Pharmaceuticals & Worldwide Consumer Medicines; Vice
President Finance, Technical Operations; and Vice President
Finance, U.S. Pharmaceutical Group. Mr. Squicciarino
also serves on the Board of Directors of Zep, Inc., a publicly
held company. He is a Certified Public Accountant, a member of
the New Jersey Society of Certified Public Accountants and a
member of the American Institute of Certified Public
Accountants. Mr. Squicciarino graduated from Adelphi
University in 1978 with a Bachelor of Science degree in
Accounting.
Stephen J. Andrzejewski has served as Chief Commercial
Officer since October 2005. He was previously Corporate Head,
Commercial Operations commencing in May 2004. Prior to joining
King, Mr. Andrzejewski was Senior Vice President,
Commercial Business at Endo Pharmaceuticals Inc. since June
2003. He previously served in various positions with
Schering-Plough Corporation beginning in 1987, including Vice
President of New Products and Vice President of Marketing, and
had responsibility for launching the
Claritin®
product. Mr. Andrzejewski graduated cum laude from Hamilton
College with a Bachelor of Arts degree in 1987 and in 1992
graduated from New York Universitys Stern School of
Business with a Master of Business Administration degree.
Frederick Brouillette, Jr. has served as Corporate
Compliance Officer since August 2003. He served as Executive
Vice President, Finance from January 2003 until August 2003 and
prior to that as Vice President, Risk Management beginning in
February 2001. Before joining King, Mr. Brouillette, a
Certified Public Accountant, was with PricewaterhouseCoopers for
4 years, serving most recently in that firms
Richmond, Virginia office providing internal audit outsourcing
and internal control consulting services. He was formerly a
chief internal audit executive for two major public corporations
and served for 12 years in the public accounting audit
practice of Peat, Marwick Mitchell & Co., the
predecessor firm to KPMG. Mr. Brouillette is a member of
the Virginia Society of Certified Public Accountants, the
American Institute of Certified Public Accountants, and the
Institute of Internal Auditors. He graduated with honors from
the University of Virginias McIntire School of Commerce in
1973 with a Bachelor of Science degree in accounting.
Eric J. Bruce has served as President, Alpharma Animal
Health since February 2009. Previously he has served as Chief
Technical Operations Officer since June 2005. Prior to joining
King, Mr. Bruce was Vice President of Operations for
Mallinckrodt Pharmaceuticals, a position he had occupied since
2000. Previously, he was Vice President of Manufacturing for
Kendall Health Care from 1997 until 2000, and from 1996 until
1997 he held various positions with INBRAND, including that of
Senior Vice President of Manufacturing. Mr. Bruce graduated
from the Georgia Institute of Technology in 1978 with a Bachelor
of Science degree in Industrial Management.
Eric G. Carter, M.D., Ph.D., has served as
Kings Chief Science Officer since January 2007. Prior to
joining King, he held several positions with GlaxoSmithKline
commencing in 1999, most recently as Vice President and Global
Head, Clinical Development and Medical Affairs,
Gastroenterology, R&D. Dr. Carter has served as a
Clinical Associate Professor at the University of North Carolina
for the Division of Digestive Diseases and Nutrition, School of
Medicine. He previously held academic positions with the
University of California, where he was responsible for
establishing and directing many research programs. After earning
a bachelors degree in Biochemistry from the University of
London, Dr. Carter received his medical degree from the
University of Miami and a doctor of philosophy degree from the
University of Cambridge. He obtained
21
board certification from the American Board of Internal
Medicine, Gastroenterology and Clinical Nutrition and has
authored or co-authored more than 50 scientific publications.
James W. Elrod has served as Chief Legal Officer/General
Counsel since February 2006 and Secretary since May 2005. He was
Acting General Counsel from February 2005 to February 2006. He
has worked in various positions with King since September 2003,
including Vice President, Legal Affairs. Prior to joining King
he served in various capacities at Service Merchandise Company,
Inc. including Vice President, Legal Department. He previously
practiced law in Nashville, Tennessee. Mr. Elrod earned a
Juris Doctor degree from the University of Tennessee and a
Bachelor of Arts degree from Berea College.
James E. Green has served as Executive Vice President,
Corporate Affairs since April 2003. He was Vice President,
Corporate Affairs commencing in June 2002 and was Senior
Director, Corporate Affairs beginning in September 2000. Prior
to joining King, he was engaged in the private practice of law
for 15 years as a commercial transactions and commercial
litigation attorney, having most recently served as the senior
member of Green & Hale, a Professional Corporation, in
Bristol, Tennessee. Mr. Green graduated from Southern
Methodist University School of Law with a Juris Doctor degree in
1985 and Milligan College with a Bachelor of Science degree, cum
laude, in 1982. He is licensed to practice law in Tennessee,
Texas and Virginia.
Employees
As of February 23, 2009, we employed approximately
3,381 full-time and 11 part-time persons. Approximately
17 employees of the Rochester facility are covered by a
collective bargaining agreement with United Steelworkers, Local
6-176. Approximately 295 employees of the St. Louis
facility are covered by a collective bargaining agreement with
the International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers of America Union, Local No. 688.
Approximately 45 employees of the Willow Island facility are
covered by a collective bargaining agreement with the United
Steelworkers Union, Local No. 499, and 5 employees are covered
by a collective bargaining agreement with the International
Union of Operating Engineers, Local No. 18-S, AFL-CIO. We also
have a limited number of employees in Europe, China and Brazil
that are subject to collective bargaining or similar laws or
provisions. We believe our employee relations are good. For
additional information, please see Note 25, Restructuring
Activities, and Note 27, Subsequent Events, in
Part IV, Item 15(a)(1), Financial Statements.
22
You should carefully consider the risks described below and
the other information contained in this report, including our
audited consolidated financial statements and related notes. The
risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. If any
of the adverse events described in this Risk Factors
section or other sections of this report actually occurs, our
business, results of operations and financial condition could be
materially adversely affected, the trading price, if any, of our
securities could decline and you might lose all or part of your
investment.
Risks
Related to Our Business
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If we
cannot successfully defend our rights under the patents relating
to our key products, such as
Skelaxin®,
or if we are unable to secure or defend our rights under other
patents and trademarks and protect our trade secrets and other
intellectual property, additional competitors could enter the
market, and sales of affected products may decline
materially.
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Under the Hatch-Waxman Act, any generic pharmaceutical
manufacturer may file an ANDA with a certification, known as a
Paragraph IV certification, challenging the
validity of or claiming non-infringement of a patent listed in
the FDAs Approved Drug Products with Therapeutic
Equivalence Evaluations, which is known as the FDAs
Orange Book, four years after the pioneer company obtains
approval of its NDA. As more fully described in Note 19,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Financial Statements, other
companies have filed Paragraph IV certifications
challenging the patents associated with some of our key
products. If any of these Paragraph IV challenges succeeds,
our affected product would face generic competition and its
sales would likely decline materially. Should sales decline, we
may have to write off a portion or all of the intangible assets
associated with the affected product.
We may not be successful in securing or maintaining proprietary
patent protection for products we currently market or for
products and technologies we develop or license. In addition,
our competitors may develop products similar to ours, including
generic products, using methods and technologies that are beyond
the scope of our intellectual property protection. The
appearance in the market of products developed in this way could
materially reduce our sales.
There is no proprietary protection for many of our branded
prescription pharmaceutical products, and generic substitutes
for many of these products are sold by other pharmaceutical
companies. Further, we also rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation in
order to maintain our competitive position with respect to some
products. Our sales could be materially reduced if our
competitors independently develop equivalent proprietary
technology and techniques or gain access to our trade secrets,
know-how and technology.
If we are unable to defend our patents and trademarks or protect
our trade secrets and other intellectual property, our results
of operations and cash flows could be materially and adversely
affected.
Additionally, certain of our supply agreements and purchase
orders for raw materials contain minimum purchase commitments.
If loss of market exclusivity or other factors cause sales of
our products to fall below amounts necessary to use the
inventory we have committed to purchase, we may incur losses in
connection with those supply agreements or purchase orders.
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In
January 2009, two key patents associated with
Skelaxin®
were ruled invalid by a federal court, and net sales of
Skelaxin®
may decrease significantly as a result. Our related
restructuring initiative might not succeed, and, in any event,
the benefits of the initiative will not be sufficient to offset
the loss of revenues from decreased
Skelaxin®
sales.
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In January 2009, a U.S. District Court ruled invalid two
key patents related to
Skelaxin®.
We plan to appeal, upon entry of an appropriate judgment, but
the appeal may be unsuccessful.
23
Following the decision of the District Court, we conducted an
extensive examination of the company and developed a
restructuring initiative designed to partially offset the
potential material decline in
Skelaxin®
sales in the event that a generic competitor entered the market.
This initiative includes, 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.
If we are unable to complete the objectives of this initiative,
our business and results of operations may be materially
adversely affected. Moreover, if a generic competitor enters the
market, the anticipated benefits of the restructuring initiative
will not be sufficient to offset the loss of revenues from
decreased
Skelaxin®
sales.
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We
undertook borrowings totaling $625 million in connection
with our acquisition of Alpharma. Our obligations to repay these
borrowings will materially limit our ability to invest in other
aspects of our business, to borrow other funds, to engage in
other transactions and to take a variety of other actions. In
addition, our future cash flows may not be sufficient to repay
these borrowings.
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In connection with the acquisition of Alpharma on
December 29, 2008, we borrowed $425.0 million in
principal amount under our $475.0 million revolving credit
facility, as amended on December 5, 2008 (the
Revolving Credit Facility). We also entered into a
new $200.0 million term loan credit agreement, comprised of
a four-year senior secured loan facility (the Term
Facility).
A substantial portion of our operating cash flow will be
dedicated to the payment of principal and interest on these
debts, and our obligations to repay these debts will therefore
limit our ability to invest in other aspects of our business
(such as product development), to borrow other funds, to engage
in other transactions and to take a variety of other actions.
The Revolving Credit Facility requires certain automatic and
permanent reductions in the commitment over the life of the
facility. The Term Facility requires repayment in certain
quarterly installments, as outlined in the agreement, over the
life of the facility. In addition, the Revolving Credit Facility
and the Term Facility require mandatory prepayment equal to 50%
of our annual excess cash flows, which can be reduced to 25%
based on certain events. There are also mandatory prepayments
upon certain events, such as an asset sale, the issuance of debt
or equity, or the liquidation of auction rate securities.
The Revolving Credit Facility and the Term Facility contain
certain covenants that, among other things, restrict additional
indebtedness, liens and encumbrances, sale and leaseback
transactions, loans and investments, acquisitions and purchases,
dividends and other restricted payments, transactions with
affiliates, asset dispositions, mergers and consolidations,
prepayments, redemptions and repurchases of other indebtedness
and other matters customarily restricted in such agreements.
The Revolving Credit Facility and the Term Facility also contain
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 breach of any covenants
or obligations under the Revolving Credit Facility or the Term
Facility could result in a default which could trigger
acceleration of (or the right to accelerate) the related debt.
Because of cross-default provisions in the agreements and
instruments governing our indebtedness, a default under one
agreement or instrument could result in a default under, and the
acceleration of, our other indebtedness. In addition, our
lenders would be entitled to proceed against the collateral
securing the indebtedness. If any of our indebtedness were to be
accelerated, it could adversely affect our ability to operate
our business or we may be unable to repay such debt, and,
therefore, such acceleration could adversely affect our results
of operations, financial condition and, consequently, the price
of our common stock.
For more information about the terms of the Revolving Credit
Facility and the Term Facility, please see Note 13,
Long Term Debt, in Part IV, Item 15(a)(1),
Financial Statements.
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If we
cannot integrate the business of companies or products we
acquire, or appropriately and successfully manage and coordinate
third-party collaborative development activities, our business
may suffer. In particular, there are risks associated with the
integration of our business with Alpharma Inc., which we
acquired in December 2008.
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The integration into our business of in-licensed or acquired
assets or businesses, as well as the coordination and
collaboration of research and development, sales and marketing
efforts with third parties, requires significant management
attention, maintenance of adequate operational, financial and
management information systems, integration of systems that we
acquire into our existing systems, and verification that the
acquired processes and systems meet applicable standards for
internal control over financial reporting. Our future results
will also depend in part on our ability to hire, retain and
motivate qualified employees to manage expanded operations
efficiently in accordance with applicable regulatory standards.
If we cannot manage our third-party collaborations and integrate
in-licensed and acquired assets successfully, or, if we do not
establish and maintain appropriate processes in support of these
activities, this could have a material adverse effect on our
business, financial condition, results of operations and cash
flows and on our ability to make the necessary certifications
with respect to our internal controls.
On December 29, 2008, we completed the acquisition of
Alpharma Inc., a specialty pharmaceutical company that develops,
manufactures and markets pharmaceutical products for humans and
animals.
There are a number of risks associated with our integration of
Alpharmas operations into ours, including, but not limited
to, the following:
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The combination may not enhance our business to the extent we
expect or may not result in operating or product synergies, and
could have a negative impact on our earnings;
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The process of integrating Alpharmas business with ours,
and/or the
measures required to effectively use acquired intellectual
property, products or other assets, could be time consuming and
may result in unforeseen operating difficulties
and/or
expenses;
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We may not be able to retain Alpharmas key employees or
maintain its critical business and customer relationships;
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There may be unforeseen liabilities or other material facts that
could adversely affect our business. For example, litigation or
other claims made in connection with, or inheritance of claims
or litigation risks as a result of, the acquisition of Alpharma
could be time consuming and may create difficulties and expenses
which are not currently anticipated. Please see Note 19,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Financial Statements.
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The intangible assets and goodwill recorded in connection with
the acquisition could be subject to impairment charges. There is
also the risk of significant accounting charges resulting from
the completion and integration of this sizeable acquisition and
increased capital expenditures.
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The
uncertainty and expense of the drug development process, actions
by our competitors and other factors may adversely affect our
ability to implement our strategy to grow our business through
increased sales, acquisitions, development and in-licensing,
and, as a result, our business or competitive position in the
pharmaceutical industry may suffer.
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Drug development is time-consuming and expensive. Only a small
percentage of chemical compounds discovered by researchers prove
to be both medically effective and safe enough to become an
approved medicine. The process from discovery to regulatory
approval typically takes 10 to 15 years or longer. Drug
candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive
regulatory approval.
Clinical trials are conducted in a series of sequential phases,
with each phase designed to address a specific research
question. In Phase I clinical trials, researchers test a new
drug or treatment in a small group of people to evaluate the
drugs safety, determine a safe dosage range, and identify
side effects. In Phase II
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clinical trials, researchers give the drug or treatment to a
larger population to assess effectiveness and to further
evaluate safety. In Phase III clinical trials, researchers
give the drug or treatment to an even larger population to
confirm its effectiveness, monitor side effects, compare it to
commonly used treatments, and collect information that will
allow the drug or treatment to be used safely. The results of
Phase III clinical trials are pivotal for purposes of
obtaining FDA approval of a new product.
The processes by which regulatory approvals are obtained from
the FDA to market and sell a new product are complex, require a
number of years and involve the expenditure of substantial
resources. Compounds or potential new products that appear
promising in development can prove unsuccessful and fail to
receive FDA approval, fail to receive approval of specific
anticipated indications, be substantially delayed, or receive
unfavorable product labeling (including indications or safety
warnings), each of which can materially affect the commercial
value of the product. Additional factors that may materially
affect the success
and/or
timing of regulatory approval of a new product, and its
commercial potential, include the regulatory filing strategies
employed, the timing of and delays in FDA review, and the
intervention by third parties in the approval process through
administrative or judicial means. As a result, there can be no
assurance that we will receive regulatory approval of our
products in development, or of new dosage forms for existing
products, that our products or dosage forms will receive
approval for specific indications or that the labeling of these
products will be as we would prefer.
Our current strategy is to increase sales of certain of our
existing products and to enhance our competitive standing
through the acquisition or in-licensing of products, either in
development or previously approved by the FDA, that complement
our business and allow us to promote and sell new products
through existing marketing and distribution channels. Moreover,
since we engage in limited proprietary research activity with
respect to the development of new chemical entities, we rely
heavily on purchasing or licensing products in development and
FDA-approved products from other companies.
Branded prescription pharmaceutical development projects,
including those for which we have collaboration agreements with
third parties, include the following:
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Embedatm,
a drug for the treatment of moderate to severe chronic pain;
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Remoxytm,
a drug for the treatment of moderate to severe chronic pain that
we are developing with Pain Therapeutics, Inc.;
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Acurox®
Tablets, a drug for the treatment of moderate to severe pain
that we are developing with Acura Pharmaceuticals, Inc.;
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CorVuetm
(binodenoson), a myocardial pharmacologic stress imaging agent;
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Ketoprofen in
Transfersome®
gel, a topical drug for local pain relief;
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Eladur®,
a patch for the treatment of pain associated with postherpetic
neuralgia;
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Vanquixtm,
a diazepam-filled auto-injector for the treatment of acute,
repetitive epileptic seizures;
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T-62, a drug for the treatment of neuropathic pain;
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Oxycodone NT, a drug for treatment of moderate to severe chronic
pain; and
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Hydrocodone NT, a drug for treatment of moderate to severe
chronic pain.
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We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial, human and other
resources substantially greater than ours, in the development
and licensing of new products. We cannot assure you that we will
be able to:
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engage in product life-cycle management to develop new
indications and line extensions for existing and acquired
products,
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successfully develop, license or commercialize new products on a
timely basis or at all,
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continue to develop products already in development in a cost
effective manner, or
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obtain any FDA approvals necessary to successfully implement the
strategies described above.
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If we are not successful in the development or licensing of new
products already in development, including obtaining any
necessary FDA approvals, our business, financial condition, and
results of operations could be materially adversely affected.
Additionally, since our currently marketed products are
generally established and commonly sold, they are subject to
competition from products with similar qualities. For example:
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Altace®
has multiple generic substitutes that entered the market in
December 2007 and in 2008.
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Skelaxin®
competes in a highly genericized market with other muscle
relaxants and could be subject to additional competition from
generic products following a courts order ruling invalid
two patents related to
Skelaxin®
in January 2009.
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Sonata®
competes with other insomnia treatments in a highly competitive
market. A generic substitute entered the market in the second
quarter of 2008.
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Levoxyl®
competes in a competitive and highly genericized market with
other levothyroxine sodium products.
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Beginning in the fourth quarter of 2007,
Thrombin-JMI®,
our bovine thrombin product, faced new competition from human
thrombin and recombinant human thrombin.
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Other of our branded prescription pharmaceutical products also
face competition from generic substitutes.
The manufacturers of generic products typically do not bear the
related research and development costs and, consequently, are
able to offer such products at considerably lower prices than
the branded equivalents. We cannot assure you that any of our
products will not face generic competition, or maintain their
market share, gross margins and cash flows, the failure of which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Other companies may license or develop products or may acquire
technologies for the development of products that are the same
as or similar to the products we have in development or that we
license. Because there is rapid technological change in the
industry and because many other companies may have more
financial resources than we do, other companies may:
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develop or license their products more rapidly than we can,
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complete any applicable regulatory approval process sooner than
we can,
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market or license their products before we can market or license
our products, or
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offer their newly developed or licensed products at prices lower
than our prices.
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Any of these events would thereby have a negative effect on the
sales of our existing, newly developed or licensed products. The
inability to effect acquisitions or licenses of additional
branded products in development and FDA-approved products could
limit the overall growth of our business. Furthermore, even if
we obtain rights to a pharmaceutical product or acquire a
company, we may not be able to generate sales sufficient to
create a profit or otherwise avoid a loss. Technological
developments or the FDAs approval of new products or of
new therapeutic indications for existing products may make our
existing products or those products we are licensing or
developing obsolete or may make them more difficult to market
successfully, which could have a material adverse effect on
results of operations and cash flows.
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We are
required annually, or on an interim basis as needed, to review
the carrying value of our intangible assets and goodwill for
impairment. If sales of our products decline because of, for
example, generic competition or an inability to manufacture or
obtain sufficient supply of product, the intangible asset value
of any declining product could become impaired.
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As of December 31, 2008, we had approximately
$1.4 billion of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If a change in circumstances causes us to lower our
future sales forecast for a product, we may be required to write
off a portion of the net book value of the intangible assets
associated with that product. In evaluating goodwill for
impairment, we estimate the fair value of our individual
business reporting units on a discounted cash flow basis. In the
event the value of an individual business reporting unit
declines significantly, it could result in a non-cash impairment
charge. Any impairment of the net book value of any intangible
asset or goodwill, depending on the size, could result in a
material adverse effect on our business, financial condition and
results of operations.
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We
have entered into agreements with manufacturers and/or
distributors of generic pharmaceutical products with whom we are
presently engaged, or have previously been engaged, in
litigation, and these agreements could subject us to claims that
we have violated federal and/or state anti-trust
laws.
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We have negotiated and entered into a number of agreements with
manufacturers
and/or
distributors of generic pharmaceutical products, some of whom
are presently engaged or have previously been engaged in
litigation with us. Governmental
and/or
private parties may allege that these arrangements and
activities in furtherance of the success of these arrangements
violate applicable federal or state anti-trust laws.
Alternatively, courts could interpret these laws in a manner
contrary to current understandings of and past rulings relating
to such laws. If a court or other governmental body were to
conclude that a violation of these laws had occurred, any
liability based on such a finding could be materially adverse
and could be preceded or followed by private litigation such as
class action litigation.
For example, we have received civil investigative demands
(CIDs) for information from the U.S. Federal
Trade Commission (FTC). The CIDs require us to
provide information related to our collaboration with Arrow, the
dismissal without prejudice of our patent infringement
litigation against Cobalt under the Hatch-Waxman Act of 1984 and
other information. We are cooperating with the FTC in this
investigation.
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An
expansion of the ban of the use of antibiotics used in
food-producing animals could result in a decrease in our
sales.
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The issue of the potential transfer of increased bacterial
resistance to human pathogens due to the use of certain
antibiotics in certain food-producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has
led to government restrictions on the use of antibiotics in
these food-producing animals. While most of the government
activity in this area has involved products other than those
that we offer for sale, the European Union (EU) and
a number of non-EU countries, including Norway and Turkey,
banned the use of zinc bacitracin, a feed antibiotic growth
promoter manufactured by us and others that has been used in
livestock feeds for over 40 years, as a feed additive
growth promoter. We have not sold this product as a feed
additive growth promoter in these countries since the bans took
effect (initially in the EU in July 1999; in Turkey, Bulgaria
and Romania (the latter two now part of the EU) in 2000; and in
Norway in January 2006). The EU ban is based upon the
Precautionary Principle, which states that a product
may be withdrawn from the market based upon a finding of a
potential threat of serious or irreversible damage even if such
finding is not supported by scientific certainty.
Taiwan, South Korea and Brazil have implemented, or are expected
to implement shortly, restrictions on the use of antibiotics in
animal feed. We have marketed antibiotics for use in
food-producing animals in these countries but will be required
to curtail or discontinue those practices. The actions by these
countries may negatively impact our business as a result of
reduced sales. It is not yet known whether this reduction will
be material to our financial position or its results of
operations.
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We cannot predict whether the present zinc bacitracin ban or
other antibiotic restrictions will be expanded. If any one of
the following events occurs, the resultant loss of sales could
be material to our financial condition, cash flows and results
of operations:
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the EU, countries within or outside the EU, or meat importers
act to prevent the importation of meat products from countries
that allow the use of bacitracin-based or other
antibiotic-containing products,
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there is an expansion of the zinc bacitracin ban to additional
countries, such as the U.S., where we have material sales of
bacitracin-based products,
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a similar ban is instituted relating to other antibiotic feed
additives sold by us in the U.S. or in one or more other
countries where we have material sales, or
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there is an increase in public pressure to discontinue the use
of antibiotic feed additives.
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We cannot predict whether this antibiotic resistance concern
will result in expanded regulations or public pressure adversely
affecting other antibiotic-based animal health products
previously sold by us in the jurisdictions where the ban has
been imposed or in other countries in which those products are
presently sold.
Discussions of the antibiotic resistance issue continue actively
in the U.S. Various sources have published reports
concerning possible adverse human effects from the use of
antibiotics in food animals. Some of these reports have asserted
that major animal producers, some of whom are our customers or
the end-users of our products, are reducing the use of
antibiotics. In July 2005, the FDA withdrew the approval of an
antibiotic poultry water medication due to concerns regarding
antibiotic resistance in humans. While we do not market this
drug, this ruling would be significant if its conclusions were
expanded to the medicated feed additives sold by us. It is
uncertain what additional actions, if any, the FDA may take for
approved animal drug products. However, the FDA has established
a rating system to be used to compare the risks associated with
the use of specific antibiotic products in food producing
animals, including those sold by us. While we do not believe
that the presently proposed risk assessment system would be
materially adverse to our business, it is subject to change
prior to adoption or to later amendment. The sales of our animal
health segment are principally antibiotic-based products for use
with food-producing animals; therefore, the future loss of major
markets, including the U.S., or negative publicity regarding
this use of antibiotic-based products, could have a negative
impact on our business, financial condition, results of
operations and cash flows.
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Unfavorable
results in pending and future claims and litigation matters
could have an adverse impact on us.
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We are named as a party in various lawsuits. For information
about our pending material litigation matters, please see
Note 19, Commitments and Contingencies, in
Part IV, Item 15(a)(1), Financial
Statements. While we intend to vigorously defend ourselves
in these actions, we are generally unable to predict the outcome
or reasonably estimate the range of potential loss, if any, in
the pending litigation. If we were not to prevail in the pending
litigation, we could be required to pay material sums in
connection with judgments or settlements related to these
matters, or the pending litigation could otherwise have a
material adverse effect on our business, results of operations,
financial condition and cash flows.
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Potential
adverse effects on human health linked to the raising or
consumption of food-producing animals using our products could
result in a decrease in our sales.
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Should the government find, or the public perceive, a risk to
human health from consumption of food-producing animals which
utilize our products (such as Avian flu) or as a by-product to
the raising of such animals, such as the Chicken
Litter litigation, there may be a decline in either the
sale of these food products, which would result in a decrease in
the use of our products, or a decrease in the use of our
products in the growing of these food-producing animals. For
additional information regarding the Chicken Litter
litigation, please see Note 19, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Financial Statements.
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Any
significant delays or difficulties in the manufacture of, or
supply of materials for, our products may reduce our profit
margins and revenues, limit the sales of our products, or harm
our products reputations.
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Many of our products, including
Skelaxin®,
the
Flector®
Patch,
Thrombin-JMI®,
Avinza®
and certain animal health products and ingredients, are
currently manufactured in part or entirely by third parties. Our
dependence upon third parties for the manufacture of certain
products may adversely affect our profit margins or may result
in unforeseen delays or other problems beyond our control. For
example, if any of these third parties is not in compliance with
applicable regulations, the manufacture of our products could be
delayed, halted or otherwise adversely affected. If for any
reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be
able to distribute our products as planned.
Further, if we encounter other delays or difficulties in
producing or packaging products either handled by third parties
or by us, the distribution, marketing and subsequent sales of
these products could be adversely affected, and we may have to
seek alternative sources of supply or abandon product lines or
sell them on unsatisfactory terms. We might not be able to enter
into alternative supply arrangements in a timely manner or at
commercially acceptable rates, if at all. We also cannot assure
you that third-party manufacturers we use will be able to
provide us with sufficient quantities of our products or that
the products supplied to us will meet our specifications.
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Sales
of
Thrombin-JMI®
may be affected by the perception of risks associated with some
of the raw materials used in its manufacture. If we are unable
to maintain purification procedures at our facilities that are
in accordance with the FDAs expectations for biological
products generally, the FDA could limit our ability to
manufacture biological products at those
facilities.
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For the twelve months ended December 31, 2008, our product
Thrombin-JMI®
accounted for 16.3% of our total revenues from continuing
operations. The source material for
Thrombin-JMI®
comes from bovine plasma and lung tissue which has been
certified by the United States Department of Agriculture for use
in the manufacture of pharmaceutical products. Bovine-sourced
materials, particularly those from outside the United States,
may be of some concern because of potential transmission of
bovine spongiform encephalopathy, or BSE. However,
we have taken precautions to minimize the risks of contamination
from BSE in our source materials and process. Our principal
precaution is the use of bovine materials only from FDA-approved
sources in the United States. Accordingly, all source animals
used in our production of
Thrombin-JMI®
are of United States origin. Additionally, source animals used
in production of
Thrombin-JMI®
are generally less than 18 months of age (BSE has not been
identified in animals less than 30 months of age).
There is currently no alternative to the bovine-sourced
materials for the manufacture of
Thrombin-JMI®.
We have two approved vendors as sources of supply of the bovine
raw materials. Any interruption or delay in the supply of these
materials could adversely affect the sales of
Thrombin-JMI®.
We will continue surveillance of the source and believe that the
risk of BSE contamination in the source materials for
Thrombin-JMI®
is very low. While we believe that our procedures and those of
our vendor for the supply, testing and handling of the bovine
material comply with all federal, state, and local regulations,
we cannot eliminate the risk of contamination or injury from
these materials. There are high levels of global public concern
about BSE. Physicians could determine not to administer
Thrombin-JMI®
because of the perceived risk, which could adversely affect our
sales of the product. Any injuries resulting from BSE
contamination could expose us to extensive liability. If public
concern about the risk of BSE infection in the United States
should increase, the manufacture and sale of
Thrombin-JMI®
and our business, financial condition, results of operations and
cash flows could be materially and adversely affected.
The FDA expects manufacturers of biological products to have
validated processes capable of removing extraneous viral
contaminants to a high level of assurance. We have developed and
implemented appropriate processing steps to achieve maximum
assurance that potential extraneous viral contaminants are
removed from
Thrombin-JMI®,
which does not include BSE because it is not a viral
contaminant, and we gained FDA approval for these processes. If
we are unable to successfully maintain these processing steps or
obtain the necessary supplies to do so in accordance with the
FDAs expectations, the manufacture and sale of Thrombin-
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JMI®
and our business, financial condition, results of operations and
cash flows could be materially and adversely affected.
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Wholesaler
and distributor buying patterns and other factors may cause our
quarterly results to fluctuate, and these fluctuations may
adversely affect our short-term results. Further, our access to
wholesaler and distributor inventory levels and sales data
affects our ability to estimate certain reserves included in our
financial statements.
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Our results of operations, including, in particular, product
sales revenue, may vary from quarter to quarter due to many
factors. Sales to wholesalers and distributors represent a
substantial majority of our total sales. Buying patterns of our
wholesalers and distributors may vary from time to time. In the
event wholesalers and distributors with whom we do business
determine to limit their purchases of our products, sales of our
products could be adversely affected. For example, in advance of
an anticipated price increase, customers may order branded
prescription pharmaceutical products in larger than normal
quantities. The ordering of excess quantities in any quarter
could cause sales of some of our branded prescription
pharmaceutical products to be lower in subsequent quarters than
they would have been otherwise. We have inventory management and
data services agreements with each of the three key branded
prescription pharmaceutical products wholesale customers and
other wholesale customers who purchase our branded prescription
pharmaceutical products. These agreements provide wholesalers
incentives to manage inventory levels and provide timely and
accurate data with respect to inventory levels held, and
valuable data regarding sales and marketplace activity. We rely
on the timeliness and accuracy of the data that each customer
provides to us on a regular basis pursuant to these agreements.
If our wholesalers fail to provide us with timely and accurate
data in accordance with the agreements, our estimates for
certain reserves included in our financial statements could be
materially and adversely affected.
Other factors that may affect quarterly results include, but are
not limited to, expenditures related to the acquisition, sale
and promotion of pharmaceutical products, a changing customer
base, the availability and cost of raw materials, interruptions
in supply by third-party manufacturers, new products introduced
by us or our competitors, the mix of products we sell,
interruptions in our internal manufacturing processes, product
recalls, competitive pricing pressures and general economic and
industry conditions that may affect customer demand. We cannot
assure you that we will be successful in maintaining or
improving our profitability or avoiding losses in any future
period.
Our
relationships with the U.S. Department of Defense and other
government entities subject us to risks associated with doing
business with the government.
All U.S. government contracts provide that they may be
terminated for the convenience of the government as well as for
default. Our Meridian Auto-Injector segment has pharmaceutical
products that are presently sold primarily to the
U.S. Department of Defense (DoD) under an
Industrial Base Maintenance Contract (IBMC). The
current IBMC expires on March 31, 2009, and we are in
negotiations regarding renewal. Although we have reason to
believe the DoD will renew the IBMC based on our relationship of
many years, we cannot assure you that it will do so or whether
this renewal will be timely. In the event the DoD does not renew
the IBMC, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. Additionally, the unexpected termination of one or
more of our significant government contracts could result in a
material adverse effect on our business, financial condition,
results of operations and cash flows. A surge capability
provision allows for the coverage of defense mobilization
requirements in the event of rapid military deployment. If this
surge capability provision becomes operative, we may be required
to devote more of our Meridian Auto-Injector segment
manufacturing capacity to the production of products for the
government, which could result in less manufacturing capacity
being devoted to products in this segment with higher profit
margins.
Our supply contracts with the DoD are subject to pre- and
post-award audits and potential price determination. These
audits may include a review of our performance on the contract,
our pricing practices, our cost structure and our compliance
with applicable laws, regulations and standards. Any costs found
to be improperly allocated to a specific contract will not be
reimbursed, while costs already reimbursed must be
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refunded. Therefore, a post-award audit or price redetermination
could result in an adjustment to our revenues. From time to time
the DoD makes claims for pricing adjustments with respect to
completed contracts. If a government audit uncovers improper or
illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines
and suspension or disqualification from doing business with the
government.
Other risks involved in government sales include the
unpredictability in funding for various government programs and
the risks associated with changes in procurement policies and
priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injectors to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A loss in government funding of these programs
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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We are
subject to the risks of doing business outside of the United
States.
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Future growth rates and success of our animal health and
auto-injector businesses depend in part on continued growth in
our operations outside of the United States. In the case of
animal health, we have both sales and manufacturing operations
outside the United States and numerous risks and uncertainties
affect those operations. These risks and uncertainties include
political and economic instability, changes in local
governmental laws, regulations and policies, including those
related to tariffs, investments, taxation, employment
regulations, repatriation of earnings, enforcement of contract
and intellectual property rights and currency exchange
fluctuations and restrictions.
International transactions may also involve increased financial
and legal risks due to differing legal systems and customs,
including risks of non-compliance with U.S. and local laws such
as the U.S. Foreign Corrupt Practices Act and the U.S. Arms
Export Control Act and the International Traffic in Arms
Regulations affecting our activities abroad.
While the impact of these factors is difficult to predict, any
of them could adversely affect our business, financial
condition, operating results or cash flows. If we were to
violate local or U.S. laws, we may be subject to fines,
penalties, other costs, loss of ability to do business with the
U.S. government or other business-related effects which could
adversely affect our business, financial condition, results of
operations and cash flows.
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Compliance
with the terms and conditions of our corporate integrity
agreement with the Office of Inspector General of the United
States Department of Health and Human Services requires
significant resources and management time and, if we fail to
comply, we could be subject to penalties or, under certain
circumstances, excluded from government health care programs,
which could materially reduce our sales.
|
In October 2005, as part of our settlement of a government
pricing investigation of our company, we entered into a
five-year corporate integrity agreement (CIA) with
the Office of Inspector General of the United States Department
of Health and Human Services (HHS/OIG). For
additional information, please see Note 19,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Financial Statements. The
purpose of the CIA, which applies to all of our
U.S. subsidiaries and employees, is to promote compliance
with the federal health care and procurement programs in which
we participate, including the Medicaid Drug Rebate Program, the
Medicare Program, the 340B Drug Pricing Program, and the
Veterans Administration Pricing Program.
In addition to the challenges associated with complying with the
regulations applicable to each of these programs (as discussed
below), we are required, among other things, to keep in place
our current compliance program, provide specified training to
employees, retain an independent review organization to conduct
periodic audits of our Medicaid Rebate calculations and our
automated systems, processes, policies and practices related to
government pricing calculations, and to provide periodic reports
to HHS/OIG.
32
Maintaining the broad array of processes, policies and
procedures necessary to comply with the CIA is expected to
continue to require a significant portion of managements
attention as well as the application of significant resources.
Failing to meet the CIA obligations could have serious
consequences for us including stipulated monetary penalties for
each instance of noncompliance. In addition, flagrant or
repeated violations of the CIA could result in our being
excluded from participating in government health care programs,
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
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Our
charter and bylaws and applicable state laws discourage
unsolicited takeover proposals and could prevent shareholders
from realizing a premium on their common stock.
|
Our charter and bylaws contain provisions that may discourage
unsolicited takeover proposals that shareholders may consider to
be in their best interests. These provisions include:
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a classified Board of Directors, although the classification of
the Board is being phased out and will be eliminated in 2010;
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the ability of our Board of Directors to designate the terms of
and issue new series of preferred stock;
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advance notice requirements for nominations for election to our
Board of Directors; and
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special voting requirements for the amendment of our charter and
bylaws.
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We are also subject to anti-takeover provisions under Tennessee
law, each of which could delay or prevent a change of control.
Together, these provisions may discourage transactions that
otherwise could involve payment of a premium over prevailing
market prices for our common stock.
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At
times, our stock price has been volatile, and such volatility in
the future could result in substantial losses for our
investors.
|
The trading price of our common stock has at times been
volatile. The stock market in general and the market for the
securities of emerging pharmaceutical companies such as King, in
particular, have experienced extreme volatility. Many factors
contribute to this volatility, including:
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variations in our results of operations;
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perceived risks and uncertainties concerning our business;
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announcements of earnings;
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the commencement of, or adverse developments in, any material
litigation or governmental investigation;
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failure to meet timelines for product development or other
projections or forward-looking statements we may make to the
public;
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failure to meet or exceed security analysts financial
projections for our company;
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comments or recommendations made by securities analysts;
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general market conditions;
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perceptions about market conditions in the pharmaceutical
industry;
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announcements of technological innovations or the results of
clinical trials or studies;
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changes in marketing, product pricing and sales strategies or
development of new products by us or our competitors;
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changes in domestic or foreign governmental regulations or
regulatory approval processes; and
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announcements concerning regulatory compliance and government
agency reviews.
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33
The volatility of our common stock imposes a greater risk of
capital losses on our shareholders than would a less volatile
stock. In addition, such volatility makes it difficult to
ascribe a stable valuation to a shareholders holdings of
our common stock.
Risks
Related to Our Industries
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Failure
to comply with laws and government regulations could adversely
affect our ability to operate our business.
|
Virtually all of our activities are regulated by U.S. federal
and state statutes and government agencies as well as laws and
agencies in foreign countries. The manufacturing, processing,
formulation, packaging, labeling, distribution and marketing of
our products, and disposal of waste products arising from these
activities, are subject to regulation by one or more federal
agencies, including the FDA, the Drug Enforcement Agency, or
DEA, the Federal Trade Commission, the Consumer
Product Safety Commission, the Department of Agriculture, the
Occupational Safety and Health Administration, and the
Environmental Protection Agency (EPA), as well as by
foreign governments in countries where we manufacture or
distribute products.
Failure to comply with the policies or requirements established
by these agencies could subject us to enforcement actions or
other consequences. For example, noncompliance with applicable
FDA policies or requirements could subject us to suspensions of
manufacturing or distribution, seizure of products, product
recalls, fines, criminal penalties, injunctions, failure to
approve pending drug product applications or withdrawal of
product marketing approvals. Similar civil or criminal penalties
could be imposed by other government agencies, such as the DEA,
the EPA or various agencies of the states and localities in
which our products are manufactured, sold or distributed, and
could have ramifications for our contracts with government
agencies, such as the Department of Veterans Affairs or the
Department of Defense.
The FDA has the authority and discretion to withdraw existing
marketing approvals and to review the regulatory status of
marketed products at any time. For example, the FDA may require
withdrawal of an approved marketing application for any drug
product marketed if new information reveals problems with a
drugs safety or efficacy. All drugs must be manufactured
in conformity with current Good Manufacturing Practices and drug
products subject to an approved application must be
manufactured, processed, packaged, held and labeled in
accordance with information contained in the approved
application.
While we believe that all of our currently marketed
pharmaceutical products comply with FDA enforcement policies,
have approval pending or have received the requisite agency
approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can
ensure that noncomplying drugs are no longer marketed and that
advertising and marketing materials and campaigns are in
compliance with FDA regulations.
In addition, modifications, enhancements, or changes in
manufacturing sites of approved products are in many
circumstances subject to additional FDA approvals which may or
may not be received and which may be subject to a lengthy FDA
review process. Our manufacturing facilities and those of our
third-party manufacturers are continually subject to inspection
by governmental agencies. Manufacturing operations could be
interrupted or halted in any of those facilities if a government
or regulatory authority is unsatisfied with the results of an
inspection. Any interruptions of this type could result in
materially reduced sales of our products or increased
manufacturing costs. For additional information please see the
section entitled Government Regulation in
Item 1, Business, in Part I.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, CERCLA, the EPA can impose
liability for the entire cost of cleanup of contaminated
properties upon each or any of the current and former site
owners, site operators or parties who sent waste to the site,
regardless of fault or the legality of the original disposal
activity. In addition, many states, including Tennessee,
Michigan, Wisconsin, Florida and Missouri, have statutes and
regulatory authorities similar to CERCLA and to the EPA. We have
entered into hazardous waste hauling agreements with licensed
third parties to properly dispose of hazardous wastes. We cannot
assure you that we will not be found liable under CERCLA or
other applicable state statutes or regulations for the costs of
undertaking a cleanup at a site to which our wastes were
transported.
34
We cannot determine what effect changes in regulations,
enforcement positions, statutes or legal interpretations, when
and if promulgated, adopted or enacted, may have on our business
in the future. These changes could, among other things, require
modifications to our manufacturing methods or facilities,
expanded or different labeling, new approvals, the recall,
replacement or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of
certain products and scientific substantiation. These changes,
new legislation, or failure to comply with existing laws and
regulations could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
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New
legislation or regulatory proposals may adversely affect our
revenues.
|
A number of legislative and regulatory proposals have been
proposed and could be proposed in the future that are aimed at
changing the health care system, easing safeguards that limit
importation and reimportation of prescription products from
countries outside the United States, providing preferential
treatment to manufacturers of generic pharmaceutical products,
imposing additional and possibly conflicting reporting
requirements on prescription pharmaceutical companies, reducing
the level at which pharmaceutical companies are reimbursed for
sales of their products, and requiring significant monitoring
initiatives by manufacturers in an attempt to reduce the misuse
and abuse of controlled substances. For more information
relating to recent regulatory proposals, please see the section
titled Recent Developments, Branded Prescription
Pharmaceuticals Promoted Portfolio Developments,
Avinza®
in Item 7 below.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, these and other similar proposals may exacerbate
industry-wide pricing pressures and could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
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An
increase in product liability claims or product recalls could
harm our business.
|
We face an inherent business risk of exposure to product
liability claims in the event that the use of our technologies
or products is alleged to have resulted in adverse effects.
These risks exist for products in clinical development and with
respect to products that have received regulatory approval for
commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able
to avoid significant product liability exposure. We currently
have product liability insurance covering all of our significant
products, but we cannot assure you that the level or breadth of
any insurance coverage will be sufficient to cover fully all
potential claims. Also, adequate insurance coverage might not be
available in the future at acceptable costs, if at all. With
respect to any product liability claims that are not covered by
insurance, we could be responsible for any monetary damages
awarded by any court or any voluntary monetary settlements.
Significant judgments against us for product liability for which
we have no insurance could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Product recalls or product field alerts may be issued at our
discretion or at the discretion of the FDA, other government
agencies or other companies having regulatory authority for
pharmaceutical product sales. From time to time, we may recall
products for various reasons, including failure of our products
to maintain their stability through their expiration dates. Any
recall or product field alert has the potential of damaging the
reputation of the product or our reputation. To date, these
recalls have not been significant and have not had a material
adverse effect on our business, financial condition, results of
operations or cash flows. However, we cannot assure you that the
number and significance of recalls will not increase in the
future. Any significant recalls could materially affect our
sales and the prescription trends for the products and damage
the reputation of the products or our reputation. In these
cases, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
35
|
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If we
fail to comply with our reporting and payment obligations under
the Medicaid rebate program or other governmental pricing
programs, we could be required to reimburse government programs
for underpayments and could be required to pay penalties,
sanctions and fines which could have a material adverse effect
on our business.
|
Medicaid reporting and payment obligations are highly complex
and in certain respects ambiguous. If we fail to comply with
these obligations, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business. Our processes for
estimating amounts due under Medicaid and other governmental
pricing programs involve subjective decisions, and, as a result,
these calculations will remain subject to the risk of errors.
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The
insolvency of any of our principal customers, who are wholesale
pharmaceutical distributors, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
|
As with most other pharmaceutical companies, the primary
customers for our branded prescription pharmaceutical products
are wholesale pharmaceutical distributors. The wholesale
distributor network for pharmaceutical products has in recent
years been subject to increasing consolidation, which has
increased our, and other industry participants, customer
concentration. Accordingly, three key customers accounted for
approximately 72% of our gross sales from branded prescription
pharmaceutical products and a significant portion of our
accounts receivable for the fiscal year ended December 31,
2008. The insolvency of any of our principal customers could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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Any
reduction in reimbursement levels by managed care organizations
or other third-party payors may have an adverse effect on our
revenues.
|
Commercial success in producing, marketing and selling branded
prescription pharmaceutical products depends, in part, on the
availability of adequate reimbursement from third-party health
care payors, such as the government, private health insurers and
managed care organizations. Third-party payors are increasingly
challenging whether to reimburse certain pharmaceutical products
and medical services. For example, many managed health care
organizations limit reimbursement of pharmaceutical products.
These limits may take the form of formularies with differential
co-pay tiers. The resulting competition among pharmaceutical
companies to maximize their product reimbursement has generally
reduced growth in average selling prices across the industry. We
cannot assure you that our products will be appropriately
reimbursed or included on the formulary lists of managed care
organizations or any or all Medicare Part D plans, or that
downward pricing pressures in the industry generally will not
negatively impact our operations.
We establish accruals for the estimated amounts of rebates we
will pay to managed care and government organizations each
quarter. Any increased usage of our products through Medicaid,
Medicare, or managed care programs will increase the amount of
rebates that we owe. We cannot assure you that our products will
be included on the formulary lists of managed care or Medicare
organizations or that adverse reimbursement issues will not
result in materially lower revenues.
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If we
fail to comply with the safe harbors provided under various
federal and state laws, our business could be adversely
affected.
|
We are subject to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback
laws and false claims laws. Anti-kickback laws make it illegal
for a prescription drug manufacturer to solicit, offer, receive,
or pay any remuneration in exchange for, or to include, the
referral of business, including the purchase or prescription of
a particular drug. The federal government has published
regulations that identify safe harbors or exemptions
for certain payment arrangements that do not violate the
anti-kickback statutes. We seek to comply with these safe
harbors. Due to the breadth of the statutory provisions and the
absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that
our practices might be challenged under anti-kickback or similar
laws. False claims laws prohibit anyone from knowingly (in the
civil context), or knowingly and willfully (in the criminal
36
context), presenting, or causing to be presented for payment to
third-party payors (including Medicaid and Medicare) claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services.
Violations of fraud and abuse laws may be punishable by civil
and/or
criminal sanctions, including fines and civil monetary
penalties, as well as the possibility of exclusion from federal
health care programs, including Medicaid and Medicare. Any such
violations could have a material adverse effect on our financial
results.
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In the
future, the publication of negative results of studies or
clinical trials may adversely affect the sales of our products
or the values of the intangible assets associated with
them.
|
From time to time, studies or clinical trials on various aspects
of pharmaceutical products are conducted by academics or others,
including government agencies, the results of which, when
published, may have dramatic effects on the markets for the
pharmaceutical products that are the subject of the study, or
those of related or similar products. The publication of
negative results of studies or clinical trials related to our
products or the therapeutic areas in which our products compete
could adversely affect our sales, the prescription trends for
our products and the reputation of our products. In the event of
the publication of negative results of studies or clinical
trials related to our branded prescription pharmaceutical
products or the therapeutic areas in which our products compete,
sales of these products may be materially adversely affected.
Additionally, potential write-offs of the intangible assets
associated with the affected products could materially adversely
affect our results of operations.
37
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
Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections, as well as
other sections of this report.
Forward-looking statements in this report include, but are not
limited to, those regarding:
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the potential of, including anticipated net sales and
prescription trends for, our branded prescription pharmaceutical
products, particularly
Altace®,
Skelaxin®,
Avinza®,
Thrombin-JMI®,
the
Flector®
Patch and
Levoxyl®;
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expectations regarding the enforceability and effectiveness of
product-related patents, including, in particular, patents
related to
Skelaxin®,
Avinza®,
and
Adenoscan®;
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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;
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anticipated capital expenditures;
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the development, approval and successful commercialization of
Remoxy®,
Embedatm,
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 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 the outcome of various pending legal
proceedings including the
Skelaxin®
and
Avinza®
patent challenges, litigation, and other legal proceedings
described in this report;
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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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38
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.
The location and business segments served by our primary
facilities are as follows:
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Location
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Principal Purposes
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Business Segment(s)
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Bristol, Tennessee
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Manufacturing, Distribution, and Administration
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Branded Prescription Pharmaceuticals
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Rochester, Michigan
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Manufacturing
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Branded Prescription Pharmaceuticals
|
St. Louis, Missouri
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Manufacturing
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Meridian Auto-Injector
|
St. Petersburg, Florida
|
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Manufacturing
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|
Branded Prescription Pharmaceuticals
|
Middleton, Wisconsin
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|
Manufacturing
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|
Branded Prescription Pharmaceuticals
|
Piscataway, New Jersey
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Research and Development
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Branded Prescription Pharmaceuticals
|
Van Buren, Arkansas
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Manufacturing
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Animal Health
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Longmont, Colorado
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Manufacturing
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Animal Health
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Chicago Heights, Illinois
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Manufacturing
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Animal Health
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Eagle Grove, Iowa
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Manufacturing
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Animal Health
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Salisbury, Maryland
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Manufacturing
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Animal Health
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Willow Island, West Virginia
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|
Manufacturing
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Animal Health
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Shenzhou, China
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Manufacturing
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Animal Health
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Yantai, China
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Manufacturing
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Animal Health
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We own each of these primary facilities, with the exception of
the facility in Van Buren, Arkansas, which is leased, the
facility in Willow Island, West Virginia, which is subject to a
ground lease, and a portion of the facilities in St. Louis,
Missouri, which is leased. For information regarding production
capacity and extent of utilization, please see
Manufacturing in Part I, Item 1,
Business.
Our corporate headquarters and centralized branded prescription
pharmaceuticals distribution center are located in Bristol,
Tennessee. We consider our properties to be generally in good
condition, well maintained, and generally suitable and adequate
to carry on our business.
We currently lease office space for our branded prescription
pharmaceutical commercial operations organization and our animal
health operations located in Bridgewater, New Jersey, our
branded prescription pharmaceutical research and development
organization located in Cary, North Carolina, and our Meridian
Auto-Injector business located in Columbia, Maryland. We also
lease office space and warehouse facilities for the use of our
animal health operations in the U.S. and elsewhere.
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Item 3.
|
Legal
Proceedings
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Please see Note 19, Commitments and
Contingencies in Part IV, Item 15(a)(1),
Financial Statements for information regarding
material legal proceedings in which we are involved.
39
PART II
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Item 5.
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Market
for Common Equity and Related Stockholder Matters
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The following table sets forth the range of high and low sales
prices per share of our common stock for the periods indicated.
Our common stock is listed on the New York Stock Exchange, where
it trades under the symbol KG. There were
approximately 856 shareholders of record on February 25, 2009.
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2008
|
|
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High
|
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Low
|
|
|
First quarter
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|
$
|
12.40
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|
|
$
|
8.26
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Second quarter
|
|
|
10.61
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|
|
|
8.47
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|
Third quarter
|
|
|
12.60
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|
|
|
8.83
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|
Fourth quarter
|
|
|
10.66
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|
|
|
6.98
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2007
|
|
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High
|
|
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Low
|
|
First quarter
|
|
$
|
19.86
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|
|
$
|
15.79
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|
Second quarter
|
|
|
22.25
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|
|
|
19.40
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|
Third quarter
|
|
|
21.10
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|
|
|
11.43
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Fourth quarter
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11.82
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9.75
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On February 25, 2009, the closing price of our common stock as
reported on the New York Stock Exchange was $8.00. For
information regarding our equity compensation plans, please see
Note 21, Stock Based Compensation, in
Part IV, Item 15(a)(1), Financial
Statements.
40
PERFORMANCE
GRAPH
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following graph compares the cumulative
five-year
total return provided shareholders on King Pharmaceuticals,
Inc.s common stock relative to the cumulative total
returns of the S&P 500 Index and the NYSE US SIC Code
2830-2839,
Drug index. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in our common stock and
in each of the indexes on December 31, 2003 and its
relative performance is tracked through December 31, 2008.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Among King Pharmaceuticals, Inc., the S&P 500 Index
and NYSE US SIC Code 2830-2839, Drug
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
12/03
|
|
12/04
|
|
12/05
|
|
12/06
|
|
12/07
|
|
12/08
|
|
King Pharmaceuticals, Inc.
|
|
|
100.00
|
|
|
|
81.26
|
|
|
|
110.88
|
|
|
|
104.33
|
|
|
|
67.10
|
|
|
|
69.59
|
|
S&P 500
|
|
|
100.00
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
NYSE US SIC Code
2830-2839,
Drug
|
|
|
100.00
|
|
|
|
92.80
|
|
|
|
89.58
|
|
|
|
103.91
|
|
|
|
108.86
|
|
|
|
88.53
|
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
We have never paid cash dividends on our common stock. The
payment of cash dividends is subject to the discretion of the
Board of Directors and is limited by the terms of our Revolving
Credit Facility and our Term Facility. We currently anticipate
that for the foreseeable future we will retain our earnings.
41
|
|
Item 6.
|
Selected
Financial Data
|
The table below should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our audited
consolidated financial statements and related notes included
elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,565,061
|
|
|
$
|
2,136,882
|
|
|
$
|
1,988,500
|
|
|
$
|
1,772,881
|
|
|
$
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(219,645
|
)
|
|
|
227,513
|
|
|
|
402,546
|
|
|
|
180,079
|
|
|
|
(41,264
|
)
|
(Loss) income from continuing operations before income taxes and
discontinued operations
|
|
|
(201,704
|
)
|
|
|
250,818
|
|
|
|
424,312
|
|
|
|
178,115
|
|
|
|
(58,034
|
)
|
Income tax expense (benefit)
|
|
|
131,359
|
|
|
|
67,600
|
|
|
|
135,730
|
|
|
|
61,485
|
|
|
|
(7,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(333,063
|
)
|
|
|
183,218
|
|
|
|
288,582
|
|
|
|
116,630
|
|
|
|
(50,622
|
)
|
(Loss) income from discontinued operations(1)
|
|
|
|
|
|
|
(237
|
)
|
|
|
367
|
|
|
|
1,203
|
|
|
|
(109,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(333,063
|
)
|
|
$
|
182,981
|
|
|
$
|
288,949
|
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
662,143
|
|
|
$
|
1,366,569
|
|
|
$
|
1,055,677
|
|
|
$
|
276,329
|
|
|
$
|
438,133
|
|
Total assets
|
|
|
4,257,696
|
|
|
|
3,426,822
|
|
|
|
3,329,531
|
|
|
|
2,965,242
|
|
|
|
2,924,156
|
|
Total debt
|
|
|
1,407,499
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
345,000
|
|
|
|
345,000
|
|
Shareholders equity
|
|
|
2,177,331
|
|
|
|
2,510,757
|
|
|
|
2,288,606
|
|
|
|
1,973,422
|
|
|
|
1,848,790
|
|
|
|
|
(1) |
|
Reflects the classification of
Nordette®
and
Prefest®
product lines as discontinued operations. |
42
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with the
other parts of this report, including the audited consolidated
financial statements and related notes. Historical results and
percentage relationships set forth in the statement of income,
including trends that might appear, are not necessarily
indicative of future operations. Please see the Risk
Factors and Forward-Looking Statements
sections for a discussion of the uncertainties, risks and
assumptions associated with these statements.
OVERVIEW
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
|
|
distribution
|
manufacturing
|
|
sales and marketing
|
packaging
|
|
business development
|
quality control and assurance
|
|
regulatory management
|
Our branded prescription pharmaceuticals include neuroscience
products (primarily pain medicines), hospital products, and
legacy brands. The 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 prescription pharmaceutical
markets. We believe our target markets have significant
potential and our organization is aligned accordingly. Our
growth in specialty markets is achieved through organic growth
and acquisitions.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management. By product life-cycle management, we
mean the extension of the economic life of a product, including
seeking and gaining necessary related governmental approvals, by
such means as:
|
|
|
|
|
securing from the U.S. Food and Drug Administration, which
we refer to as the FDA, additional approved uses
(indications) for our products;
|
|
|
|
developing and producing different strengths;
|
|
|
|
producing different package sizes;
|
|
|
|
developing new dosage forms; and
|
|
|
|
developing new product formulations.
|
Our strategy also focuses on growth through the acquisition of
novel branded prescription pharmaceutical products in various
stages of development and the acquisition of prescription
pharmaceutical technologies, particularly those products and
technologies that we believe have significant market potential
and complement the commercial footprint we have established in
the neuroscience and hospital markets. Using our internal
resources and a disciplined business development process, 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 products or products in
development, technologies or sales and marketing capabilities to
our existing platforms or that otherwise complement our
operations. We also work to achieve organic growth by continuing
to develop investigational drugs, as we have a commitment to
research and development and advancing the products and
technologies in our development pipeline.
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. Branded prescription pharmaceutical products are
innovative
43
products sold under a brand name that have, or previously had,
some degree of market exclusivity. When we refer to
branded prescription pharmaceutical products, we
mean branded prescription pharmaceutical products that are
intended for humans.
Our animal health products are marketed through a staff of
trained sales and technical service and marketing employees,
many of whom are veterinarians and nutritionists. We have sales
offices 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
Acquisition
of Alpharma Inc.
On December 29, 2008, we completed our acquisition of all
of the outstanding shares of the Class A Common Stock of
Alpharma Inc. (Alpharma) at a price of $37.00 per
share in cash, for an aggregate purchase price of approximately
$1.6 billion.
As a result of the transaction, Alpharma is now a wholly-owned
subsidiary of King. The acquisition was funded with available
cash on hand, borrowings of $425.0 million under our
Revolving Credit Facility, as amended on December 5, 2008,
and borrowings of $200.0 million under a term loan.
Alpharma has a growing branded prescription pharmaceutical
franchise in the U.S. pain market with its
Flector®
Patch (diclofenac epolamine topical patch) 1.3%, and a pipeline
of new pain medicines led by
Embedatm,
a formulation of long-acting morphine that is designed to
provide controlled pain relief and deter certain common methods
of misuse and abuse. Alpharma is also a global leader in the
development, registration, manufacture and marketing of MFAs and
water soluble therapeutics for food-producing animals, including
poultry, cattle and swine.
We believe our acquisition of Alpharma is particularly
significant because it strengthens our portfolio and development
pipeline of pain management products, and increases our
capabilities and expertise in this important market. The
development pipeline provides us with both near-term and
long-term revenue
opportunities and the animal health business further diversifies
our revenue base. As a result, we believe this acquisition
creates a stronger foundation for sustainable, long-term growth
for our Company.
Contemporaneous with our acquisition of Alpharma and in
accordance with a consent order with the U.S. Federal Trade
Commission, we divested the rights to Alpharmas
Kadian®
(morphine sulfate long-acting) to Actavis Elizabeth, L.L.C.
(Actavis). Pursuant to the divestiture, we will
receive from Actavis future quarterly payments 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. In
connection with the divestiture, we recorded a receivable equal
to the present value of the estimated future cash flows from the
quarterly
gross-profit
related milestones. There was no gain or loss recorded as a
result of the divestiture.
Potential
Generic Substitution for
Skelaxin®
On January 20, 2009 the U.S. District Court for the Eastern
District of New York, in the case of King Pharmaceuticals, Inc.,
et al. v. Eon Labs, Inc., Case
No. 04-cv-5540
(DGT), issued an Order ruling invalid United States Patent Nos.
6,407,128 and 6,683,102, two patents related to
Skelaxin®.
The Order was issued without the benefit of a hearing in
response to Eon Labs motion for summary judgment. We plan
to appeal, upon the entry of an appropriate judgment, and intend
to vigorously defend our interests. The entry of the Order may
lead to generic versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause net sales of
Skelaxin®
to decline significantly. Also, in January 2008, we entered into
an agreement with CorePharma, LLC (CorePharma)
granting CorePharma a license to launch an authorized generic
version of
Skelaxin®
in December 2012, or earlier under certain conditions.
Following the decision of the District Court, our senior
management team conducted an extensive examination of the
Company and developed a restructuring initiative designed to
partially offset the potential decline in
Skelaxin®
sales in the event that a generic competitor entered the market.
This initiative includes,
44
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 estimate that, in connection with the restructuring
initiative, we will incur total restructuring costs of between
$50,000 and $55,000, all of which are expected to be incurred
and expensed during the first half of 2009 and almost all of
which will be cash expenditures. These costs all relate to
severance pay and other employee termination expenses.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 380 people in
our sales force.
Branded
Prescription Pharmaceuticals Development
Advances
Embedatm
The
Embedatm
New Drug Application (NDA) was submitted to the FDA
in June 2008. Utilizing proprietary technology,
Embedatm,
which contains long-acting morphine pellets, each with a
sequestered core of naltrexone, an opioid antagonist, has a
proposed indication for the management of moderate to severe
pain when a continuous, around-the-clock opioid analgesic is
needed for an extended period of time. The formulation is
designed to work such that if taken as directed, the morphine
would relieve pain while the sequestered naltrexone would pass
through the body with no intended clinical effect. If
Embedatm
capsules were crushed or chewed, however, the naltrexone would
be released, mitigating the euphoric effect that might otherwise
be caused by the morphine under these circumstances. We acquired
Embedatm
on December 29, 2008 as part of our acquisition of
Alpharma. In December 2008, the FDA informed us that it is
continuing its review of the NDA.
Remoxy®
The
Remoxy®
NDA was submitted to the FDA in June 2008. On December 10,
2008, we received a Complete Response Letter from the FDA with
respect to the NDA for
Remoxy®,
requiring additional non-clinical information to support
approval. We are working with our partner, Pain Therapeutics,
Inc., to complete an assessment of the Complete Response Letter
and prepare a written response. We, together with PTI plan to
meet with the FDA during the second quarter of 2009 to discuss
the response, following which we expect to have a better
understanding of the additional steps and the time required to
obtain approval.
Remoxy®
is a unique long-acting formulation of oral oxycodone with a
proposed indication for the management of moderate to severe
pain when a continuous, around-the-clock, opioid analgesic is
needed for an extended period of time. This formulation uses the
Oradurtm
platform technology which provides a unique physical barrier
that is designed to provide controlled pain relief and resist
certain common methods used to extract the opioid more rapidly
than intended as can occur with currently available products.
Common methods used to cause a rapid extraction of an opioid
include crushing, chewing, and dissolution in alcohol. These
methods are typically used to cause failure of the controlled
release dosage form, resulting in dose dumping of
oxycodone, or the immediate release of the active drug.
Acurox®
Tablets
An NDA for
Acurox®
(oxycodone HCl/niacin) Tablets was submitted to the FDA in
December 2008.
Acurox®,
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®
Tablets use the patented
Aversion®
Technology of Acura Pharmaceuticals, Inc., 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 results in the formation of a
viscous gel which is intended to sequester the opioid and deter
I.V. injection. 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
45
numbers of
Acurox®
Tablets releases niacin in quantities that are intended to cause
unpleasant and undesirable side effects that may potentially
deter this method of misuse and abuse.
CorVuetm
(binodenoson) for injection
In December 2008, we submitted an NDA for
CorVuetm
to the FDA.
CorVuetm
is a cardiac pharmacologic stress SPECT (single-photon-emission
computed tomographic) imaging agent intended for use in patients
with or at risk for coronary artery disease who are unable to
perform a cardiac exercise stress test. In the NDA, we are
requesting FDA approval of
CorVuetm
as an adjunct to non-invasive myocardial perfusion imaging tests
to detect perfusion abnormalities in patients with known or
suspected coronary artery disease.
T-62
In December 2008, we initiated the Phase II clinical trial
program evaluating the efficacy and safety of T-62, our
investigational oral drug formulation for the treatment of
neuropathic pain. T-62, a new chemical entity, is an adenosine
A1 allosteric enhancer that increases the effectiveness of the
bodys endogenous adenosine to treat neuropathic pain. The
Phase II clinical trial is a multicenter, randomized,
double-blind, placebo-controlled study assessing the analgesic
efficacy and safety of T-62 in subjects with postherpetic
neuralgia and its associated pain. The study is expected to
enroll approximately 130 patients in up to 20 study centers
and will evaluate two doses of T-62 and placebo utilizing a
parallel design. Each patient will complete a
7-day
screening period, a
28-day
treatment period, and a
14-day
post-treatment period.
Branded
Prescription Pharmaceuticals Promoted Portfolio
Developments
Avinza®
New mandates of the Food and Drug Administration Amendments Act
of 2007 (FDAAA) authorize the FDA to require a risk evaluation
and mitigation strategy (REMS) as part of the new drug approval
process if the agency believes that it is needed to ensure that
a proposed new drugs benefits outweigh its risks. The law
also authorizes the agency to require a REMS for certain drugs
approved before FDAAA was signed into law. A REMS can include a
Medication Guide, Patient Package Insert, a communication plan,
elements to ensure safe use and an implementation schedule, and
must include a timetable for assessment of the REMS. Elements to
ensure safe use include requiring that: healthcare providers
have particular training or be certified, pharmacies,
practitioners or healthcare settings that dispense the drug be
specially certified, the drug be dispensed to patients only in
certain healthcare settings, the drug be dispensed to patients
with evidence of safe use conditions, each patient be subject to
certain monitoring,
and/or each
patient using the drug be enrolled in a registry.
On February 6, 2009, the FDA sent a letter to the 16
manufacturers of previously approved, currently marketed
long-acting opioid drug products, including us as manufacturer
of
Avinza®,
indicating that this class of drugs will be required to have a
REMS. FDA has determined that a REMS is required to ensure that
the benefits outweigh the risks of: 1) use of certain
opioid products in non-opioid tolerant individuals;
2) abuse; and 3) overdose, both accidental and
intentional. The agency has announced its intention to consult
all relevant stakeholders, including manufacturers, pharmacies,
healthcare practitioners, patient groups and others in
developing this
class-wide
REMS of long-acting opioids. In the first of a series of such
meetings, the FDA has invited those companies that market the
affected opioid drugs to meet with the agency on March 3,
2009 to discuss development of such a
class-wide
REMS.
King currently has a Risk Management Program (RMP) in place for
Avinza®
consisting of an Appropriate Use and Communication Program,
Monitoring and Surveillance, Research and Evaluation.
Kings Risk Management Team (RMT) meets every 6 weeks
to review data collected on any reported misuse, abuse and
diversion of
Avinza®.
It is not possible at this time to determine whether or in what
way the consideration of a
class-wide
REMS for all long-acting opioids will change the elements of
Kings current risk management program for
Avinza®
or how any such changes might affect the marketing or sales of
Avinza®.
46
As discussed elsewhere in this report, King has NDAs for two
long-acting opioid products,
Embedatm
and
Remoxy®,
under review by the FDA. Both of these applications include
comprehensive proposals for REMS for those products. It is not
possible at this time to determine what, if any, affect the
FDAs ongoing process for developing
class-wide
REMS for previously approved, currently marketed long-acting
opioids will have on the FDAs review timeline of the
pending NDAs for
Embedatm
and/or
Remoxy®,
or their future market potential.
Thrombin-JMI®
Beginning in the fourth quarter of 2007,
Thrombin-JMI®,
our bovine thrombin product, faced new competition. A human
thrombin product entered the market in the fourth quarter of
2007 and a recombinant human thrombin entered the market during
the first quarter of 2008.
Sonata®
In June 2008, a third party entered the market with a generic
substitute for
Sonata®
following the expiration of our patent covering
Sonata®.
OPERATING
RESULTS
The following table summarizes total revenues and cost of
revenues by operating segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
1,263,488
|
|
|
$
|
1,857,813
|
|
|
$
|
1,724,701
|
|
Meridian Auto-Injector
|
|
|
218,448
|
|
|
|
183,860
|
|
|
|
164,760
|
|
Royalties
|
|
|
79,442
|
|
|
|
82,589
|
|
|
|
80,357
|
|
Contract manufacturing
|
|
|
1,327
|
|
|
|
9,201
|
|
|
|
16,501
|
|
Other
|
|
|
2,356
|
|
|
|
3,419
|
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,565,061
|
|
|
$
|
2,136,882
|
|
|
$
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
298,861
|
|
|
$
|
467,507
|
|
|
$
|
317,677
|
|
Meridian Auto-Injector
|
|
|
85,550
|
|
|
|
76,050
|
|
|
|
74,576
|
|
Royalties
|
|
|
9,720
|
|
|
|
10,158
|
|
|
|
9,748
|
|
Contract manufacturing
|
|
|
680
|
|
|
|
9,434
|
|
|
|
17,636
|
|
Other
|
|
|
14
|
|
|
|
3,385
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
394,825
|
|
|
$
|
566,534
|
|
|
$
|
419,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following table summarizes our deductions from gross sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Gross Sales
|
|
$
|
1,899,096
|
|
|
$
|
2,623,330
|
|
|
$
|
2,461,588
|
|
Commercial Rebates
|
|
|
87,646
|
|
|
|
188,966
|
|
|
|
188,652
|
|
Medicare Part D Rebates
|
|
|
28,110
|
|
|
|
59,103
|
|
|
|
54,221
|
|
Medicaid Rebates
|
|
|
39,658
|
|
|
|
39,608
|
|
|
|
27,219
|
|
Chargebacks
|
|
|
92,252
|
|
|
|
97,251
|
|
|
|
102,876
|
|
Returns
|
|
|
12,892
|
|
|
|
11,679
|
|
|
|
14,832
|
|
Trade Discounts/Other
|
|
|
73,477
|
|
|
|
90,211
|
|
|
|
84,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,565,061
|
|
|
$
|
2,136,512
|
|
|
$
|
1,989,068
|
|
Discontinued Operations
|
|
|
|
|
|
|
(370
|
)
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,565,061
|
|
|
$
|
2,136,882
|
|
|
$
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales were lower in 2008 compared to 2007 primarily due to
a decrease in gross sales of
Altace®,
partially offset by increases in gross sales of
Avinza®,
which we acquired on February 26, 2007, and the Meridian
Auto-Injector segment. During December 2007 a competitor entered
the market with a generic substitute for
Altace®
and additional generic competitors entered the market in June
2008. We anticipate gross sales will increase in 2009 due to the
acquisition of Alpharma at the end of December 2008, partially
offset by anticipated decreases in sales of several key products
in the branded prescription pharmaceuticals segment discussed
below.
Gross sales were higher in 2007 compared to 2006 primarily due
to the acquisition of
Avinza®
on February 26, 2007, price increases taken during 2007 and
an increase in gross sales of our Meridian Auto-Injector
segment. These increases in gross sales were partially offset by
a decline in prescriptions of certain of our branded
prescription pharmaceutical products during 2007.
We maintain inventory management and data services agreements
(IMAs) with each of our three key branded
prescription wholesale customers and other wholesale customers.
These agreements provide wholesalers incentives to manage
inventory levels and provide timely and accurate data with
respect to inventory levels held, and valuable data regarding
sales and marketplace activity. We rely on the timeliness and
accuracy of the data that each customer provides to us on a
regular basis pursuant to these agreements. If our wholesalers
fail to provide us with timely and accurate data in accordance
with the agreements, our estimates for certain reserves included
in our financial statements could be materially and adversely
affected.
Based on inventory data provided by our key customers under the
IMAs, we believe that wholesale inventory levels of
Skelaxin®,
Thrombin-JMI®,
and
Avinza®,
as of December 31, 2008, are at or below levels we consider
normal. As part of the acquisition of Alpharma at the end of
December 2008, we acquired the
Flector®
Patch product. We believe that the wholesale inventory levels of
Flector®
Patch at the time of the acquisition were well above levels we
consider normal. As a result, we expect that sales of
Flector®
Patch in the first quarter of 2009 will be significantly less
than prescription demand. We estimate that the wholesale and
retail inventories of all our products as of December 31,
2008 represent gross sales of approximately $140.0 million
to $150.0 million.
48
The following tables provide the activity and ending balances
for our significant deductions from gross sales.
Accrual
for Rebates, including Administrative Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, net of prepaid amounts
|
|
$
|
65,301
|
|
|
$
|
53,765
|
|
|
$
|
126,240
|
|
Current provision related to sales made in current period
|
|
|
151,014
|
|
|
|
285,253
|
|
|
|
282,603
|
|
Current provision related to sales made in prior periods
|
|
|
4,400
|
|
|
|
2,424
|
|
|
|
(12,511
|
)
|
Rebates paid
|
|
|
(199,912
|
)
|
|
|
(276,141
|
)
|
|
|
(342,567
|
)
|
Alpharma acquisition
|
|
|
37,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, net of prepaid amounts
|
|
$
|
58,129
|
|
|
$
|
65,301
|
|
|
$
|
53,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial rebates and Medicaid and Medicare
rebates.
During the first quarter of 2006, we paid approximately
$129.3 million related to (i) the settlement
agreements with the Office of Inspector General of the United
States Department of Health and Human Services
(HHS/OIG) and the Department of Veterans Affairs, to
resolve the governmental investigations related to our
underpayment of rebates owed to Medicaid and other governmental
pricing programs during the period from 1994 to 2002 and
(ii) similar state settlement agreements. Of the
$129.3 million paid in the first quarter of 2006,
approximately $64.0 million reduced the rebate accrual and
is reflected in Rebates paid in the table above.
In addition, during the first quarter of 2006, we delayed our
regular periodic Medicaid rebate payments as a result of prior
overpayments. During the second quarter of 2006, we began
reducing our payments for Medicaid rebates to utilize
overpayments made to the government related to Medicaid during
the government pricing investigation in 2003, 2004 and 2005.
During the period of the investigation, we made actual Medicaid
payments in excess of estimated expense to avoid any
underpayments to the government. During the third quarter of
2005, we began reporting to the Centers for Medicare and
Medicaid Services using a refined calculation to compute our
Average Manufacturers Price (AMP) and Best
Price. As a result of refining the AMP and Best Price
calculations in the third quarter of 2005, we discontinued the
practice of making payments in excess of the amounts expensed.
We expect to recover the remaining overpayments to the
government and will continue to reduce cash payments in the
future until this overpayment is fully recovered. In 2008, 2007
and 2006, the utilization of overpayments reduced our rebate
payments by approximately $25.3 million, $6.5 million
and $25.0 million, respectively. The utilization of the
overpayment has therefore reduced Rebates paid in
the table above.
During the third quarter of 2006, we reduced our Medicaid rebate
expense and increased net sales from branded prescription
pharmaceutical products by approximately $9.3 million due
to the determination that a liability established in 2005 for a
government pricing program for military dependents and retirees
was no longer probable.
A competitor entered the market with a generic substitute for
Altace®
during December 2007 and additional competitors entered the
market in June 2008. As a result of this competition, sales of
Altace®
and utilization of
Altace®
by rebate-eligible customers decreased in each quarter of 2008
and we expect sales of
Altace®
to continue to decline significantly in the future. The
significant decrease in utilization of
Altace®
by rebate-eligible customers has significantly decreased the
current provision related to sales made in the current
period in the table above. As
Altace®
sales continue to decline, we expect rebate payments to continue
to exceed the current provision as shown in the table above.
Rebate payments are made to rebate eligible customers
approximately one quarter after the utilization. When
Altace®
sales stabilize, we anticipate our rebate payments will more
closely approximate our current provision for rebates. For a
discussion regarding
Altace®
net sales, please see
Altace®
within the Sales of Key Products section below.
49
Accrual
for Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
32,860
|
|
|
$
|
42,001
|
|
|
$
|
50,902
|
|
Current provision
|
|
|
12,892
|
|
|
|
11,679
|
|
|
|
14,832
|
|
Actual returns
|
|
|
(21,658
|
)
|
|
|
(20,820
|
)
|
|
|
(23,733
|
)
|
Alpharma acquisition
|
|
|
9,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31
|
|
$
|
33,471
|
|
|
$
|
32,860
|
|
|
$
|
42,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our calculation for product return reserves is based on
historical sales and return rates over the period during which
customers have a right of return. We also consider current
wholesale and retail inventory levels of our products.
Because actual returns related to sales in prior periods were
lower than our original estimates, we recorded a decrease in our
reserve for returns in each of the first quarter of 2007 and the
first quarter of 2006. During the first quarter of 2007, we
decreased our reserve for returns by approximately
$8.0 million and increased our net sales from branded
prescription pharmaceuticals, excluding the adjustment to sales
classified as discontinued operations, by the same amount. The
effect of the change in estimate on first quarter 2007 operating
income was an increase of approximately $5.0 million.
During the first quarter of 2006, we decreased our reserve for
returns by approximately $8.0 million and increased our net
sales from branded prescription pharmaceuticals, excluding the
adjustment to sales classified as discontinued operations, by
the same amount. The effect of the change in estimate on first
quarter 2006 operating income was an increase of approximately
$6.0 million. The Accrual for Returns table
above reflects these adjustments as a reduction in the current
provision.
Accrual
for Chargebacks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
11,120
|
|
|
$
|
13,939
|
|
|
$
|
13,153
|
|
Current provision
|
|
|
92,252
|
|
|
|
97,251
|
|
|
|
102,876
|
|
Actual chargebacks
|
|
|
(93,563
|
)
|
|
|
(100,070
|
)
|
|
|
(102,090
|
)
|
Alpharma acquisition
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31
|
|
$
|
9,965
|
|
|
$
|
11,120
|
|
|
$
|
13,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Branded
Prescription Pharmaceuticals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skelaxin®
|
|
$
|
446,243
|
|
|
$
|
440,003
|
|
|
$
|
415,173
|
|
|
$
|
6,240
|
|
|
|
1.4
|
%
|
|
$
|
24,830
|
|
|
|
6.0
|
%
|
Thrombin-JMI®
|
|
|
254,581
|
|
|
|
267,354
|
|
|
|
246,520
|
|
|
|
(12,773
|
)
|
|
|
(4.8
|
)
|
|
|
20,834
|
|
|
|
8.5
|
|
Altace®
|
|
|
166,406
|
|
|
|
645,989
|
|
|
|
652,962
|
|
|
|
(479,583
|
)
|
|
|
(74.2
|
)
|
|
|
(6,973
|
)
|
|
|
(1.1
|
)
|
Avinza®
|
|
|
135,452
|
|
|
|
108,546
|
|
|
|
|
|
|
|
26,906
|
|
|
|
24.8
|
|
|
|
108,546
|
|
|
|
|
|
Levoxyl®
|
|
|
73,064
|
|
|
|
100,102
|
|
|
|
111,771
|
|
|
|
(27,038
|
)
|
|
|
(27.0
|
)
|
|
|
(11,669
|
)
|
|
|
(10.4
|
)
|
Sonata®
|
|
|
31,158
|
|
|
|
78,695
|
|
|
|
85,809
|
|
|
|
(47,537
|
)
|
|
|
(60.4
|
)
|
|
|
(7,114
|
)
|
|
|
(8.3
|
)
|
Other
|
|
|
156,584
|
|
|
|
217,124
|
|
|
|
212,466
|
|
|
|
(60,540
|
)
|
|
|
(27.9
|
)
|
|
|
4,658
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,263,488
|
|
|
$
|
1,857,813
|
|
|
$
|
1,724,701
|
|
|
$
|
(594,325
|
)
|
|
|
(32.0
|
)%
|
|
$
|
133,112
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments
|
|
$
|
298,861
|
|
|
$
|
467,507
|
|
|
$
|
317,677
|
|
|
$
|
(168,646
|
)
|
|
|
(36.1
|
)%
|
|
$
|
149,830
|
|
|
|
47.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from branded prescription pharmaceutical products were
lower in 2008 than in 2007 primarily due to a decrease in net
sales of
Altace®,
partially offset by increases in net sales of
Avinza®,
which we acquired on February 26, 2007. During December
2007 a competitor entered the market with a generic substitute
for
Altace®
and additional generic competitors entered the market in June
2008. Excluding the potential for sales from any products for
which NDAs have been submitted to the FDA, we expect net sales
from branded prescription pharmaceutical products in 2009 will
be lower than that experienced in 2008 primarily due to lower
net sales of
Altace®,
Skelaxin®
and other products discussed below, partially offset by sales of
Flector®
Patch, a branded prescription pharmaceutical product purchased
in the Alpharma acquisition at the end of December 2008.
Net sales from branded prescription pharmaceutical products were
higher in 2007 than in 2006 primarily due to the acquisition of
Avinza®
on February 26, 2007 and price increases taken on various
products. These increases in net sales were partially offset by
a decline in prescriptions of certain of our branded
prescription pharmaceutical products during 2007.
For a discussion regarding the potential risk of generic
competition for
Skelaxin®
and
Avinza®,
please see Note 19 Commitments and
Contingencies in Part IV, Item 15(a)(1),
Financial Statements.
Sales
of Key Products
Skelaxin®
On January 20, 2009 the U.S. District Court for the
Eastern District of New York, in the case of King
Pharmaceuticals, Inc., et al. v. Eon Labs, Inc., Case
No. 04-cv-5540
(DGT), issued an Order ruling invalid United States Patent Nos.
6,407,128 and 6,683,102, two patents related to
Skelaxin®.
The Order was issued without the benefit of a hearing in
response to Eon Labs motion for summary judgment. We plan
to appeal, upon the entry of an appropriate judgment, and intend
to vigorously defend our interests. The entry of the Order may
lead to generic versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause net sales of
Skelaxin®
to decline significantly. Also, in January 2008, we entered into
an agreement with CorePharma, LLC (CorePharma)
granting CorePharma a license to launch an authorized generic
version of
Skelaxin®
in December 2012, or earlier under certain conditions.
For a discussion regarding the risk of potential generic
competition for
Skelaxin®,
please see Note 19 Commitments and
Contingencies in Part IV, Item 15(a)(1),
Financial Statements.
51
Net sales of
Skelaxin®
increased in 2008 from 2007 primarily due to a price increase
taken in the fourth quarter of 2007 and decreases in wholesale
inventory levels during 2007, partially offset by a decrease in
prescriptions. During 2007, net sales of
Skelaxin®
benefited from a favorable change in estimate during the first
quarter of 2007 in the products reserve for returns as
discussed above. Due to increased competition, total
prescriptions for
Skelaxin®
decreased approximately 11.9% in 2008 compared to 2007 according
to IMS Health Incorporated (IMS) monthly
prescription data. We believe net sales of
Skelaxin®
will decrease significantly in 2009 compared to 2008 as a result
of decreases in promotional efforts.
Net sales of
Skelaxin®
increased in 2007 from 2006 primarily due to a price increase
taken in the fourth quarter of 2006. During 2006, net sales of
Skelaxin®
benefited from a reduction in the rebate reserve for a
government pricing program for military dependents and retirees.
During 2007, net sales of
Skelaxin®
benefited from a favorable change in estimate in the products
reserve for returns as discussed above. Total prescriptions for
Skelaxin®
decreased approximately 1.6% in 2007 compared to 2006, according
to IMS monthly prescription data.
Thrombin-JMI®
Net sales of
Thrombin-JMI®
decreased in 2008 compared to 2007 primarily due to price
concessions. A competing product entered the market in the
fourth quarter of 2007 and another entered the market in the
first quarter of 2008. We believe net sales of
Thrombin-JMI®
will decrease at a significantly higher rate than that
experienced in 2008 due to additional price concessions as a
result of these competing products.
Net sales of
Thrombin-JMI®
increased in 2007 compared to 2006 primarily due to a price
increase taken in the fourth quarter of 2006.
Altace®
Net sales of
Altace®
decreased significantly in 2008 from 2007 primarily due to a
competitor entering the market in December 2007, and additional
competitors entering the market in June 2008, with generic
substitutes for
Altace®.
As a result of the entry of generic competition, we expect net
sales of
Altace®
to continue to decline significantly in the future. Total
prescriptions for
Altace®
decreased approximately 74.5% in 2008 compared to 2007 according
to IMS monthly prescription data.
Net sales of
Altace®
decreased in 2007 from 2006 primarily due to decreases in
prescriptions, partially offset by price increases taken in the
fourth quarter of 2006 and the third quarter and fourth quarters
of 2007. Total prescriptions for
Altace®
decreased approximately 7.1% in 2007 compared to the same period
of the prior year according to IMS monthly prescription data.
For a discussion regarding the generic competition for
Altace®,
please see Note 19, Commitments and
Contingencies in Part IV, Item 15(a)(1),
Financial Statements.
Avinza®
We acquired all rights to
Avinza®
in the United States, its territories and Canada on
February 26, 2007. Net sales of
Avinza®
increased in 2008 compared to 2007 primarily due to a price
increase taken in the fourth quarter of 2007, an increase in
prescriptions and the fact that net sales of
Avinza®
in 2007 only reflect sales occurring from February 26, 2007
through December 31, 2007. Total prescriptions for
Avinza®
increased approximately 3.4% in 2008 compared to 2007 according
to IMS monthly prescription data. We do not anticipate net sales
of
Avinza®
in 2009 will increase at the rate experienced in 2008 as the
majority of the increase experienced in 2008 was due to the
timing of its acquisition.
On March 24, 2008, we received a letter from the United
States Food and Drug Administration, Division of Drug Marketing,
Advertising, and Communications (DDMAC) regarding
promotional material for
Avinza®
that was created and submitted to the DDMAC by Ligand
Pharmaceuticals (the company from which we acquired
Avinza®
in late February 2007). The letter expressed concern with the
balance of the described risks and benefits associated with the
use of the product and the justification for certain statements
made in the promotional material. We discontinued the use of
promotional materials created by Ligand prior to
52
receiving the letter and have communicated this to DDMAC. In
addition, DDMAC requested support for certain statements
included in
Avinza®
promotional materials which were then in use. We promptly
responded to this request and asked for a meeting with DDMAC to
discuss this matter.
Our request resulted in a teleconference with DDMAC
representatives on January 6, 2009. After this call, we
immediately ceased the dissemination of promotional materials
for
Avinza®
that included any statements with which DDMAC took issue in its
March 24, 2008 letter. Further, we directed our sales
representatives to discontinue the use of such materials and
ceased all advertising containing the statements discussed in
that letter. We continue to cooperate fully with DDMAC in this
matter.
For a discussion regarding the risk of potential generic
competition for
Avinza®,
please see Note 19, Commitments and
Contingencies in Part IV, Item 15(a)(1),
Financial Statements.
Levoxyl®
Net sales of
Levoxyl®
decreased in 2008 compared to 2007 primarily due to a decrease
in prescriptions as a result of generic competition. In
addition, net sales of
Levoxyl®
decreased as a result of decreases in the wholesale inventory
levels in the first quarter 2008. These decreases in 2008 were
partially offset by a price increase taken in the fourth quarter
of 2007. Total prescriptions for
Levoxyl®
decreased approximately 5.6% in 2008 compared to 2007 according
to IMS monthly prescription data. We believe decreases in sales
of
Levoxyl®
in 2009 will more closely reflect anticipated decreases in
prescriptions.
The decrease in net sales of
Levoxyl®
in 2007 compared to 2006, primarily due to a decrease in
prescriptions in 2007 discussed above, was partially offset by
the effect of an increase in wholesale inventory levels during
2007. During 2006, net sales of
Levoxyl®
benefited from a favorable change in estimate of approximately
$7.0 million in the products reserve for Medicaid
rebates as a result of the government pricing investigation
settlement, partially offset by a decrease in wholesale
inventory levels. This benefit was substantially offset by
increases in Medicaid rebate reserves for other products as a
result of the settlement. Total prescriptions for
Levoxyl®
were approximately 12.4% lower in 2007 compared to 2006
according to IMS monthly prescription data.
Other
The branded prescription pharmaceutical products included in
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 prescription pharmaceutical products were lower
in 2008 compared to 2007 primarily due to the sale of several of
our other branded prescription pharmaceutical products to JHP
Pharmaceuticals LLC (JHP) on October 1, 2007,
and lower net sales of
Sonata®
and
Bicillin®.
Net sales of
Sonata®
were lower in 2008 compared to 2007 primarily due to competition
entering the market with generic substitutes for
Sonata®.
The composition of matter patent covering
Sonata®
expired in June 2008, at which time several competitors entered
the market with generic substitutes.
We completed construction of facilities to produce
Bicillin®
at our Rochester, Michigan location, began commercial production
in the fourth quarter of 2006 and replenished wholesale
inventories of the product during the first quarter of 2007. As
a result of this replenishment, we believe that net sales of
Bicillin®
in 2007 exceeded demand. Prior to the first quarter of 2007,
Bicillin®
was in short supply.
Net sales of other branded prescription pharmaceutical products
were higher in 2007 compared to 2006 primarily due to an
increase in net sales of
Bicillin®
described above and price increases which were partially offset
by decreases in prescriptions. As a result of generic
competition for
Sonata®
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 2009.
53
Cost
of Revenues
Cost of revenues from branded prescription pharmaceutical
products decreased in 2008 from 2007 primarily due to lower unit
sales of
Altace®
and the sale of several of our other branded prescription
pharmaceutical products to JHP on October 1, 2007,
partially offset by an increase in unit sales of
Avinza®
due to the acquisition of this product on February 26, 2007.
Cost of revenues from branded prescription pharmaceutical
products increased in 2007 from 2006 primarily due to an
increase in royalties associated with
Skelaxin®
and
Avinza®
and the effects of special items in 2007 associated with
Altace®
as discussed 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, 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.
Special items affecting cost of revenues from branded
prescription pharmaceuticals during 2008, 2007 and 2006 included
the following:
|
|
|
|
|
A charge of $8.1 million in 2008 primarily associated with
minimum purchase requirements under a supply agreement to
purchase raw materials associated with
Altace®.
|
|
|
|
|
|
An inventory valuation allowance that resulted in a charge of
$78.8 million for inventories associated with
Altace®
in 2007. For additional information please see Note 7,
Inventory, in Part IV, Item 15(a)(1),
Financial Statements.
|
|
|
|
|
|
A charge of $25.4 million primarily associated with minimum
purchase requirements under a supply agreement to purchase raw
material inventory associated with
Altace®
in 2007. For additional information please see Note 7,
Inventory, in Part IV, Item 15(a)(1),
Financial Statements.
|
|
|
|
A contract termination that resulted in a charge of
$3.8 million in 2007.
|
We anticipate cost of revenues will decrease in 2009 compared to
2008 primarily due to a decrease in unit sales of several
branded prescription pharmaceutical products, as discussed
above, partially offset by an increase in cost of revenues due
to the
Flector®
Patch due to the acquisition of Alpharma at the end of 2008.
Meridian
Auto-Injector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector revenue
|
|
$
|
218,448
|
|
|
$
|
183,860
|
|
|
$
|
164,760
|
|
|
$
|
34,588
|
|
|
|
18.8
|
%
|
|
$
|
19,100
|
|
|
|
11.6
|
%
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments
|
|
|
85,550
|
|
|
|
76,050
|
|
|
|
74,576
|
|
|
|
9,500
|
|
|
|
12.5
|
%
|
|
|
1,474
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,898
|
|
|
$
|
107,810
|
|
|
$
|
90,184
|
|
|
$
|
25,088
|
|
|
|
23.3
|
%
|
|
$
|
17,626
|
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from our Meridian Auto-Injector segment increased in
2008 compared to 2007 primarily due to higher unit sales of
other products to various government agencies and higher unit
sales of
Epipen®.
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.
Revenues from the
54
Meridian Auto-Injector segment fluctuate based on the buying
patterns of Dey, L.P. and government customers.
Revenues from government entities were unusually high in 2008
compared to 2007. With respect to auto-injector products sold to
government entities, demand for these products is affected by
the timing of procurements which can be affected by preparedness
initiatives and responses to domestic and international events.
Demand for
Epipen®
is seasonal as a result of its use in 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. Revenues from
Epipen®
in the United States increased in 2008 from 2007 due to an
increase in prescriptions. Total prescriptions for
Epipen®
in the United States increased approximately 6.4% in 2008
compared to 2007 according to IMS monthly prescription data.
We do not believe revenues from Meridian Auto-Injector segment
will continue to increase at the rate experienced in 2008.
Revenues from our Meridian Auto-Injector segment increased in
2007 compared to 2006 primarily due to increases in unit sales
of
Epipen®
to Dey, L.P., an increase in revenues derived from our
acquisition of the rights to market and sell
Epipen®
in Canada that we purchased from Allerex Laboratory Ltd. in
March 2006 and a price increase taken in the first quarter of
2007.
Cost of revenues from the Meridian Auto-Injector segment
increased in 2008 compared to 2007 and in 2007 compared to 2006
primarily due to higher unit sales.
Royalties
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
79,442
|
|
|
$
|
82,589
|
|
|
$
|
80,357
|
|
|
$
|
(3,147
|
)
|
|
|
(3.8
|
)%
|
|
$
|
2,232
|
|
|
|
2.8
|
%
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments
|
|
|
9,720
|
|
|
|
10,158
|
|
|
|
9,748
|
|
|
|
(438
|
)
|
|
|
(4.3
|
)%
|
|
|
410
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,722
|
|
|
$
|
72,431
|
|
|
$
|
70,609
|
|
|
$
|
(2,709
|
)
|
|
|
(3.7
|
)%
|
|
$
|
1,822
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As a
result, we are not able to predict whether revenue from
royalties will increase or decrease in future periods.
On April 10, 2008, CV Therapeutics, Inc. and Astellas
Pharma US, Inc. announced that the FDA approved regadenoson
injection, an A2A adenosine receptor agonist product that will
compete with
Adenoscan®.
Regadenoson has been commercialized by Astellas. Astellas is
also responsible for the marketing and sale of
Adenoscan®
pursuant to agreements we have with Astellas. It is anticipated
that with the commercial launch of regadenoson, sales of
Adenoscan and our royalty revenue may continue to decline.
However, our agreements with Astellas provide for minimum
royalty payments to King of $40.0 million per year for
three years (beginning June 1, 2008 and ending May 31,
2011). King will continue to receive royalties on the sale of
Adenoscan®
through expiration of the patents covering the product, but the
minimum guaranteed portion of the royalty payments terminates
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 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.
55
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
$
|
394,825
|
|
|
$
|
566,534
|
|
|
$
|
419,808
|
|
|
$
|
(171,709
|
)
|
|
|
(30.3
|
)%
|
|
$
|
146,726
|
|
|
|
35.0
|
%
|
Selling, general and administrative
|
|
|
446,020
|
|
|
|
691,034
|
|
|
|
713,965
|
|
|
|
(245,014
|
)
|
|
|
(35.5
|
)
|
|
|
(22,931
|
)
|
|
|
(3.2
|
)
|
Research and development
|
|
|
743,673
|
|
|
|
184,735
|
|
|
|
253,596
|
|
|
|
558,938
|
|
|
|
>100
|
|
|
|
(68,861
|
)
|
|
|
(27.2
|
)
|
Depreciation and amortization
|
|
|
150,713
|
|
|
|
173,863
|
|
|
|
147,549
|
|
|
|
(23,150
|
)
|
|
|
(13.3
|
)
|
|
|
26,314
|
|
|
|
17.8
|
|
Asset impairments
|
|
|
40,995
|
|
|
|
223,025
|
|
|
|
47,842
|
|
|
|
(182,030
|
)
|
|
|
(81.6
|
)
|
|
|
175,183
|
|
|
|
>100
|
|
Restructuring charges
|
|
|
7,098
|
|
|
|
70,178
|
|
|
|
3,194
|
|
|
|
(63,080
|
)
|
|
|
(89.9
|
)
|
|
|
66,984
|
|
|
|
>100
|
|
Acquisition related costs
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
1,784,706
|
|
|
$
|
1,909,369
|
|
|
$
|
1,585,954
|
|
|
$
|
(124,663
|
)
|
|
|
(6.5
|
)%
|
|
$
|
323,415
|
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$
|
408,955
|
|
|
$
|
511,303
|
|
|
$
|
496,215
|
|
|
$
|
(102,348
|
)
|
|
|
(20.0
|
)%
|
|
$
|
15,088
|
|
|
|
3.0
|
%
|
Co-promotion fees
|
|
|
37,065
|
|
|
|
179,731
|
|
|
|
217,750
|
|
|
|
(142,666
|
)
|
|
|
(79.4
|
)
|
|
|
(38,019
|
)
|
|
|
(17.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
446,020
|
|
|
$
|
691,034
|
|
|
$
|
713,965
|
|
|
$
|
(245,014
|
)
|
|
|
(35.5
|
)%
|
|
$
|
(22,931
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 28.5%, 32.3% and 35.9% during 2008,
2007 and 2006, respectively.
Total selling, general and administrative expenses decreased in
2008 compared to 2007, primarily due to a decrease in
co-promotion expenses for fees that we pay to Wyeth under our
Amended and Restated Co-Promotion Agreement (the Amended
Co-Promotion Agreement) and a decrease in operating
expenses. The decrease in co-promotion expenses is due to a
decrease in
Altace®
net sales and the lower percentage of net sales of
Altace®
that we paid Wyeth in 2008 compared to 2007 under the Amended
Co-Promotion Agreement. For additional discussion regarding the
Amended Co-Promotion Agreement, please see General
within the Liquidity and Capital Resources section
below. For a discussion regarding net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
Following the Circuit Courts decision in September 2007
invalidating our 722 patent that covered
Altace®,
our senior management team conducted an extensive examination of
our company and developed a restructuring initiative. This
initiative included a reduction in personnel, staff leverage,
expense reductions and additional controls over spending,
reorganization of sales teams and a realignment of research and
development priorities. As a result of these actions, we reduced
selling, general and administrative expenses, exclusive of
co-promotion fees.
Total selling, general and administrative expenses decreased in
2007 compared to 2006, primarily due to a decrease in
co-promotion fees we pay to Wyeth under our Amended Co-Promotion
Agreement, partially offset by an increase in operating expenses
associated with sales and marketing. The increases in sales and
marketing expenses were driven by an increase in the size of our
sales force and marketing costs primarily
56
associated with
Altace®
and
Avinza®.
The co-promotion fee decreased in 2007 compared to 2006 due to a
lower co-promotion fee average rate during 2007 as a result of
the Amended Co-Promotion Agreement.
Selling, general and administrative expense includes the
following special items:
|
|
|
|
|
Income of $4.4 million during 2008 and charges of
$2.1 million and $0.1 million during 2007 and 2006,
respectively, primarily due to professional fees related to the
previously completed investigation of our company by the
HHS/OIG, and the SEC, and the private plaintiff securities
litigation. During 2008, 2007 and 2006, we received payment from
our insurance carriers for the recovery of legal fees in the
amount of $11.0 million, $3.4 million and
$6.8 million, respectively, related to the securities
litigation. These recoveries have been reflected as reductions
of professional fees in 2008, 2007 and 2006. For additional
information, please see Note 19, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Financial Statements.
|
|
|
|
A charge of $45.1 million during 2006 related to the
results of a binding arbitration proceeding with Elan
Corporation, plc regarding an agreement concerning the
development of a modified release formulation of
Sonata®.
During 2004, we incurred a charge of $5.0 million as
estimated settlement costs related to the termination of this
agreement.
|
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
$
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
145,173
|
|
|
$
|
149,425
|
|
|
$
|
143,596
|
|
|
$
|
(4,252
|
)
|
|
$
|
5,829
|
|
Research and development in-process upon acquisition
|
|
|
598,500
|
|
|
|
35,310
|
|
|
|
110,000
|
|
|
|
563,190
|
|
|
|
(74,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
743,673
|
|
|
$
|
184,735
|
|
|
$
|
253,596
|
|
|
$
|
558,938
|
|
|
$
|
(68,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development represents expenses associated with the
ongoing development of investigational drugs and product
life-cycle management projects in our research and development
pipeline, which primarily consists of branded prescription
pharmaceutical products. During 2008, we expensed and paid
milestone payments of $5.1 million associated with the
acceptance of an investigational new drug application under our
agreements with Pain Therapeutics, $15.8 million associated
with the acceptance of the NDA filing for
Remoxy®
by the FDA and a $5 million milestone to Acura associated
with positive top-line results from the Phase III clinical
trial evaluating
Acurox®
Tablets. For a discussion regarding recent research and
development activities, please see Recent
Developments above.
Research and development in-process upon acquisition
represents the actual cost of acquiring rights to novel branded
prescription pharmaceutical projects in development from third
parties, which costs we expense at the time of acquisition. We
classify these costs as special items, and in 2008, 2007, and
2006 special items included the following:
|
|
|
|
|
A charge of $590.0 million for our acquisition of
in-process research and development related to the completion of
our acquisition of Alpharma on December 29, 2008. The
charge represents purchase price allocation associated with
Embedatm,
Oxycodone NT and Hydrocodone NT projects of $410.0 million,
$90.0 million and $90.0 million, respectively. The
amounts associated with each of these projects were expensed as
the in-process research and development projects had not
received regulatory approval and had no alternative future use.
The
Embedatm
NDA was submitted to the FDA in June 2008. We currently believe
we will obtain approval of the
Embedatm
NDA during 2009. The success of the project is dependent upon
NDA approval by the FDA. Oxycodone NT and Hydrocodone NT, each
long-acting treatments for moderate to severe chronic pain, are
currently in the early stages of development. Oxycodone NT and
Hydrocodone NT are each designed to resist certain common
methods of misuse and abuse associated with long-acting
oxycodone and hydrocodone products that are currently available.
If the clinical development programs are successful, we would
not expect to commercialize
|
57
|
|
|
|
|
these products any sooner than 2011. The estimated cost to
complete the development of these products is approximately
$35 million each. We believe there is a reasonable
probability of completing these projects successfully, but the
success of the projects depends on the outcome of the clinical
development programs and approval by the FDA.
|
|
|
|
|
|
Charges totaling $6.0 million in 2008 for our acquisition
of in-process research and development related to the exercise
of our options for a third and fourth immediate-release opioid
product under 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 amount
of each option exercise was $3.0 million. We believe there
is a reasonable probability of completing the projects
successfully, but the success of the projects depends on the
successful outcome of the clinical development programs and
approval of the products by the FDA. The estimated cost to
complete each project at the time of the execution of the option
was approximately $16.0 million for each product.
|
|
|
|
A charge of $2.5 million in 2008 for our acquisition of
in-process research and development associated with our Product
Development Agreement with CorePharma LLC
(CorePharma) to develop new formulations of
Skelaxin®.
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. The success
of the project depends on additional development activities and
FDA approval. The estimated cost to complete the development
activities at the time of the execution of the agreement was
approximately $2.5 million.
|
|
|
|
A charge of $32.0 million during 2007 associated with our
collaborative agreement with Acura to develop and commercialize
certain immediate-release opioid analgesic products utilizing
Acuras proprietary
Aversion®
Technology in the United States, Canada and Mexico. The
agreement provides us with an exclusive license for
Acurox®
(oxycodone HCl/niacin) tablets and another immediate-release
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 connection with the agreement with Acura, we recognized the
above payments of $32.0 million as in-process research and
development expense during 2007. This amount was expensed as the
in-process research and development project had not received
regulatory approval and had no alternative future use. The
in-process research and development project is part of the
branded prescription pharmaceutical segment. An NDA for
Acurox®
Tablets was submitted to the FDA in December 2008. The success
of the project depends on approval by the FDA. The estimated
cost to complete the project at the execution of the agreement
was approximately $9.0 million. We may obtain FDA approval
in 2009.
|
|
|
|
|
A charge of $3.1 million during 2007 for a payment to
Mutual Pharmaceutical Company (Mutual) to jointly
research and develop one or more improved formulations of
metaxalone. Under the agreement with Mutual, we sought
Mutuals expertise in developing improved formulations of
metaxalone, including improved formulations Mutual developed
prior to execution of this agreement and access to Mutuals
and United Research Laboratories rights in intellectual
property pertaining to these formulations. Development
activities under this agreement ceased in December 2007.
|
|
|
|
A charge of $110.0 million during 2006 for our acquisition
of in-process research and development associated with our
collaboration with Arrow to commercialize one or more novel
formulations of ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow granted us rights
to certain current and future NDAs regarding novel formulations
of ramipril and intellectual property, including patent rights
and technology licenses relating to these novel formulations.
This project included a NDA filed by Arrow for a tablet
formulation of ramipril in January 2006 (the Ramipril
Application). The FDA approved the NDA on
February 27, 2007. Arrow granted us an exclusive option to
acquire their entire right, title and interest to the Ramipril
Application or any future filed Amended Ramipril Application for
the amount of $5.0 million. In April 2007, we exercised our
option and paid $5.0 million to Arrow. We do not currently
anticipate any future revenues as a result of our rights to
these ramipril formulations.
|
58
Depreciation
and Amortization Expense
Depreciation and amortization expense decreased in 2008 compared
to 2007 primarily due to a decrease in amortization associated
with
Altace®,
partially offset by increases in amortization associated with
Skelaxin®
and
Avinza®,
as discussed below. In addition, the decrease in depreciation
and amortization expense during 2008 was partially attributable
to the cessation of depreciation and amortization associated
with the Rochester, Michigan sterile manufacturing facility that
we sold in October 2007.
Following the Circuit Courts decision in September 2007
invalidating our 722 patent that covered
Altace®,
we undertook an analysis of the potential effect on future net
sales of the product. Based upon this analysis, we reduced the
estimated remaining useful life of
Altace®.
Accordingly, amortization of the remaining intangibles
associated with
Altace®
was completed during the first quarter of 2008. The amortization
expense associated with
Altace®
during the first quarter of 2008 was $29.7 million.
In January 2008, we entered into an agreement with CorePharma
providing CorePharma with the right to launch an authorized
generic version of
Skelaxin®
pursuant to a license in December 2012, or earlier under certain
conditions. As a result, we decreased the estimated useful life
of
Skelaxin®,
which had the effect of increasing amortization in 2008 compared
to 2007. Additionally, on February 26, 2007, we completed
our acquisition of
Avinza®
and began amortizing the associated intangible assets as of that
date.
Depreciation and amortization expense increased in 2007 compared
to 2006 primarily due to increased amortization expense related
to
Avinza®
and
Altace®,
partially offset by a decrease in depreciation and amortization
expense associated with the sale of the Rochester, Michigan
sterile manufacturing facility. On February 26, 2007, we
completed our acquisition of
Avinza®
and began amortizing the associated intangible assets as of that
date. During 2007, following the Circuit Courts decision
invalidating our
Altace®
patent as discussed above, we decreased the estimated useful
life of our
Altace®
intangible assets. On June 30, 2007, the assets associated
with the sale of the Rochester, Michigan sterile manufacturing
facility were classified as held for sale, and accordingly the
depreciation and amortization was discontinued as of that date.
For additional information about the sale of the Rochester,
Michigan facility and the acquisition of
Avinza®,
please see Note 9, Acquisitions, Dispositions,
Co-Promotions and Alliances, in Part IV,
Item 15(a)(1), Financial Statements. For
additional information relating to the
Altace®
intangible assets, please see Note 10, Intangible
Assets and Goodwill, in Part IV, Item 15(a)(1),
Financial Statements.
Depreciation and amortization expense in 2008, 2007 and 2006
includes a special item consisting of $2.6 million,
$7.0 million and $3.0 million, respectively,
associated with accelerated depreciation on certain assets,
including those associated with our decision to transfer the
production of
Levoxyl®
from our St. Petersburg, Florida facility to our Bristol,
Tennessee facility, which we expect to complete in the first
half of 2009.
Following the U.S. District Courts Order ruling
invalid two
Skelaxin®
patents on January 20, 2009, we estimated the potential
effect on future net sales of the product. Based upon this
analysis, we reduced the estimated remaining useful life of
Skelaxin®.
Accordingly,
Skelaxin®
amortization will increase in 2009 compared to 2008. For
additional information relating to
Skelaxin®,
please see Note 27, Subsequent Events, in
Part IV, Item 15(a)(1), Financial
Statements.
In addition, the acquisition of Alpharma will increase
depreciation and amortization in 2009 compared to 2008.
For additional information relating to 2009 amortization
expense, please see Note 10, Intangible Assets and
Goodwill, in Part IV, Item 15(a)(1),
Financial Statements.
59
Other
Operating Expenses
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses
resulting in a net charge totaling $49.5 million during
2008 compared to a net charge totaling $293.2 million
during 2007 and $51.0 million during 2006. These other
special items included the following:
|
|
|
|
|
Asset impairment charges of $40.9 million in 2008 primarily
associated with a decline in end-user demand for
Synercid®.
|
|
|
|
An intangible asset impairment charge of $146.4 million in
2007 related to our
Altace®
product as a result of the invalidation of the 722 patent
which covered the
Altace®
product. Following the Circuit Courts decision, we reduced
the estimated useful life of this product and forecasted net
sales. This decrease in estimated remaining useful life and
forecasted net sales reduced the probability-weighted estimated
undiscounted future cash flows associated with
Altace®
intangible assets to a level below their carrying value. We
determined the fair value of these assets based on
probability-weighted estimated discounted future cash flows.
|
|
|
|
A charge of $46.4 million in 2007 related to the write-down
of our Rochester, Michigan sterile manufacturing facility and
certain legacy branded prescription pharmaceutical products. On
October 1, 2007, we closed the asset purchase agreement
with JHP, pursuant to which JHP acquired our Rochester, Michigan
sterile manufacturing facility, some of our legacy products that
are manufactured there and the related contract manufacturing
business. For additional information, please see Note 10,
Intangible Assets and Goodwill, in Part IV,
Item 15(a)(1), Financial Statements.
|
|
|
|
Intangible asset impairment charges of $30.2 million in
2007 primarily related to our decision to no longer pursue the
development of a new formulation of
Intal®
utilizing hydroflouroalkane as a propellant.
|
|
|
|
An intangible asset impairment charge in 2006 of
$47.8 million, which is primarily related to lower than
expected prescription growth for
Intal®
and
Tilade®.
These charges were recorded in order to adjust the carrying
value of the intangible assets on our balance sheet associated
with these products so as to reflect the estimated fair value of
these assets at the time the charges were incurred.
|
|
|
|
Restructuring charges in the amount of $7.1 million in 2008
primarily related to our integration of Alpharma.
|
|
|
|
Restructuring charges in the amount of $68.6 million in
2007 primarily due to our restructuring initiative designed to
accelerate a planned strategic shift emphasizing our focus on
the neuroscience and hospital markets and separation payments
associated with the sale of the Rochester, Michigan sterile
manufacturing facility discussed above.
|
|
|
|
Restructuring charges of $1.6 million and $3.2 million
during 2007 and 2006, respectively, for separation payments that
primarily arose in connection with our decision to transfer the
production of
Levoxyl®
from our St. Petersburg, Florida facility to the Bristol,
Tennessee facility.
|
As of December 31, 2008, the net intangible assets
associated with
Skelaxin®
and
Synercid®
totaled approximately $117.0 million and
$29.0 million, respectively. We believe that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if our estimates regarding future cash flows prove to be
incorrect or adversely change, we may have to reduce the
estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
Certain generic companies have challenged patents on
Skelaxin®
and
Avinza®.
In addition, on January 20, 2009, the U.S. District Court
issued an order ruling invalid two of our
Skelaxin®
patents. For additional information, please see Note 19,
Commitments and Contingencies and Note 27,
Subsequent Events in Part IV,
Item 15(a)(1), Financial Statements. If a
generic version of
Skelaxin®
or
Avinza®
enters the market, we may have to write off a portion or all of
the intangible assets associated with these products.
The net book value of some of our manufacturing facilities
currently exceeds fair market value. Management currently
believes that the long-term assets associated with these
facilities are not impaired based
60
on estimated undiscounted future cash flows. However, if we were
to approve a plan to sell or close any of the facilities for
which the carrying value exceeds fair market value, we would
have to write off a portion of the assets or reduce the
estimated useful life of the assets, which would accelerate
depreciation.
NON-OPERATING
ITEMS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
36,970
|
|
|
$
|
42,491
|
|
|
$
|
32,152
|
|
Interest expense
|
|
|
(7,943
|
)
|
|
|
(7,818
|
)
|
|
|
(9,857
|
)
|
Loss on investment
|
|
|
(7,451
|
)
|
|
|
(11,591
|
)
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
628
|
|
Other, net
|
|
|
(3,635
|
)
|
|
|
223
|
|
|
|
(1,157
|
)
|
Income tax expense
|
|
|
131,359
|
|
|
|
67,600
|
|
|
|
135,730
|
|
Discontinued operations
|
|
|
|
|
|
|
(237
|
)
|
|
|
367
|
|
Other
Income (Expense)
Interest
Income
Interest income decreased during 2008 compared to 2007 primarily
due to a decrease in interest rates partially offset by a higher
total balance of cash, cash equivalents and investments in debt
securities in 2008. Interest income increased in 2007 compared
to 2006 primarily due to an increase in interest rates and a
higher average balance of cash, cash equivalents and investments
in debt securities in 2007 compared to 2006. We believe interest
income will decrease in 2009 compared to 2008 due to a reduction
in cash, cash equivalents and investments in debt securities.
For additional information related to our investments in debt
securities, please see Liquidity and Capital
Resources below.
Interest
Expense
On December 29, 2008, we completed our acquisition of all
of the outstanding common shares of the Class A Common Stock of
Alpharma at a price of $37.00 per share in cash, for an
aggregate purchase price of approximately $1.6 billion. As
a result of the transaction, Alpharma is now a wholly-owned
subsidiary of King. The acquisition was funded with available
cash on hand, borrowings of $425.0 million under the Senior
Secured Revolving Credit Facility, as amended on
December 5, 2008, and borrowings of $200.0 million
under a new Senior Secured Term Facility. As a result of these
borrowings we expect interest expense to increase significantly
in 2009. For more information regarding this financing and the
associated interest rates, please see the sections entitled
Senior Secured Revolving Credit Facility and
Senior Secured Term Facility under, Certain
Indebtedness and Other Matters, below.
Additionally, In May 2008, the Financial Accounting Standards
Board (FASB) issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion (FSP APB
14-1).
FSP APB 14-1
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuers nonconvertible debt
borrowing rate. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB
14-1 as of
January 1, 2009. Upon adoption of FSP APB
14-1, our
accounting for our $400.0 million
11/4% Convertible
Senior Notes due April 1, 2026 will be affected. We are
currently evaluating the potential effect of FSP APB
14-1 on our
financial statements, but estimate that implementation would
result in a reduction in the carrying value of the outstanding
$400.0 million
11/4% Convertible
Senior Notes due April 1, 2026 by approximately
$130.0 million, with a corresponding increase in equity. We
also estimate that upon adoption, the retrospective application
of FSP APB
14-1 will
61
result in increased interest expense of approximately
$18.0 million for the year ending December 31, 2009.
Retrospective application to all periods presented is required.
Special items affecting other income (expense) included the
following:
|
|
|
|
|
A loss of $7.5 million in 2008 related to our investment in
debt securities.
|
|
|
|
A loss of $11.6 million in 2007 related to our investment
in Palatin.
|
|
|
|
Income of $0.6 million during 2006 resulting from the early
retirement of our
23/4% Convertible
Debentures due November 15, 2021.
|
Income
Tax Expense
During 2008, our effective income tax rate on the loss from
continuing operations was (65.1)%. This rate differed from the
statutory rate of 35% primarily due to non-deductible research
and development in process at acquisition and state taxes offset
by tax benefits relating to tax-exempt interest income and
domestic production activities deductions. We currently believe
our effective tax rate in 2009 will be slightly higher than the
statutory rate.
During 2007, our effective income tax rate on income from
continuing operations was 27.0%. This rate differed from the
statutory rate of 35% primarily due to tax benefits relating to
tax-exempt interest income and domestic production activities
deductions, which benefits were partially offset by state taxes.
Additionally, the 2007 rate benefited from the release of
reserves under FIN 48 as a result of the expiration of
certain federal and state statutes of limitations for the 2002
and 2003 tax years.
During 2006, our effective tax rate for continuing operations
was 32.0%. This rate differed from the federal statutory rate of
35% primarily due to benefits related to charitable
contributions of inventory, tax-exempt interest income and
domestic manufacturing activities deductions, which benefits
were partially offset by state taxes.
For additional information relating to income taxes, please see
Note 17, Income Taxes, in Part IV,
Item 15(a)(1), Financial Statements.
Off-Balance
Sheet Arrangements, Contractual Obligations and Commercial
Commitments
We do not have any off-balance sheet arrangements, except for
operating leases in the normal course of business as described
in Note 11, Lease Obligations, in Part IV,
Item 15(a)(1), Financial Statements to our
audited consolidated financial statements included in this
report and as reflected in the table below.
The following table summarizes contractual obligations and
commitments as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
One to
|
|
|
Four to
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,402,269
|
|
|
$
|
436,401
|
|
|
$
|
266,447
|
|
|
$
|
699,421
|
|
|
$
|
|
|
Operating leases
|
|
|
78,901
|
|
|
|
14,489
|
|
|
|
24,804
|
|
|
|
24,974
|
|
|
|
14,634
|
|
Unconditional purchase obligations
|
|
|
431,941
|
|
|
|
201,527
|
|
|
|
91,303
|
|
|
|
53,370
|
|
|
|
85,741
|
|
Interest on long-term debt
|
|
|
121,349
|
|
|
|
43,015
|
|
|
|
64,410
|
|
|
|
13,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,034,460
|
|
|
$
|
695,432
|
|
|
$
|
446,964
|
|
|
$
|
791,689
|
|
|
$
|
100,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our unconditional purchase obligations are primarily related to
minimum purchase requirements under contracts with suppliers to
purchase raw materials and finished goods related to our branded
prescription pharmaceutical products and commitments associated
with research and development projects. The above table
62
does not reflect any potential milestone payments in connection
with research and development projects or acquisitions. Required
funding obligations for 2009 relating to the Companys
pension and other postretirement benefit plans are not expected
to be material.
We have a supply agreement with a third party to produce
metaxalone, the active ingredient in
Skelaxin®.
This supply agreement requires us to purchase certain minimum
levels of metaxalone and expires in 2010. If sales of
Skelaxin®
are not consistent with current forecasts, we could incur losses
in connection with purchase commitments for metaxalone, which
could have a material adverse effect upon our results of
operations and cash flows.
As of December 31, 2008, we had a liability for
unrecognized tax benefits of $49.9 million. Due to the high
degree of uncertainty regarding the timing of future cash
outflows of liabilities for unrecognized tax benefits beyond one
year, a reasonable estimate of the period of cash settlement for
years beyond 2009 cannot be made.
Liquidity
and Capital Resources
General
We believe that existing balances of cash, cash equivalents,
investments in debt securities and marketable securities, 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.
Investments
in Debt Securities
As of December 31, 2008, 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 are 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 December 31,
2008, all our investments in auction rate securities, with a
total par value of $417.1 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
February 25, 2009, we have received all scheduled interest
payments associated with these securities.
The current instability in the credit markets may continue to
affect our ability to liquidate these securities. The funds
associated with failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the
underlying security, the underlying security matures or a buyer
outside the auction process emerges. 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 $417.1 million
in par value of our investments in debt securities, or 34.6% of
the assets that we have measured at fair value, using
unobservable inputs which are classified as Level 3
measurements under Statement of Financial Accounting Standards
No. 157, Fair Value Measurements
(SFAS No. 157). For additional information
regarding SFAS No. 157, please see Note 15,
Fair Value Measurements, in Part IV,
Item 15(a)(1), Financial Statements.
Although we have realized no loss of principal with respect to
these investments, as of December 31, 2008, we recorded
unrealized losses on our investments in auction rate securities
of $56.8 million. We have recorded $45.3 million of
the unrealized holding losses in accumulated other comprehensive
income on our Consolidated Balance Sheet, as we believe the
decline is temporary and we have the intent and ability to hold
our investments in securities until they recover in value or
until maturity. During the fourth quarter of 2008 we accepted
an offer from UBS Financial Services, Inc. (UBS)
providing us the right to sell certain auction rate securities
with a par value of $40.7 million to UBS during the period
from June 30, 2010 to July 2, 2012 at par value. We
have elected to account for this right at fair value in
accordance with SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities.
The right to sell the auction rate securities
63
to UBS at par was valued at $4.0 million and has been reflected
as an unrealized gain in other income (expense) in the
accompanying Consolidated Statement of Operations. In addition,
we transferred the classification of the auction rate securities
that are included in this right from available-for-sale
securities to trading securities and therefore recognized the
unrealized losses related to these securities of
$4.6 million in other income (expense) on the accompanying
Consolidated Operations.
In addition, we have recognized unrealized losses of
$6.8 million in other income (expense) on the accompanying
Consolidated Statement of Operations for a municipal bond for
which the holding losses were determined to be other than
temporary.
As of December 31, 2008, we had approximately
$417.1 million, in par value, invested in tax-exempt
auction rate securities which consisted of $296.5 million
associated with student loans backed by the federal family
education loan program (FFELP), $89.4 million associated
with municipal bonds in which performance is supported by bond
insurers and $31.2 million associated with student loans
collateralized by loan pools which equal at least 200% of the
bond issue.
As of December 31, 2008, we classified $6.4 million of
auction rate securities as current assets and
$353.8 million as long-term assets.
Skelaxin®
As previously disclosed, we are involved in multiple legal
proceedings over patents relating to our product
Skelaxin®.
On January 20, 2009, the U.S. District Court for the
Eastern District of New York, in the case of King
Pharmaceuticals, Inc., et al. v. Eon Labs Inc., Case
No. 04-cv-5540
(DGT), issued an Order ruling invalid two of these patents,
United States Patent Nos. 6,407,128 and 6,683,102. The Order was
issued without the benefit of a hearing in response to Eon
Labs motion for summary judgment. We plan to appeal, upon
the entry of an appropriate judgment, and intend to vigorously
defend our interests. The entry of the Order may lead to generic
versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause net sales of
Skelaxin®
to decline significantly.
Following the decision of the District Court, we conducted an
extensive examination of the company and developed a
restructuring initiative designed to partially offset the
potential material decline in Skelaxin sales in the event that a
generic competitor enters the market. This initiative includes,
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. Our animal health activities are
not affected by the restructuring.
We estimate that, in connection with the restructuring
initiative, we will incur total restructuring costs of between
$50 million and $55 million, all of which are expected
to be incurred and expensed during the first half of 2009 and
almost all of which will be cash expenditures. These costs all
relate to severance pay and other employee termination expenses.
For additional information, please see Note 27,
Subsequent Events, in Part IV,
Item 15(a)(1), Financial Statements.
Alpharma
On December 29, 2008, we completed our acquisition of all
the outstanding shares of Class A Common Stock, together
with the associated preferred stock purchase rights of Alpharma
at a price of $37.00 per share in cash, for an aggregate
purchase price of approximately $1.6 billion. Alpharma is a
branded specialty pharmaceutical company with a growing
specialty pharmaceutical franchise in the U.S. pain market
with its
Flector®
Patch (diclofenac epolamine topical patch) and a pipeline of new
pain medicines led by
Embedatm,
a formulation of long-acting morphine that is designed to
provide controlled pain relief and deter certain common methods
of misuse and abuse. Alpharma is also a global leader in the
development, registration, manufacture and marketing of MFAs and
water soluble therapeutics for food-producing animals, including
poultry, cattle and swine.
64
The acquisition was financed with available cash on hand,
borrowings under the Senior Secured Revolving Credit Facility of
$425.0 million and borrowings under the Term Loan of
$200.0 million. For additional information on the
borrowings, please see below.
In connection with the acquisition of Alpharma, we together with
Alpharma executed a consent order (the Consent
Order) with the U.S. Federal Trade Commission. The
Consent Order required us to divest the rights to
Alpharmas branded oral long-acting opioid analgesic drug
Kadian®
to Actavis Elizabeth, L.L.C., (Actavis). In
accordance with the Consent Order, effective upon the
acquisition of Alpharma, on December 29, 2008, we divested
the
Kadian®
product to Actavis. Actavis is entitled to sell
Kadian®
as a branded or generic product. Prior to this divestiture,
Actavis supplied
Kadian®
to Alpharma.
Actavis 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, shall exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis 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 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 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
and its affiliates for the period from January 1, 2009
through June 30, 2010. In connection with the divestiture,
we recorded a receivable equal to the value of the estimated
future cash flows from the quarterly gross-profit related
milestones. There was no gain or loss recorded as a result of
the divestiture.
As part of the integration of Alpharma, management developed a
restructuring initiative to eliminate redundancies in operations
created by the acquisition. This initiative includes, 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 $66.5 million associated with
this restructuring plan, of which all are cash related costs.
All employee termination costs are expected to be paid by the
end of 2011. All contract termination costs are expected to be
paid by the end of 2018. The cash payments are expected to be
paid through 2018. For additional information, please see
Note 25, Restructuring Activities, in
Part IV, Item 15(a)(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 Certain Indebtedness and Other
Matters.
Senior
Secured Revolving Credit Facility
On April 23, 2002, we established a $400.0 million
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new
$475.0 million five-year Senior Secured Revolving Credit
Facility, as amended on December 5,
65
2008 (the Revolving Credit Facility). The Revolving
Credit Facility matures in April 2012 or on September 30,
2011 if the Convertible Senior Notes have not been refinanced.
In connection with the acquisition of Alpharma on
December 29, 2008 we borrowed $425 million in
principal amount under the Revolving Credit Facility.
As of December 31, 2008, the remaining undrawn commitment
amount under the Revolving Credit Facility totals approximately
$37.9 million after giving effect to outstanding letters of
credit totaling approximately $12.1 million.
Under the Revolving Credit Facility, we are required to make
prepayments equal to 50% of our annual excess cash flows, which
can be reduced to 25% upon the occurrence of certain events. In
addition, we are 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. These mandatory prepayments will be allocated among
the Revolving Credit Facility and the Term Facility described
below in accordance with these agreements and will permanently
reduce the commitments under the Revolving Credit Facility.
However, commitments under the Revolving Credit Facility would
not be reduced in any event below $150.0 million.
Under the terms of the Revolving Credit Facility the credit
commitments will be automatically and permanently reduced on a
quarterly basis, to the amounts set forth below:
|
|
|
|
|
December 31, 2009
|
|
$
|
403.8 million
|
|
December 31, 2010
|
|
$
|
308.8 million
|
|
December 31, 2011
|
|
$
|
213.8 million
|
|
March 31, 2012
|
|
$
|
190.0 million
|
|
We have the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Revolving
Credit Facility.
Senior
Secured Term Facility
Also on December 29, 2008, King entered into a
$200 million term loan credit agreement, comprised of a
four-year senior secured loan facility (the Term
Facility) with a maturity date of December 28, 2012.
Under the terms of the Term Facility, we are required to repay
the borrowings in equal quarterly payments that total the
following annual amounts:
|
|
|
|
|
2009
|
|
$
|
30.0 million
|
|
2010
|
|
$
|
40.0 million
|
|
2011
|
|
$
|
40.0 million
|
|
2012
|
|
$
|
90.0 million
|
|
We have the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Term Facility.
Under the Term Facility, we are required to make prepayments
equal to 50% of our annual excess cash flows, which can be
reduced to 25% upon the occurrence of certain events. In
addition, we are 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. These mandatory prepayments will be allocated among
the Term Facility and the Revolving Credit Facility in
accordance with these agreements and will reduce on a pro-rata
basis any remaining scheduled payments.
CorePharma
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
66
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
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. During January 2008, we made an
additional payment of $2.0 million to Acura, which was
accrued as of December 31, 2007, for certain research and
development expenses incurred by Acura prior to the closing date
of the agreement. We may make additional non-refundable cash
milestone payments to Acura based on the successful achievement
of certain 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.
Altace®
In December 2007, a third party launched a generic substitute
for
Altace®.
In June 2008, additional competitors entered the market with
generic substitutes for
Altace®.
As a result of the entry of generic competition,
Altace®
net sales decreased in 2008 and we expect net sales of
Altace®
will continue to decline significantly during 2009. For a
discussion regarding the generic competition for
Altace®,
please see Note 19, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Financial Statements.
Following the Circuit Courts decision in September 2007
invalidating our 722 Patent that covered
Altace®,
our senior management team conducted an extensive examination of
our company and developed a restructuring initiative. This
initiative included a reduction in personnel, staff leverage,
expense reductions and additional controls over spending,
reorganization of sales teams and a realignment of research and
development priorities. We incurred total costs of approximately
$67.0 million in connection with this initiative. This
total included the contract termination payment paid to Depomed,
Inc. in October of 2007 of approximately $29.7 million. We
made additional cash payments of $22.2 million during the
first quarter of 2008 primarily related to employee termination
costs. For additional information, please see Note 25,
Restructuring Activities, in Part IV,
Item 15(a)(1), Financial Statements.
Rochester
Facility
In October 2007, we sold our Rochester, Michigan sterile
manufacturing facility, some of our legacy products that are
manufactured there and the related contract manufacturing
business to JHP Pharmaceuticals,
67
LLC for $91.7 million, less fees of $5.4 million. We
retained our stand-alone Bicillin (sterile penicillin products)
manufacturing facility which is also located in Rochester,
Michigan. For additional information, please see Note 9,
Acquisitions, Dispositions, Co-Promotions and
Alliances, in Part IV, Item 15(a)(1),
Financial Statements.
Avinza®
In September 2006, we entered into a definitive asset purchase
agreement and related agreements with Ligand Pharmaceuticals
Incorporated (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. We completed the acquisition of
Avinza®
on February 26, 2007, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289.7 million, consisting of $289.3 million in cash
consideration and $0.4 million for the assumption of a
short-term
liability. Additionally, we incurred acquisition costs of
$6.8 million. Of the cash payments made to Ligand,
$15.0 million was set aside in an escrow account to fund
potential liabilities that Ligand could later owe us, of which
$7.5 million was released to Ligand in each of the third
quarter of 2007 and the first quarter of 2008.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty 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 will
be 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.
|
In connection with the transaction, in October 2006, we entered
into a loan agreement with Ligand for the amount of
$37.8 million. The principal amount of the loan was to be
used solely for the purpose of paying a specific liability
related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. On January 8, 2007, Ligand repaid the principal
amount of the loan of $37.8 million and accrued interest of
$0.9 million. Pursuant to the terms of the loan agreement
with Ligand, we forgave the interest on the loan and repaid
Ligand the interest at the time of closing the transaction to
acquire
Avinza®.
Accordingly, we have not recognized interest income on the note
receivable.
Other
In June 2000, we entered into a Co-Promotion Agreement with
Wyeth to promote
Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee to us
of $75.0 million. In connection with the Co-Promotion
Agreement, we agreed to pay Wyeth a promotional fee based on
annual net sales of
Altace®.
In July 2006, we entered into an Amended and Restated
Co-Promotion Agreement with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
For all of 2006, the Wyeth sales force promoted the product with
us and Wyeth shared marketing expenses. We have paid or will pay
Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2006, 15% of
Altace®
net sales up to $165.0 million, 42.5% of
Altace®
net sales in excess of $165.0 million and less than or
equal to $465.0 million, and 52.5% of
Altace®
net sales that are in excess of $465.0 million and less
than or equal to $585.0 million.
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178.5 million.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134.0 million.
|
68
|
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84.5 million.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5.0 million.
|
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year.
In March 2006, we acquired the exclusive right to market,
distribute and sell
EpiPen®
throughout Canada and other specific 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 will increase intangible assets by the
amount of the accrual. As of December 31, 2008, we have
incurred a total of $8.7 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. 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 on net sales of products containing metaxalone
to Mutual. This royalty increased in the fourth quarter of 2006
due to the achievement of a certain milestone and may continue
to increase depending on the achievement of certain regulatory
and commercial milestones in the future. We anticipate an
increase in the royalty rate in 2009 due to the achievement of
certain regulatory milestones. The royalty we pay to Mutual is
in addition to the royalty we pay to Elan Corporation, plc
(Elan) on our current formulation of metaxalone,
which we refer to as
Skelaxin®.
During the fourth quarter of 2005, we entered into a strategic
alliance with Pain Therapeutics, Inc. to develop and
commercialize
Remoxy®
and other opioid painkillers.
Remoxy®,
an investigational novel formulation of long-acting oxycodone
with a proposed indication for the treatment of moderate to
severe chronic pain, provides a unique physical barrier that is
designed to provide controlled pain relief and resist certain
common methods used to extract the opioid more rapidly than
intended, as can occur with currently available products. Common
methods used to cause a rapid extraction of the opioid include
crushing, chewing, or dissolution in alcohol. These methods are
typically used to cause failure of the controlled release dosage
form, resulting in dose dumping of oxycodone, or the
immediate release of the active drug. 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®.
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.
Elan was working to develop a modified release formulation of
Sonata®,
which we refer to as
Sonata®
MR, pursuant to an agreement we had with them which we refer to
as the
Sonata®
MR Development Agreement. In early 2005, we advised Elan that we
considered the
Sonata®
MR Development Agreement terminated for failure to satisfy the
target product profile required by us. Elan disputed the
termination and initiated an arbitration proceeding. During
December of 2006, the arbitration panel reached a decision in
favor of Elan and ordered us to pay Elan certain milestone
payments and other research and development-related expenses of
approximately $49.8 million, plus interest from the date of
the decision. In January 2007, we paid Elan $50.1 million,
which included interest of $0.4 million.
Governmental
Pricing Investigation and Related Matters
For information on these matters, please see Note 19,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Financial Statements.
69
Patent
Challenges
Certain generic companies have challenged patents on
Skelaxin®
and
Avinza®.
For additional information, please see Note 19,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Financial Statements. If a
generic version of
Skelaxin®
or
Avinza®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Cash
Flows
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
491,391
|
|
|
$
|
672,649
|
|
|
$
|
465,627
|
|
Our net cash from operations was lower in 2008 than in 2007
primarily due to a decrease in net sales of branded prescription
pharmaceutical products. Branded prescription pharmaceutical
product net sales decreased in 2008 from 2007 primarily as a
result of a competitor entering the market in December 2007 and
additional competitors entering the market in June 2008 with
generic substitutes for
Altace®.
The decrease in net sales was partially offset by a decrease in
selling, general and administration expenses and co-promotion
fees. Please see the section entitled Operating
Results for a discussion of net sales, selling, general
and administrative expenses and co-promotion fees. Our net cash
flows from operations in 2007 include a payment of
$50.1 million resulting from a binding arbitration
proceeding with Elan in 2006.
Our net cash from operations was higher in 2007 than in 2006
primarily due to our payment in 2006 of $129.3 million as a
result of the government pricing investigation, an increase in
net sales and a lower co-promotion fee rate in 2007 compared to
2006. Our net cash flows from operations in 2007 benefited from
an $80.1 million reduction in accounts receivable during
2007 which is discussed below, that was partially offset by the
effect of a $50.1 million payment we made in 2007 as a
result of a binding arbitration proceeding with Elan in 2006.
We expect net cash flows from operations will continue to
decline in 2009. Although we anticipate an increase in sales in
2009 due to the acquisition of Alpharma at the end of December
2008, we anticipate a decrease in operating income due to the
decrease in sales of several key branded prescription
pharmaceutical products.
Please see the section entitled Operating Results
for a discussion of net sales, selling, general and
administrative expenses and co-promotion fees.
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the periods ending
December 31, 2008, 2007 and 2006 and the resulting cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, net of allowance
|
|
$
|
37,956
|
|
|
$
|
80,106
|
|
|
$
|
(41,746
|
)
|
Inventories
|
|
|
22,785
|
|
|
|
55,056
|
|
|
|
48,275
|
|
Prepaid expenses and other current assets
|
|
|
16,785
|
|
|
|
(43,555
|
)
|
|
|
(45,796
|
)
|
Accounts payable
|
|
|
9,673
|
|
|
|
(16,276
|
)
|
|
|
(8,568
|
)
|
Accrued expenses and other liabilities
|
|
|
(180,960
|
)
|
|
|
(33,408
|
)
|
|
|
(50,458
|
)
|
Income taxes payable
|
|
|
24,713
|
|
|
|
(9,009
|
)
|
|
|
8,479
|
|
Deferred revenue
|
|
|
(4,680
|
)
|
|
|
(4,680
|
)
|
|
|
(6,886
|
)
|
Other assets
|
|
|
27,078
|
|
|
|
(3,470
|
)
|
|
|
(20,173
|
)
|
Deferred taxes
|
|
|
37,313
|
|
|
|
(91,229
|
)
|
|
|
(39,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes from operating assets and liabilities and deferred
taxes
|
|
$
|
(9,337
|
)
|
|
$
|
(66,465
|
)
|
|
$
|
(155,883
|
)
|
70
The significant decrease in accounts receivable at
December 31, 2007 from December 31, 2006 is primarily
due to the timing of sales within the year. Gross sales in
December 2007 and December 2006 were $124.7 million and
$189.7 million, respectively. Sales to our three major
pharmaceutical wholesale customers represented approximately 75%
of total gross sales in 2007. The timing of orders from these
customers can vary within a quarter and can have a material
effect on our accounts receivable balance and cash flows from
operations.
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash used in investing activities
|
|
$
|
(156,110
|
)
|
|
$
|
(776,251
|
)
|
|
$
|
(436,315
|
)
|
During 2008, we used cash of approximately $1.557 billion,
offset by $532.6 million of cash acquired, for the
acquisition of Alpharma, Inc. Net sales of our investments in
debt securities provided cash of $927.9 million during
2008. We incurred capital expenditures of $57.5 million
during 2008.
Investing activities in 2007 include the acquisition of
Avinza®
for $296.4 million, purchases of product rights and
intellectual property for $98.9 million and net investments
in debt securities of $454.8 million. Capital expenditures
during 2007 totaled $49.6 million, which included property,
plant and equipment purchases, building improvements for
facility upgrades and costs associated with improving our
production capabilities. These payments were partially offset by
the collection of the loan to Ligand in the amount of
$37.8 million and the net proceeds received of
$86.3 million from the sale of the Companys
Rochester, Michigan sterile manufacturing facility.
Investing activities in 2006 primarily relate to our net
investments in debt securities of $395.5 million. We
transferred $129.3 million from restricted cash for
payments associated with the government pricing investigation
noted above in cash flows from operating activities.
Additionally, we made payments totaling $85.8 million for
our collaboration agreement with Arrow and our acquisition from
Allerex Laboratory LTD of the exclusive right to market
Epipen®
in Canada. Capital expenditures during 2006 totaled
$45.8 million which included property, plant and equipment
purchases, building improvements for facility upgrades and costs
associated with improving our production capabilities, as well
as costs associated with moving production of some of our
pharmaceutical products to our facilities in St. Louis,
Bristol and Rochester. Additionally, in the fourth quarter of
2006, in connection with our pending acquisition from Ligand of
all of Ligands assets related to
Avinza®,
we entered into a Loan Agreement with Ligand pursuant to which
we loaned Ligand $37.8 million. The principal amount of the
Loan was to be used solely for the purpose of paying certain
obligations of Ligand to Organon USA Inc., which obligations we
assumed as part of the acquisition.
We anticipate capital expenditures, for the year ending
December 31, 2009 of approximately $60.0 to
$65.0 million, which we expect to fund 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by financing activities
|
|
$
|
584,922
|
|
|
$
|
9,834
|
|
|
$
|
54,451
|
|
Our cash flows from financing activities for 2008 primarily
related to $425.0 million in proceeds from the Revolving
Credit Facility and $192.0 million in proceeds from the
Term Facility partially offset by $30.0 million in debt
issuance costs and $2.0 million related to activities
associated with our stock compensation plans, including the
exercise of employee stock options.
Our cash flows from financing activities for 2007 primarily
related to activities associated with our stock compensation
plans, including the exercise of employee stock options.
71
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 and repurchased all of our
outstanding
23/4% Convertible
Debentures due November 15, 2021 for $342.7 million.
Certain
Indebtedness and Other Matters
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 (the Notes). The
Notes are unsecured obligations and are guaranteed by each of
our U.S. subsidiaries other than Alpharma and its subsidiaries.
We expect Alpharma and its subsidiaries to become guarantors
during the first quarter of 2009. on a joint and several basis.
The 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 interest during any
six-month interest period if the average trading price of the
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 Notes. Interest is payable on April 1 and October 1 of each
year, beginning October 1, 2006.
On or after April 5, 2013, we may redeem for cash some or
all of the Notes at any time at a price equal to 100% of the
principal amount of the Notes to be redeemed, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the date fixed for redemption. Holders may require us
to purchase for cash some or all of their 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 Notes to be purchased, plus any accrued and unpaid
interest, and liquidated damages, if any, to but excluding the
purchase date.
Senior
Secured Revolving Credit Facility
On April 23, 2002, we established a $400.0 million
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new $475.0 five-year
Senior Secured Revolving Credit Facility, as amended on
December 5, 2008, (the Revolving Credit
Facility). The Revolving Credit Facility matures in April
2012 or in October 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. The Revolving Credit Facility
requires us to pledge as collateral 100% of the equity of our
domestic 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.
Under the terms of the Revolving Credit Facility, the credit
commitments will be automatically and permanently reduced, on a
quarterly basis. Additionally, we 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 information, please see the
discussion in the section titled Liquidity and Capital
Resources above.
Our borrowings under the Revolving Credit Facility bear interest
at annual rates that, at our option, will be either:
|
|
|
|
|
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) an
applicable percentage of 4.0%; or
|
|
|
|
an adjusted LIBO 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) an
applicable percentage of 5.0%.
|
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.
72
The Revolving Credit Facility requires us to meet certain
financial tests, including, without limitation:
|
|
|
|
|
maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50 to 1 to 3.25 to 1 (depending on dates and
the occurrence of certain events relating to certain
patents); and
|
|
|
|
maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75 to 1 to 4.00 to 1 (depending on
dates and the occurrence of certain events relating to certain
patents).
|
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 maintain hedging
agreements that will fix the interest rates on 50% of our
outstanding long term debt beginning 90 days after the
amendment to the facility for a period of not less than two
years.
The remaining undrawn committed amount under the Revolving
Credit Facility after giving effect to the borrowing described
above, and after giving effect to outstanding letters of credit
totaling approximately $12.1 million, is approximately
$37.9 million.
In connection with the borrowings, we incurred approximately
$21.6 million of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date based on the automatic commitment reductions
described above.
Senior
Secured Term Facility
On December 29, 2008, we entered into a $200.0 million term
loan credit agreement, comprised of a four-year senior secured
loan facility (the Term Facility) with a maturity
date of December 28, 2012. We borrowed $200.0 million under
the Term Facility and received proceeds of $192.0 million, net
of the discount at issuance. The Term Facility requires us to
pledge as collateral 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.
Under the terms of the Term Facility, we will repay the
borrowings in quarterly payments. Additionally, we have the
right, without penalty (other than customary breakage costs), to
prepay any borrowing under the Term Facility and, subject to
certain conditions, we could be required to make mandatory
prepayments. For additional information please see the
discussion in the section titled Liquidity and Capital
Resources above.
Our borrowings under the Term Facility bear interest at annual
rates that, at our option, will be either:
|
|
|
|
|
5.00% plus the Adjusted LIBO Rate or
|
|
|
|
4.00% plus the Alternate Base Rate.
|
The Alternate Base Rate is the highest of
(x) the federal funds rate plus 0.50%, (y) the prime
or base commercial lending rate, and (z) the Adjusted LIBO
Rate for a one-month interest period plus 1.00%. The Adjusted
LIBO Rate is the higher of (x) 3.00% and (y) the rate
per annum, determined by the administrative agent under the Term
Facility, in accordance with its customary procedures, at which
dollar deposits for applicable periods are offered to major
banks in the London interbank market, adjusted by the reserve
percentage prescribed by governmental authorities as determined
by such administrative agent.
73
The Term Facility requires us to meet certain financial tests,
including, without limitation:
|
|
|
|
|
maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50 to 1 to 3.25 to 1 (depending on dates and
the occurrence of certain events relating to certain
patents); and
|
|
|
|
maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75 to 1 to 4.00 to 1 (depending on
dates and the occurrence of certain events relating to certain
patents).
|
In addition, the Term 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
Term 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 Term Facility requires us to maintain hedging agreements
that will fix the interest rates on 50% of our outstanding long
term debt beginning 90 days after the borrowing under the
facility for a period of two years.
In connection with the borrowings, we incurred approximately
$8.5 million of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date based on the repayment schedule described above.
Alpharma
Convertible Senior Notes
At the time of the acquisition of Alpharma by us, Alpharma had
$300.0 million 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 the 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 us 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.
As of December 31, 2008, we had $385.2 million of
Alpharma Notes included in current portion of long-term debt in
the accompanying financial statements. During the first quarter
of 2009, we paid $385.2 million to redeem the Alpharma
Notes.
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.
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
74
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 and
other rebates, returns and chargebacks, allowances for doubtful
accounts 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:
|
|
|
|
|
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 product rights and trademarks,
patents, acquired 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. However, patents have specific
legal lives over which they are amortized. Conversely,
trademarks and product rights have no specific legal lives. We
use a straight-line method of amortization for our intangible
assets.
|
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, 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. Further, on an annual
basis, we review the life of each intangible asset and make
adjustments as deemed appropriate. 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.
As of December 31, 2008, our goodwill totaled
$450.5 million. Of this amount, $258.1 million is
related to our branded prescription pharmaceuticals segment and
includes $237.4 million associated with our acquisition of
Alpharma on December 29, 2008. Our animal health segment
has total goodwill of $84.0 million which is solely related
to our acquisition of Alpharma. Additionally, our Meridian
auto-injection segment has total goodwill of
$108.4 million. Revenues associated with Meridian
auto-injector increased 19% in 2008 compared to 2007. As of
December 31, 2008, management believes that no impairment of
goodwill exists. The allocation of the purchase price associated
with the acquisition of Alpharma is not yet finalized as the
acquisition was completed close to the end of the year and
management is continuing to complete its initial estimate of the
valuation of assets and liabilities.
75
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
December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
285,700
|
|
|
$
|
48,933
|
|
|
$
|
236,767
|
|
Skelaxin®
|
|
|
278,853
|
|
|
|
161,874
|
|
|
|
116,979
|
|
Sonata®
|
|
|
61,961
|
|
|
|
61,961
|
|
|
|
|
|
Flector®
Patch
|
|
|
130,000
|
|
|
|
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
756,514
|
|
|
|
272,768
|
|
|
|
483,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
70,959
|
|
|
|
41,951
|
|
|
|
29,008
|
|
Other hospital
|
|
|
8,442
|
|
|
|
6,427
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
79,401
|
|
|
|
48,378
|
|
|
|
31,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
92,350
|
|
|
|
31,270
|
|
|
|
61,080
|
|
Other legacy products
|
|
|
324,035
|
|
|
|
274,817
|
|
|
|
49,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
416,385
|
|
|
|
306,087
|
|
|
|
110,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
1,252,300
|
|
|
|
627,233
|
|
|
|
625,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
170,000
|
|
|
|
|
|
|
|
170,000
|
|
Meridian Auto-Injector
|
|
|
179,879
|
|
|
|
41,281
|
|
|
|
138,598
|
|
Royalties
|
|
|
3,731
|
|
|
|
3,177
|
|
|
|
554
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,605,910
|
|
|
$
|
671,691
|
|
|
$
|
934,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
The amounts for impairments and amortization expense for the
twelve months ended December 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
|
|
|
$
|
26,553
|
|
|
$
|
|
|
|
$
|
22,380
|
|
Skelaxin®
|
|
|
|
|
|
|
23,620
|
|
|
|
|
|
|
|
17,427
|
|
Sonata®
|
|
|
|
|
|
|
315
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
50,488
|
|
|
|
|
|
|
|
40,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
39,630
|
|
|
|
7,731
|
|
|
|
|
|
|
|
9,499
|
|
Other hospital
|
|
|
|
|
|
|
304
|
|
|
|
968
|
|
|
|
1,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
39,630
|
|
|
|
8,035
|
|
|
|
968
|
|
|
|
10,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
|
|
|
|
3,702
|
|
|
|
|
|
|
|
3,702
|
|
Other legacy products
|
|
|
1,251
|
|
|
|
41,624
|
|
|
|
175,703
|
|
|
|
69,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
1,251
|
|
|
|
45,326
|
|
|
|
175,703
|
|
|
|
73,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
40,881
|
|
|
|
103,849
|
|
|
|
176,671
|
|
|
|
123,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
7,860
|
|
|
|
|
|
|
|
8,001
|
|
Royalties
|
|
|
|
|
|
|
737
|
|
|
|
|
|
|
|
279
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
40,881
|
|
|
$
|
112,446
|
|
|
$
|
176,671
|
|
|
$
|
132,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining patent amortization period compared to the
remaining amortization period for trademarks and product rights
associated with significant products is as follows:
|
|
|
|
|
|
|
Remaining Life at December 31, 2008
|
|
|
Skelaxin®
|
|
|
1 year 6 months
|
|
Avinza®
|
|
|
8 years 11 months
|
|
Synercid®
|
|
|
5 years
|
|
Bicillin®
|
|
|
16 years 6 months
|
|
Flector®
Patch
|
|
|
11 years
|
|
|
|
|
|
|
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.
|
|
|
|
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
|
77
|
|
|
|
|
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.
|
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.
|
|
|
|
|
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. Royalty revenue is recognized based on a percentage of
sales (namely, contractually
agreed-upon
royalty rates) reported by third parties. For additional
information, please see Note 2, Summary of
Significant Accounting Policies, in Part IV, Item
15(a)(1), Financial Statements.
|
Recently
Issued Accounting Standards
For information regarding recently issued accounting standards,
please see Note 24, Recently Issued Accounting
Standards, in Part IV, Item 15(a)(1),
Financial Statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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). We have no
financial instruments held for trading purposes. Additionally,
at December 31, 2008, 2007 and 2006, we held derivative
financial instruments associated with utility contracts which
qualify as normal purchase and sales and derivatives associated
with the convertible senior notes. The quantitative and
qualitative disclosures about market risk are set forth below.
78
Interest
Rate Risk
The fair market value (fair value) of long-term
fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest
rates rise. In addition, the fair value of our convertible
debentures is affected by our stock price. The estimated fair
value of our total long-term fixed rate debt at
December 31, 2008 was $293.0 million, which excludes
the Alpharma Notes which were outstanding at the time of our
acquisition of Alpharma. Fair values were determined from
available market prices, using current interest rates and terms
to maturity. If interest rates were to increase or decrease by
1%, the fair value of our long-term debt would increase or
decrease by approximately $16.5 million. In connection with
the acquisition of Alpharma, holders of the Alpharma Notes were
entitled to convert the Alpharma Notes at a premium as a result
of a fundamental change . As of December 31, 2008, we had
$385.2 million of Alpharma Notes included in the current
portion of long-term debt in the accompanying financial
statements. During the first quarter of 2009, we paid
$385.2 million to redeem the Alpharma notes.
We are subject to interest rate risk on our variable rate debt
as changes in interest rates could adversely affect earnings and
cash flows. As of December 31, 2008, our variable rate debt
totaled $625.0 million and a 1% change in interest rates
would have an annualized pre-tax effect of $4.3 million in
our consolidated statements of operations and cash flows as of
December 31, 2008. While our variable-rate debt may impact
earnings and cash flows as interest rates change, it is not
subject to changes in fair value.
Foreign
Currency Exchange Rate Risk
Foreign currency exchange rate movements create fluctuations in
U.S. Dollar reported amounts of foreign subsidiaries whose
local currencies are their respective functional currencies. We
primarily use forward foreign exchange contracts to hedge
certain cash flows denominated in currencies other than the
foreign subsidiarys functional currency. Such cash flows
are normally represented by actual receivables and payables and
anticipated receivables and payables for which there is a firm
commitment.
At December 31, 2008, the Company had forward foreign
exchange contracts mainly denominated in Euros, Pound Sterling,
Canadian Dollar, U.S. Dollar, Mexican Peso and Chinese Yuan
with a notional amount of $291.2 million. The fair market
value of such contracts has been recognized in the financial
statements and is not material. All contracts expire in the
first quarter of 2009. The cash flows expected from the
contracts will generally offset the cash flows of related
non-functional currency transactions. The change in notional
value of the foreign currency forward contracts resulting from a
10% movement in foreign currency exchange rates would be
approximately $29.0 million and generally would be offset
by the change in value of the hedged receivable or payable. Such
contracts are not designated hedges for accounting purposes.
Investment
Risk
We have marketable securities which are carried at fair value
based on current market quotes. Gains and losses on securities
are based on the specific identification method. For additional
information related to our investment in debt securities, please
see Liquidity and Capital Resources above.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our audited consolidated financial statements and related notes
as of December 31, 2008 and 2007 and for each of the three
years ended December 31, 2008, 2007 and 2006 are included
under Item 15 and begin on
page F-1.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act of
1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported within the time periods
specified in the
79
SECs rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
financial disclosure.
Management, with the participation of our Chief Executive
Officer and Chief Financial Officer, carried out an evaluation,
as required by
Rule 13a-15(b)
under the Exchange Act, of the effectiveness of the design and
operation of the disclosure controls and procedures (as defined
in Exchange Act
Rule 13a-15(e))
as of December 31, 2008.
Based on this evaluation by management, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2008, our disclosure controls and procedures
were effective.
Managements
Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rule 13a-15(f).
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management has conducted an evaluation of the effectiveness of
our internal control over financial reporting as of
December 31, 2008 based on the framework and criteria
established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management has concluded that internal control
over financial reporting was effective as of December 31,
2008.
As discussed in Item 1 of this annual report under the
caption Business and in Note 9 to our
consolidated financial statements included in this annual
report, on December 29, 2008, we completed our acquisition
of Alpharma. As permitted by the rules and regulations of the
SEC, we have excluded Alpharma from our evaluation of our
internal control over financial reporting as of
December 31, 2008. Total assets of Alpharma represent
approximately 39.7% of, and are included in, our consolidated
total assets as of December 31, 2008. Since we acquired
Alpharma at the end of December 2008, the financial results of
Alpharma are excluded from our financial results.
The effectiveness of our internal control over financial
reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in its report which appears herein.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting. As set forth above, we excluded
Alpharma from our evaluation of internal control over financial
reporting for the quarter and year ended December 31, 2008.
In the future, the acquired company will be material to our
results of operations, financial position, and cash flows, and
we are in the process of integrating the internal controls over
financial reporting of Alpharma into our internal control
structure and evaluation process.
PART III
The information called for by Part III of
Form 10-K
(Item 10 Directors, Executive Officers and
Corporate Governance, Item 11 Executive
Compensation, Item 12 Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters, Item 13 Certain Relationships and
Related Transactions, and Director Independence and
Item 14 Principal Accounting Fees and
Services), is incorporated by reference from our proxy statement
related to our 2009 annual meeting of shareholders, which will
be filed with the SEC not later than April 30, 2009
(120 days after the end of the fiscal year covered by this
report).
80
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as a part of this report:
(1) Financial Statements
|
|
|
|
|
|
|
Page Number
|
|
|
|
|
F-1
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
S-1
|
|
All other schedules have been omitted because of the absence of
conditions under which they are required or because the required
information is given in the above-listed financial statements or
notes thereto.
The following Exhibits are filed herewith or incorporated herein
by reference:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1(1)
|
|
Underwriting Agreement, dated March 15, 2007, between
Alpharma Inc. and Banc of America Securities LLC
|
|
2
|
.1(2)
|
|
Stock and Asset Purchase Agreement among Alpharma Inc., Alpharma
(Luxembourg) S.ar.l., Alpharma Bermuda G.P., and Alpharma
International (Luxembourg) S.ar.l., Alfanor 7152 AS (under
change of name to Otnorbidco AS), Otdenholdco ApS and
Otdelholdco Inc., dated February 6, 2008
|
|
2
|
.2(3)
|
|
Agreement and Plan of Merger, dated as of November 23,
2008, among King Pharmaceuticals, Inc., Albert Acquisition Corp.
and Alpharma Inc.
|
|
3
|
.1(4)
|
|
Third Amended and Restated Charter of King Pharmaceuticals, Inc.
|
|
3
|
.2(5)
|
|
Amended and Restated Bylaws of King Pharmaceuticals, Inc.
|
|
4
|
.1(5)
|
|
Specimen Common Stock Certificate for King Pharmaceuticals, Inc.
|
|
4
|
.2(1)
|
|
First Supplemental Indenture between Alpharma and U.S. Bank
National Association, dated as of March 20, 2007
|
|
4
|
.3(6)
|
|
Warrant Certificate, dated October 3, 2007, issued by
Alpharma Inc. to IBSA Institut Biochimique SA
|
|
4
|
.4(7)
|
|
Warrant Certificate, dated October 12, 2007, issued by
Alpharma Inc. to IDEA AG
|
|
4
|
.5(7)
|
|
Warrant Certificate, dated October 12, 2007, issued by
Alpharma Inc. to IDEA AG
|
|
10
|
.1(8)*
|
|
Alpharma Inc. Amended and Restated Deferred Compensation Plan,
effective July 1, 1984, amended October 14, 1994
|
|
10
|
.2(8)*
|
|
Amendment No. 1 to the Alpharma Inc. Amended and Restated
Deferred Compensation Plan
|
|
10
|
.3(9)*
|
|
Amendment to the Alpharma Inc. Deferred Compensation Plan,
effective as of June 22, 2006
|
|
10
|
.4(10)*
|
|
1989 Incentive Stock Option Plan of Jones Medical Industries,
Inc.
|
|
10
|
.5(10)*
|
|
Jones Medical Industries, Inc. 1994 Incentive Stock Plan
|
|
10
|
.6(5)*
|
|
1997 Incentive and Nonqualified Stock Option Plan for Employees
of King Pharmaceuticals, Inc.
|
81
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.7(10)*
|
|
Jones Medical Industries, Inc. 1997 Incentive Stock Plan
|
|
10
|
.8(11)
|
|
King Pharmaceuticals, Inc. 1998 Non-Employee Director Stock
Option Plan
|
|
10
|
.9(12)*
|
|
King Pharmaceuticals, Inc. 401(k) Retirement Savings Plan
|
|
10
|
.10(13)*
|
|
The Medco Research, Inc. 1989 Stock Option and Stock
Appreciation Rights Plan, as amended through July 29, 1998
|
|
10
|
.11(14)*
|
|
Offer Letter to Brian A. Markison, dated July 15, 2004
|
|
10
|
.12(15)*
|
|
Offer letter to Joseph Squicciarino dated May 25, 2005
|
|
10
|
.13(15)*
|
|
Offer letter to Eric J. Bruce dated May 19, 2005
|
|
10
|
.14(16)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Stock Certificate and Restricted Stock Grant Agreement
|
|
10
|
.15(16)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Option
Certificate and Nonstatutory Stock Option Grant Agreement
|
|
10
|
.16(17)
|
|
Settlement Agreement, dated as of October 31, 2005, among
the United States of America acting through the entities named
therein, King Pharmaceuticals, Inc. and Monarch Pharmaceuticals,
Inc.
|
|
10
|
.17(17)
|
|
Settlement Agreement, dated as of October 31, 2005, among
the state of Massachusetts, King Pharmaceuticals, Inc. and
Monarch Pharmaceuticals, Inc. and general description of the
other state settlement agreements
|
|
10
|
.18(17)
|
|
Corporate Integrity Agreement, dated as of October 31,
2005, between the Office of Inspector General of the Department
of Health and Human Services and King Pharmaceuticals, Inc.
|
|
10
|
.19(18)*
|
|
King Pharmaceuticals, Inc. Incentive Plan
|
|
10
|
.20(19)
|
|
Collaboration Agreement by and between King Pharmaceuticals,
Inc. and Pain Therapeutics, Inc., dated as of November 9,
2005
|
|
10
|
.21(19)
|
|
License Agreement by and between King Pharmaceuticals, Inc. and
Pain Therapeutics, Inc., dated as of December 29, 2005
|
|
10
|
.22(19)
|
|
License Agreement, by and between King Pharmaceuticals, Inc. and
Mutual Pharmaceutical Company, Inc., dated as of
December 6, 2005
|
|
10
|
.23(20)
|
|
Amended and Restated Copromotion Agreement between King
Pharmaceuticals, Inc. and Wyeth, effective as of January 1,
2006
|
|
10
|
.24(9)*
|
|
Amendment No. 1 to the A.L. Pharma Inc. Supplemental
Pension Plan (Amended and Restated as of January 1, 2005),
effective March 31, 2006
|
|
10
|
.25(21)
|
|
Indenture, dated as of March 29, 2006, among King
Pharmaceuticals, Inc., the Subsidiary Guarantors parties hereto
and The Bank of New York Trust Company, N.A., as Trustee
|
|
10
|
.26(21)
|
|
Registration Rights Agreement dated as of March 29, 2006
between King Pharmaceuticals, Inc., the Guarantors and the
Initial Purchasers of Kings 1 1 / 4% Convertible
Notes due 2026, represented by Citigroup Global Markets Inc.
|
|
10
|
.27(22)
|
|
Amended and Restated Loan and Security Agreement, among Alpharma
Inc., certain of its subsidiaries, various financial
institutions party thereto and Bank of America, N.A., in its
capacity as Lender, Issuing Bank, and collateral and
administrative agent, dated March 10, 2006
|
|
10
|
.28(9)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated July 28, 2006
|
|
10
|
.29(9)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated October 6, 2006
|
|
10
|
.30(1)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated March 14, 2007
|
82
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.31(7)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated August 24, 2007
|
|
10
|
.32(7)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated September 3, 2007
|
|
10
|
.33(7)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated October 22, 2007
|
|
10
|
.34(23)
|
|
Letter Amendment to Amended and Restated Loan and Security
Agreement, among Alpharma Inc., certain of its subsidiaries,
various financial institutions party thereto from time to time
and Bank of America, N.A., in its capacity as collateral and
administrative agent, dated October 7, 2008
|
|
10
|
.35(24)
|
|
Generic Distribution Agreement by and between King
Pharmaceuticals, Inc. and Cobalt Pharmaceuticals, Inc., dated as
of February 12, 2006
|
|
10
|
.36(24)
|
|
Product Supply Agreement by and among King Pharmaceuticals,
Inc., Selamine Limited, Robin Hood Holdings Limited and Arrow
Pharm Malta Limited, dated as of February 12, 2006
|
|
10
|
.37(24)
|
|
Ramipril Application License Agreement by and among King
Pharmaceuticals, Inc., King Pharmaceuticals Research and
Development, Inc., Arrow International Limited and Robin Hood
Holdings Limited, dated as of February 12, 2006
|
|
10
|
.38(24)
|
|
Ramipril Patent License Agreement by and among King
Pharmaceuticals, Inc., King Pharmaceuticals Research and
Development, Inc., Selamine Limited and Robin Hood Holdings
Limited, dated as of February 12, 2006
|
|
10
|
.39(24)
|
|
Amended and Restated U.S. Product Manufacturing Agreement by and
between King Pharmaceuticals, Inc. and Sanofi-Aventis
Deutschland GmbH, dated as of February 27, 2006
|
|
10
|
.40(24)
|
|
First Amendment to the U.S. Product Agreement by and between
King Pharmaceuticals, Inc., Sanofi-Aventis U.S. LLC and
Sanofi-Aventis Deutschland GmbH, dated as of February 27,
2006
|
|
10
|
.41(24)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Long-Term
Performance Unit Agreement (One Year Performance Cycle)
|
|
10
|
.42(24)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Long-Term
Performance Unit Agreement (Three Year Performance Cycle)
|
|
10
|
.43(25)
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Unit Certificate and Restricted Unit Grant Agreement
|
|
10
|
.44(26)
|
|
Purchase Agreement between Ligand Pharmaceuticals Incorporated,
King Pharmaceuticals, Inc. and King Pharmaceuticals Research and
Development, Inc., dated as of September 6, 2006
|
|
10
|
.45(27)
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Unit Certificate and Restricted Unit Grant Agreement
|
|
10
|
.46(28)
|
|
Amendment No. 1 to Purchase Agreement, Contract Sales Force
Agreement and Confidentiality Agreement by and between Ligand
Pharmaceuticals Incorporated, King Pharmaceuticals, Inc. and
King Pharmaceuticals Research and Development, Inc., dated as of
January 3, 2007, effective as of November 30, 2006
|
|
10
|
.47(29)
|
|
Amendment No. 2 to Purchase Agreement, by and between King
Pharmaceuticals, Inc., King Pharmaceuticals Research and
Development, Inc. and Ligand Pharmaceuticals Incorporated,
effective as of February 26, 2007
|
|
10
|
.48(30)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Option and
Nonstatutory Stock Option Agreement
|
|
10
|
.49(30)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Stock Certificate and Restricted Stock Grant Agreement
|
|
10
|
.50(30)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form Of
Long-Term Performance Unit Award Agreement (One Year Performance
Cycle)
|
83
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.51(30)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form Of
Long-Term Performance Unit Award Agreement (Three Year
Performance Cycle)
|
|
10
|
.52(31)*
|
|
2007 Executive Management Incentive Awards
|
|
10
|
.53(32)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Retention
Grant Agreement
|
|
10
|
.54(32)
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Stock Unit Certificate and Restricted Stock Unit Grant Agreement
|
|
10
|
.55(32)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form Of
Long-Term Performance Unit Award Agreement (One Year Performance
Cycle)
|
|
10
|
.56(32)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form Of
Long-Term Performance Unit Award Agreement (Three Year
Performance Cycle)
|
|
10
|
.57(32)
|
|
Director Compensation Policy for Non-Employee Directors, amended
May 16, 2007
|
|
10
|
.58(4)
|
|
Credit Agreement dated as of April 19, 2007 among King
Pharmaceuticals, Inc.; the Lenders named therein; Credit Suisse,
Cayman Islands Branch, as Administrative Agent, Collateral Agent
and Swingline Lender; Bank of America, N.A. and UBS Securities
LLC, as Co-Syndication Agents; Citigroup Global Markets Inc.,
Wachovia Bank, National Association and The Royal Bank of
Scotland plc, as Co-Documentation Agents; U.S. Bank National
Association as Managing Agent; and Credit Suisse Securities as
Sole Lead Arranger and Bookrunner
|
|
10
|
.59(33)
|
|
Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals,
Inc., King Pharmaceuticals Research and Development, Inc., and
JHP Pharmaceuticals, LLC dated as of July 14, 2007
|
|
10
|
.60(7)
|
|
Exclusive License and Distribution Agreement, by and between
IBSA Institut Biochimique SA (Switzerland) and Alpharma
Pharmaceuticals LLC, dated as of August 16, 2007
|
|
10
|
.61(7)
|
|
Exclusive License and Distribution Agreement for TIROSINT by and
between IBSA Institut Biochimique SA (Switzerland) and Alpharma
Pharmaceuticals LLC, dated as of August 16, 2007
|
|
10
|
.62(7)
|
|
Exclusive License Agreement, dated September 4, 2007,
between IDEA AG and Alpharma Ireland Limited
|
|
10
|
.63(7)
|
|
Registration Rights Agreement, dated October 12, 2007
between Alpharma Inc., IDEA AG and any Stockholders
|
|
10
|
.64(34)*
|
|
Amended and Restated King Pharmaceuticals, Inc. Severance Pay
Plan: Tier I, effective October 16, 2007
|
|
10
|
.65(35)*
|
|
License, Development and Commercialization Agreement, between
King Pharmaceuticals Research and Development, Inc. and Acura
Pharmaceuticals, Inc., dated October 30, 2007
|
|
10
|
.66(35)
|
|
King Pharmaceuticals, Inc. Deferred Compensation Plan
|
|
10
|
.67(36)*
|
|
Amended and Restated King Pharmaceuticals, Inc. Non-Employee
Directors Deferred Compensation Plan
|
|
10
|
.68(36)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Stock Certificate and Restricted Stock Grant Agreement
|
|
10
|
.69(37)*
|
|
Alpharma Inc. 2005 Supplemental Savings Plan, Amended and
Restated, effective January 1, 2008
|
|
10
|
.70(37)*
|
|
Alpharma Inc. 2007 Supplemental Savings Plan, effective
January 1, 2008
|
|
10
|
.71(37)*
|
|
A.L. Pharma Inc. Supplemental Pension Plan (amended and
restated, effective January 1, 2008)
|
|
10
|
.72(37)*
|
|
Alpharma Inc. Supplemental Savings Plan (amended and restated,
effective January 1, 2008)
|
|
10
|
.73(38)
|
|
Termination of Litigation Agreement, dated January 2, 2008,
by and among King Pharmaceuticals, Inc., King Pharmaceuticals
Research and Development, Inc. and CorePharma LLC
|
|
10
|
.74(38)
|
|
Metaxalone 800 mg Product Agreement, dated January 2,
2008, by and among King Pharmaceuticals, Inc., King
Pharmaceuticals Research and Development, Inc. and CorePharma LLC
|
|
10
|
.75(37)*
|
|
Alpharma Inc. Severance Plan, Amended and Restated Effective
January 25, 2008
|
|
10
|
.76(37)*
|
|
Alpharma Inc. Change in Control Plan, Amended and Restated
Effective January 25, 2008
|
84
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.77(39)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Option
Certificate and Nonstatutory Stock Option Agreement
|
|
10
|
.78(39)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Stock Certificate and Restricted Stock Grant Agreement
|
|
10
|
.79(39)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Long-Term
Performance Unit Award Agreement (One-Year Performance Cycle)
|
|
10
|
.80(39)*
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Long-Term
Performance Unit Award Agreement (Three-Year Performance Cycle)
|
|
10
|
.81(40)*
|
|
2008 Executive Management Incentive Awards
|
|
10
|
.82(41)
|
|
King Pharmaceuticals, Inc. Incentive Plan: Form of Restricted
Unit Certificate and Restricted Unit Grant Agreement
|
|
10
|
.83(42)
|
|
First Amendment to License Agreement, dated March 31, 2008,
between IDEA AG and Alpharma Ireland Limited
|
|
10
|
.84(43)
|
|
Product Development Agreement between King Pharmaceuticals,
Inc., King Pharmaceuticals Research and Development, Inc. and
CorePhrma LLC, dated June 18, 2008
|
|
10
|
.85(43)
|
|
Director Compensation Policy for Non-Employee Directors of King
Pharmaceuticals, Inc., amended July 30, 2008
|
|
10
|
.86(44)
|
|
Settlement Agreement, dated August 21, 2008, by and among
King Pharmaceuticals, Inc., other defendants, and Representative
Plaintiffs related to a certain consolidated shareholder
derivative action entitled, In Re: King Pharmaceuticals, Inc.
Derivative Litigation
|
|
10
|
.87(23)
|
|
Development and License Agreement between Durect Corporation and
Alpharma Ireland Limited, dated as of September 19, 2008
|
|
10
|
.88(45)
|
|
Amendment No. 1, dated as of December 5, 2008, to
Credit Agreement, dated as of April 19, 2007, among King
Pharmaceuticals, Inc.; the Lenders named therein; Credit Suisse,
Cayman Islands Branch, as Administrative Agent, Collateral Agent
and Swingline Lender; Bank of America, N.A. and UBS Securities
LLC, as Co-Syndication Agents; Citigroup Global Markets Inc.,
Wachovia Bank, National Association and The Royal Bank of
Scotland plc, as Co-Documentation Agents; U.S. Bank National
Association as Managing Agent; Credit Suisse Securities (USA)
LLC and Wachovia Capital Markets, LLC, as Joint Lead Arrangers
and Joint Bookrunners
|
|
10
|
.89(45)
|
|
Asset Purchase Agreement by and between King Pharmaceuticals,
Inc. and Actavis Elizabeth, L.L.C., dated as of
December 17, 2008.
|
|
10
|
.90(45)
|
|
Term Loan Credit Agreement, dated as of December 29, 2008,
among King Pharmaceuticals, Inc., the Lenders party thereto,
Credit Suisse, as Administrative Agent and Collateral Agent,
Credit Suisse Securities (USA) LLC and Wachovia Capital Markets,
LLC as Joint Bookrunners and Joint Lead Arrangers, Wachovia
Bank, National Association and SunTrust Bank as Co-Syndication
Agents, DNB First Bank and U.S. Bank National Association as
Co-Documentation Agents, DZ Bank AG, Deutsche
Zentral-Genossenschaftsbank, New York Branch, Siemens Financial
Services, Inc., The PrivateBank and Trust Company and Union
Bank, N.A. as Senior Managing Agents
|
|
14
|
.1(46)
|
|
Corporate Code of Conduct and Ethics
|
|
21
|
.1
|
|
Subsidiaries of the Registrant as of February 25, 2009
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP
|
|
31
|
.1
|
|
Certificate of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certificate of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certificate of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certificate of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
|
|
|
Portions of this Exhibit have been omitted and filed separately
with the Securities and Exchange Commission as part of an
application for confidential treatment pursuant to the
Securities Exchange Act of 1934. |
85
|
|
|
(1) |
|
Incorporated by reference to Alpharma Inc.s Current Report
on
Form 8-K
filed on March 20, 2007. |
|
(2) |
|
Incorporated by reference to Alpharma Inc.s Current Report
on
Form 8-K
filed on February 7, 2008. |
|
(3) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed November 24, 2008. |
|
(4) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 7, 2007. |
|
(5) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-1
(Registration
No. 333-38753)
filed October 24, 1997. |
|
(6) |
|
Incorporated by reference to Alpharma Inc.s Current Report
on
Form 8-K
filed October 10, 2007. |
|
(7) |
|
Incorporated by reference to Alpharma Inc.s Quarterly
Report on
Form 10-Q
filed on October 30, 2007. |
|
(8) |
|
Incorporated by reference to Alpharma Inc.s Annual Report
on
Form 10-K
filed on March 16, 2006. |
|
(9) |
|
Incorporated by reference to Alpharma Inc.s Annual Report
on
Form 10-K
filed on March 1, 2007. |
|
(10) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
(File
No. 333-45284)
filed September 6, 2000. |
|
(11) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
(File
No. 333-45276)
filed September 6, 2000. |
|
(12) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
(File
No. 333-73053)
filed February 26, 1999. |
|
(13) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
(File
No. 333-32072)
filed March 9, 2000. |
|
(14) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed March 21, 2005. |
|
(15) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 9, 2005. |
|
(16) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed November 9, 2005. |
|
(17) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed November 4, 2005. |
|
(18) |
|
Incorporated by reference to Kings Definitive Proxy
Statement, filed April 28, 2005, related to the 2005 annual
meeting of shareholders. |
|
(19) |
|
Incorporated by reference to Kings Annual Report on
Form 10-K
filed March 3, 2006. |
|
(20) |
|
Incorporated by reference to Kings Quarterly Report of
Form 10-Q
filed November 9, 2006. |
|
(21) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 30, 2006. |
|
(22) |
|
Incorporated by reference to Alpharma Inc.s Quarterly
Report on
Form 10-Q
filed on May 2, 2006. |
|
(23) |
|
Incorporated by reference to Alpharma Inc.s Quarterly
Report on
Form 10-Q
filed on October 29, 2008. |
|
(24) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed May 10, 2006. |
|
(25) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 9, 2006. |
|
(26) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed September 12, 2006. |
|
(27) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed November 9, 2006. |
|
(28) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed January 5, 2007. |
|
(29) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 2, 2007. |
|
(30) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 27, 2007. |
|
(31) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed May 10, 2007. |
|
(32) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed May 21, 2007. |
|
(33) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed July 19, 2007. |
|
(34) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed October 22, 2007. |
|
(35) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed November 5, 2007. |
|
(36) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed December 5, 2007. |
|
(37) |
|
Incorporated by reference to Alpharma Inc.s Annual Report
on
Form 10-K
filed February 27, 2008. |
|
(38) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed January 8, 2008. |
86
|
|
|
(39) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed April 1, 2008. |
|
(40) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed May 8, 2008. |
|
(41) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed May 21, 2008. |
|
(42) |
|
Incorporated by reference to Alpharma Inc.s Quarterly
Report on
Form 10-Q
filed May 9, 2008. |
|
(43) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 7, 2008. |
|
(44) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed August 27, 2008. |
|
(45) |
|
Filed as an Exhibit to this Report. |
|
(46) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed December 8, 2005. |
87
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of King
Pharmaceuticals, Inc. and its subsidiaries (the
Company) at December 31, 2008 and
December 31, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and the financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 17 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control
over Financial Reporting appearing under item 9A,
management has excluded Alpharma, Inc. (Alpharma)
from its assessment of internal control over
F-1
financial reporting as of December 31, 2008 because it was
acquired by the Company in a purchase business combination
during 2008. We have also excluded Alpharma from our audit of
internal control over financial reporting. Alpharma is a
wholly-owned subsidiary whose total assets represent 39.7% of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2008.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 27, 2009
F-2
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
940,212
|
|
|
$
|
20,009
|
|
Investments in debt securities
|
|
|
6,441
|
|
|
|
1,344,980
|
|
Marketable securities
|
|
|
511
|
|
|
|
1,135
|
|
Accounts receivable, net of allowance of $4,713 and $5,297
|
|
|
245,070
|
|
|
|
183,664
|
|
Inventories
|
|
|
258,303
|
|
|
|
110,308
|
|
Deferred income tax assets
|
|
|
89,513
|
|
|
|
100,138
|
|
Income tax receivable
|
|
|
|
|
|
|
20,175
|
|
Prepaid expenses and other current assets
|
|
|
129,214
|
|
|
|
39,245
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,669,264
|
|
|
|
1,819,654
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
421,321
|
|
|
|
257,093
|
|
Intangible assets, net
|
|
|
934,219
|
|
|
|
780,974
|
|
Goodwill
|
|
|
450,548
|
|
|
|
129,150
|
|
Deferred income tax assets
|
|
|
303,722
|
|
|
|
343,700
|
|
Investments in debt securities
|
|
|
353,848
|
|
|
|
|
|
Other assets (includes restricted cash of $16,580 and $16,480)
|
|
|
124,774
|
|
|
|
96,251
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,257,696
|
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
140,908
|
|
|
$
|
76,481
|
|
Accrued expenses
|
|
|
411,488
|
|
|
|
376,604
|
|
Income taxes payable
|
|
|
10,448
|
|
|
|
|
|
Short-term debt
|
|
|
5,230
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,007,121
|
|
|
|
453,085
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
963,222
|
|
|
|
400,000
|
|
Other liabilities
|
|
|
110,022
|
|
|
|
62,980
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,080,365
|
|
|
|
916,065
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 15,000,000 shares authorized, no shares
issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value, 600,000,000 shares authorized,
246,487,232 and 245,937,709 shares issued and outstanding
|
|
|
1,313,321
|
|
|
|
1,283,440
|
|
Retained earnings
|
|
|
892,297
|
|
|
|
1,225,360
|
|
Accumulated other comprehensive income (loss)
|
|
|
(28,287
|
)
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,177,331
|
|
|
|
2,510,757
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,257,696
|
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,485,619
|
|
|
$
|
2,054,293
|
|
|
$
|
1,908,143
|
|
Royalty revenue
|
|
|
79,442
|
|
|
|
82,589
|
|
|
|
80,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,565,061
|
|
|
|
2,136,882
|
|
|
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues, exclusive of depreciation, amortization and
impairments shown below
|
|
|
394,825
|
|
|
|
566,534
|
|
|
|
419,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
408,955
|
|
|
|
511,303
|
|
|
|
496,215
|
|
Co-promotion fees
|
|
|
37,065
|
|
|
|
179,731
|
|
|
|
217,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
446,020
|
|
|
|
691,034
|
|
|
|
713,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
145,173
|
|
|
|
149,425
|
|
|
|
143,596
|
|
Research and development in process upon acquisition
|
|
|
598,500
|
|
|
|
35,310
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
743,673
|
|
|
|
184,735
|
|
|
|
253,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
150,713
|
|
|
|
173,863
|
|
|
|
147,549
|
|
Asset impairments
|
|
|
40,995
|
|
|
|
223,025
|
|
|
|
47,842
|
|
Restructuring charges
|
|
|
7,098
|
|
|
|
70,178
|
|
|
|
3,194
|
|
Acquisition related costs
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,784,706
|
|
|
|
1,909,369
|
|
|
|
1,585,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(219,645
|
)
|
|
|
227,513
|
|
|
|
402,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
36,970
|
|
|
|
42,491
|
|
|
|
32,152
|
|
Interest expense
|
|
|
(7,943
|
)
|
|
|
(7,818
|
)
|
|
|
(9,857
|
)
|
Loss on investment
|
|
|
(7,451
|
)
|
|
|
(11,591
|
)
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
628
|
|
Other, net
|
|
|
(3,635
|
)
|
|
|
223
|
|
|
|
(1,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
17,941
|
|
|
|
23,305
|
|
|
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(201,704
|
)
|
|
|
250,818
|
|
|
|
424,312
|
|
Income tax expense
|
|
|
131,359
|
|
|
|
67,600
|
|
|
|
135,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(333,063
|
)
|
|
|
183,218
|
|
|
|
288,582
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(369
|
)
|
|
|
572
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(132
|
)
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations
|
|
|
|
|
|
|
(237
|
)
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(333,063
|
)
|
|
$
|
182,981
|
|
|
$
|
288,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: (Loss) income from continuing operations
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: (Loss) income from continuing operations
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1.37
|
)
|
|
$
|
0.75
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, December 31, 2005
|
|
|
242,493,416
|
|
|
$
|
1,222,246
|
|
|
$
|
(8,764
|
)
|
|
$
|
754,953
|
|
|
$
|
4,987
|
|
|
$
|
1,973,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of Statement of Financial Accounting Standard 123(R)
|
|
|
|
|
|
|
(8,764
|
)
|
|
|
8,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,949
|
|
|
|
|
|
|
|
288,949
|
|
Net unrealized loss on marketable securities, net of tax of
$2,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,067
|
)
|
|
|
(5,067
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based award activity
|
|
|
657,807
|
|
|
|
31,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
243,151,223
|
|
|
$
|
1,244,986
|
|
|
$
|
|
|
|
$
|
1,043,902
|
|
|
$
|
(282
|
)
|
|
$
|
2,288,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,981
|
|
|
|
|
|
|
|
182,981
|
|
Reclassification of unrealized losses on marketable securities
to earnings, net of tax of $377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615
|
|
|
|
615
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,624
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of Financial Accounting Standards Board Interpretation
No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,523
|
)
|
|
|
|
|
|
|
(1,523
|
)
|
Stock-based award activity
|
|
|
2,786,486
|
|
|
|
38,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
245,937,709
|
|
|
$
|
1,283,440
|
|
|
$
|
|
|
|
$
|
1,225,360
|
|
|
$
|
1,957
|
|
|
$
|
2,510,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333,063
|
)
|
|
|
|
|
|
|
(333,063
|
)
|
Net unrealized loss on investments in debt securities, net of
taxes of $17,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,092
|
)
|
|
|
(28,092
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,152
|
)
|
|
|
(2,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based award activity
|
|
|
549,523
|
|
|
|
29,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
246,487,232
|
|
|
$
|
1,313,321
|
|
|
$
|
|
|
|
$
|
892,297
|
|
|
$
|
(28,287
|
)
|
|
$
|
2,177,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(333,063
|
)
|
|
$
|
182,981
|
|
|
$
|
288,949
|
|
Loss (income) from discontinued operations
|
|
|
|
|
|
|
237
|
|
|
|
(367
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
150,713
|
|
|
|
173,863
|
|
|
|
147,549
|
|
Amortization of deferred financing costs
|
|
|
2,148
|
|
|
|
2,057
|
|
|
|
2,874
|
|
Deferred income taxes
|
|
|
37,313
|
|
|
|
(91,229
|
)
|
|
|
(39,010
|
)
|
Impairment of intangible assets
|
|
|
40,995
|
|
|
|
176,671
|
|
|
|
47,842
|
|
Loss on sale of assets
|
|
|
|
|
|
|
46,354
|
|
|
|
|
|
Inventory write-down
|
|
|
|
|
|
|
79,807
|
|
|
|
|
|
In-process research and development charges
|
|
|
598,500
|
|
|
|
35,310
|
|
|
|
110,000
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(628
|
)
|
Loss on investment
|
|
|
7,451
|
|
|
|
11,591
|
|
|
|
|
|
Other non-cash items, net
|
|
|
(530
|
)
|
|
|
2,591
|
|
|
|
573
|
|
Stock based compensation
|
|
|
34,514
|
|
|
|
27,652
|
|
|
|
24,718
|
|
Changes in operating assets and liabilities net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
37,956
|
|
|
|
80,106
|
|
|
|
(41,746
|
)
|
Inventories
|
|
|
22,785
|
|
|
|
55,056
|
|
|
|
48,275
|
|
Prepaid expenses and other current assets
|
|
|
16,785
|
|
|
|
(43,555
|
)
|
|
|
(45,796
|
)
|
Other assets
|
|
|
27,078
|
|
|
|
(3,470
|
)
|
|
|
(20,173
|
)
|
Accounts payable
|
|
|
9,673
|
|
|
|
(16,276
|
)
|
|
|
(8,568
|
)
|
Accrued expenses and other liabilities
|
|
|
(180,960
|
)
|
|
|
(33,408
|
)
|
|
|
(50,458
|
)
|
Deferred revenue
|
|
|
(4,680
|
)
|
|
|
(4,680
|
)
|
|
|
(6,886
|
)
|
Income taxes
|
|
|
24,713
|
|
|
|
(9,009
|
)
|
|
|
8,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
491,391
|
|
|
|
672,649
|
|
|
|
465,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments in debt securities
|
|
|
(279,175
|
)
|
|
|
(2,744,575
|
)
|
|
|
(1,705,517
|
)
|
Proceeds from maturity and sale of investments in debt securities
|
|
|
1,207,080
|
|
|
|
2,289,780
|
|
|
|
1,309,995
|
|
Transfer (to)/from restricted cash
|
|
|
(100
|
)
|
|
|
(512
|
)
|
|
|
128,561
|
|
Acquisition of Alpharma, net of cash acquired
|
|
|
(1,024,761
|
)
|
|
|
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(44
|
)
|
|
|
(296,437
|
)
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(57,455
|
)
|
|
|
(49,602
|
)
|
|
|
(45,816
|
)
|
Purchases of product rights and intellectual property
|
|
|
(12,065
|
)
|
|
|
(98,942
|
)
|
|
|
(85,795
|
)
|
Proceeds from sale of assets
|
|
|
10,410
|
|
|
|
86,287
|
|
|
|
|
|
Loan to Ligand
|
|
|
|
|
|
|
37,750
|
|
|
|
(37,750
|
)
|
Other investing activities
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(156,110
|
)
|
|
|
(776,251
|
)
|
|
|
(436,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
439
|
|
|
|
10,656
|
|
|
|
7,338
|
|
Net (payments) proceeds related to stock-based award activity
|
|
|
(2,441
|
)
|
|
|
705
|
|
|
|
484
|
|
Proceeds from issuance of long-term debt
|
|
|
617,000
|
|
|
|
|
|
|
|
400,000
|
|
Payments on long-term debt
|
|
|
|
|
|
|
|
|
|
|
(342,691
|
)
|
Debt issuance costs
|
|
|
(30,076
|
)
|
|
|
(1,527
|
)
|
|
|
(10,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
584,922
|
|
|
|
9,834
|
|
|
|
54,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
920,203
|
|
|
|
(93,768
|
)
|
|
|
83,763
|
|
Cash and cash equivalents, beginning of year
|
|
|
20,009
|
|
|
|
113,777
|
|
|
|
30,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
940,212
|
|
|
$
|
20,009
|
|
|
$
|
113,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for: Interest
|
|
$
|
5,985
|
|
|
$
|
6,047
|
|
|
$
|
8,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for: Taxes
|
|
$
|
69,207
|
|
|
$
|
171,924
|
|
|
$
|
163,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
KING
PHARMACEUTICALS, INC.
(in
thousands, except share and per share data)
King Pharmaceuticals, Inc. (King or the
Company) is a vertically integrated pharmaceutical
company that performs basic research and develops, manufactures,
markets and sells branded prescription pharmaceutical products
and animal health products. King markets its 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. The
Companys animal health products are primarily marketed
through a staff of trained sales and technical service and
marketing employees, many of whom are veterinarians and
nutritionists. The Company has sales offices in the U.S.,
Europe, Canada, Mexico, South America and Asia. Elsewhere the
Companys animal health products are sold primarily through
the use of distributors and other third-party sales companies.
Through a team of inside sales professionals, the Company
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
agencies, emergency medical personnel and first responders. The
Company is also the exclusive manufacturer and supplier of a
commercial auto-injector which is sold worldwide by a third
party, except in Canada, where the Company markets, distributes
and sells the product. In addition, the Company receives
royalties from the rights to certain products (including
Adenoscan®)
previously sold.
These consolidated financial statements include the accounts of
King and all of its wholly owned subsidiaries. See Note 9.
All intercompany transactions and balances have been eliminated
in consolidation.
Discontinued operations in these consolidated financial
statements represent the effect of the
Prefest®
and
Nordette®
product rights which the Company divested in 2004.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates. 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 the
Companys 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 an immediate
material impairment charge and, whether they result in an
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 commercial rebates; returns; chargebacks;
allowances for doubtful accounts; and estimates used in applying
the revenue recognition policy. Reserves for returns;
chargebacks; Medicaid, Medicare and commercial rebates each use
the estimate of the level of inventory of the Companys
branded prescription pharmaceutical products in the distribution
channel at the end of the period. The estimate of the level of
inventory of the Companys branded prescription
pharmaceutical products in the distribution channel is based
primarily on data provided by our three key wholesalers under
inventory management agreements.
The Company is subject to risks and uncertainties that may cause
actual results to differ from the related estimates, and the
Companys estimates may change from time to time in
response to actual developments and new information.
F-7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue recognition. Revenue is recognized
when title and risk of loss are transferred to customers,
collection of sales is reasonably assured, and the Company has
no further performance obligations. This is generally at the
time products are received by the customer. Accruals for
estimated discounts, returns, rebates and chargebacks that are
determined based on historical experience, reduce revenues at
the time of sale and are included in accrued expenses. Royalty
revenue is recognized based on a percentage of sales (namely,
contractually
agreed-upon
royalty rates) reported by third parties.
Intangible Assets and Goodwill. Intangible
assets, which primarily include acquired product rights,
trademarks, tradenames and patents, are stated at cost, net of
accumulated amortization. Amortization is computed over the
estimated useful lives, ranging from one to forty years, using
primarily the straight-line method. 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 factors. The
Company evaluates the remaining useful lives of 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 the quarterly
evaluation of intangibles for impairment. The Company reviews
its intangible assets for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company reviews goodwill for possible
impairment annually, or whenever events or circumstances
indicate that the carrying amount may not be recoverable. In
evaluating goodwill for impairment, the Company estimates fair
value of the Companys 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, the Companys amortization policies
reflect judgments on the estimated useful lives of assets.
Accruals for rebates, returns, and
chargebacks. The Company establishes accruals for
returns; chargebacks; and commercial, Medicare and Medicaid
rebate obligations in the same period it recognizes 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, the Company records a reduction to accrued
expenses and, at the end of each quarter, adjusts 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 chargeback and rebates may differ
from the Companys estimates.
The Companys 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 based on historical sales and return rates. The
Company estimates its commercial, Medicare and Medicaid rebate
accruals based on estimates of utilization by rebate-eligible
customers, estimates of the level of inventory of its products
in the distribution channel that remain potentially subject to
those rebates, and the terms of its commercial, Medicare and
Medicaid rebate obligations. The Company estimates its
chargeback accrual based on its estimates of the level of
inventory of its products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
branded prescription pharmaceutical products in the distribution
channel is based primarily on data provided by our three key
wholesalers under inventory management agreements.
The Companys accruals for returns, chargebacks and rebates
are adjusted as appropriate for specific known developments that
may result in a change in its product returns or its rebate and
chargeback obligations. In the case of product returns, the
Company monitors demand levels for its products and the effects
of the introduction of competing products and other factors on
this demand. When the Company identifies decreases
F-8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in demand for products or experiences higher than historical
rates of returns caused by unexpected discrete events, it
further analyzes these products for potential additional
supplemental reserves.
Shipping and Handling Costs. The Company
incurred $2,884, $3,527, and $3,777 in 2008, 2007, and 2006,
respectively, related to third-party shipping and handling costs
classified as selling, general and administrative expenses in
the consolidated statements of operations. The Company does not
bill customers for such costs.
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 include institutional
money market funds and bank time deposits.
Restricted Cash. Cash escrowed for a specific
purpose is designated as restricted cash.
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. The Company
classifies auction rate securities as available-for-sale at the
time of purchase in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Temporary gains or losses are included in
accumulated other comprehensive income (loss) on the
Consolidated Balance Sheets. Other-than-temporary gains or
losses are included in income (expense) on the Consolidated
Statement of Operations.
As of December 31, 2008, the Companys investments in
debt securities of $360,289 consisted solely of tax-exempt
auction rate securities and the Company had 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 are limited to issues which are rated AA or higher at
the time of purchase. The Company has realized no loss of
principal with respect to these investments.
On February 11, 2008, the Company began to experience
auction failures. In the event of an auction failure, the
interest rate on the security is set according to the
contractual terms in the underlying indenture. The funds
associated with failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the
underlying security, the underlying security matures or a buyer
outside the auction process emerges. For additional information
regarding investments in debt securities, please see
Note 15.
Marketable Securities. The Company classifies
its marketable securities as available-for-sale. These
securities are carried at fair market value based on current
market quotes, with unrealized gains and losses reported in
shareholders equity as a component of accumulated other
comprehensive income. Gains or losses on securities sold are
based on the specific identification method. The Company reviews
its investment portfolio as deemed necessary and, where
appropriate, adjusts individual securities for
other-than-temporary impairments. The Company does not hold
these securities for speculative or trading purposes.
Accounts Receivable and Allowance for Doubtful
Accounts. Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The allowance
for doubtful accounts is managements best estimate of the
amount of probable credit losses in the Companys existing
accounts receivable. Management determines the allowance based
on historical experience along with the present knowledge of
potentially uncollectible accounts. Management reviews its
allowance for doubtful accounts quarterly. Past due balances
over 120 days and greater than a specified amount are
reviewed individually for collectibility. All other balances are
reviewed on a pooled basis by type of receivable. Account
balances are charged off against the allowance when management
feels it is probable the receivable will not be recovered. The
Company does not have any off-balance-sheet credit exposure
related to customers.
Inventories. Inventories are stated at the
lower of cost or market. Cost is determined using the
first-in,
first-out (FIFO) method. Product samples held for distribution
to physicians and other healthcare providers
F-9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
represent approximately 3% and 4% of inventory as of
December 31, 2008 and 2007, respectively. The Company has
fixed purchase commitments under supply contracts for certain
raw materials. A loss accrual is recorded when the total
inventory for a product is projected to be more than the
forecasted demand.
Income Taxes. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and the tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded when, in the opinion of management, it is more likely
than not that some or all of the deferred tax assets will not be
realized.
Litigation. At various times the Company may
have patent, product liability, consumer, commercial,
environmental and tax claims asserted against it and may be
subjected to litigation with respect to the claims. In addition,
the Company may be the subject of government investigations and
a party to other legal proceedings that arise from time to time
in the ordinary course of business (see Note 19). The
Company accrues for amounts related to these legal matters if it
is probable that a liability has been incurred and an amount is
reasonably estimable. If the estimated amount of the liability
is a range and some amount within the range appears to be a
better estimate than any other amount within the range, that
amount is accrued. When no amount within the range is a better
estimate than any other amount, the minimum amount in the range
is accrued. The Company capitalizes legal costs in the defense
of its patents to the extent there is an evident increase in the
value of the patent.
Foreign currency translation and
transactions. The assets and liabilities of the
Companys foreign subsidiaries are translated from their
respective functional currencies into U.S. Dollars at rates
in effect at the balance sheet date. Results of operations are
translated using average rates in effect during the year.
Foreign currency transaction gains and losses are included in
income. Foreign currency translation adjustments are included in
accumulated other comprehensive income (loss) as a separate
component of stockholders equity.
Financial Instruments and Derivatives. The
Company does not use financial instruments for trading purposes.
At December 31, 2008 and 2007 the Company had utility
contracts which qualify as normal purchase and sales,
derivatives associated with the Convertible Senior Notes (see
Note 13), and forward foreign exchange contracts. The
Company carries its derivative instruments at their fair value
on the balance sheet date.
Property, Plant and Equipment. Property, plant
and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Depreciation is computed over the
estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally
fifteen to forty years for buildings and improvements and three
to fifteen years for machinery and equipment.
The Company capitalizes certain computer software acquisition
and development costs incurred in connection with developing or
obtaining computer software for internal use. Capitalized
software costs are amortized over the estimated useful lives of
the software which generally range from three to seven years.
In the event that facts and circumstances indicate that the
carrying amount of property, plant and equipment may be
impaired, evaluation of recoverability is performed using the
estimated future undiscounted cash flows associated with the
asset compared to the assets carrying amount to determine
if a write-down is required. To the extent such projection
indicates that undiscounted cash flow is not expected to be
adequate to recover the carrying amount, the asset would be
written down to its fair value using discounted cash flows.
Research and Development Costs. Research and
development costs consist primarily of services performed by
third parties, and are expensed as incurred. This includes costs
to acquire in-process research and development projects for
products that have not received regulatory approval and do not
have an alternative future use. Milestone payments made to third
parties in connection with a product in development prior to its
regulatory approval are also expensed as incurred. Milestone
payments made to third parties with
F-10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respect to a product on or after its regulatory approval are
capitalized and amortized over the remaining useful life of the
product. Amounts capitalized for these payments are included in
intangible assets.
Deferred Financing Costs. Financing costs
related to the $400,000 convertible senior notes are being
amortized over seven years to the first date the debt can be put
by the holders to the Company. Financing costs related to the
senior secured revolving credit facility are being amortized
over five years, the term of the facility. Financing costs
related to the Term Loan are being amortized over 4 years.
See Note 13 for further discussion.
Insurance. The Company is self-insured with
respect to its healthcare benefit program. The Company pays a
fee to a third party to administer the plan. The Company has
stop loss coverage on a per employee basis as well as in the
aggregate. Self-insured costs are accrued based upon reported
claims and an estimated liability for claims incurred but not
reported.
Advertising. The Company expenses advertising
costs as incurred and these costs are classified as selling,
general and administrative expenses in the consolidated
statements of operations. Advertising costs for the years ended
December 31, 2008, 2007, and 2006 were $88,106, $125,064,
and $92,492, respectively.
Promotional Fees to Wyeth. On June 22,
2000, the Company entered into a Co-Promotion Agreement with
Wyeth to promote
Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee of
$75,000 to King, which was classified as a liability and is
being amortized over the term of the agreement as amended. In
connection with the Co-Promotion Agreement, the Company agreed
to pay Wyeth a promotional fee based on annual net sales of
Altace®.
On July 5, 2006, the Company entered into an Amended and
Restated Co-Promotion Agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®
which extended the term to December 31, 2010. Effective
January 1, 2007, the Company assumed full responsibility
for selling, marketing and promoting
Altace®.
Under the Amended Co-Promotion Agreement, the Company will pay
Wyeth a reduced annual fee based on net sales of
Altace®.
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year. See Note 9 for further discussion.
|
|
3.
|
Invalidation
of
Altace®
Patent
|
In September 2007, the U.S. Circuit Court of Appeals for
the Federal Circuit (the Circuit Court) declared
invalid U.S. Patent No. 5,061,722 (the 722
patent) that covered the Companys
Altace®
product, overruling the decision of the U.S. District Court
for the Eastern District of Virginia (the District
Court), which had upheld the validity of the patent. The
Company filed with the Circuit Court a petition for rehearing
and rehearing en banc, but this petition was denied in
December 2007. The Circuit Court issued the mandate to the
District Court on December 10, 2007, beginning the
180-day
Hatch-Waxman exclusive marketing period for the first generic
competitor who entered the market in December 2007 with a
generic substitute for the Companys
Altace®.
Additional competitors entered the market in June 2008 with
generic substitutes for our
Altace®
product. For additional information regarding this legal
proceeding, please see Note 19.
As a result of the entry of generic competition,
Altace®
net sales have significantly decreased and the Company expects
net sales of
Altace®
will continue to decline significantly in the future. As a
result, during 2007 the Company recorded charges of $146,444
associated with
Altace®
intangible assets, $78,812 associated with
Altace®
inventory and $25,755 associated with minimum purchase
commitments for excess
Altace®
raw material. Net sales of
Altace®
were $166,406 in 2008 and $645,989 in 2007. For additional
information regarding the
Altace®
intangible assets, please see Note 10. For additional
information regarding
Altace®
inventory, please see Note 7.
F-11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys calculation of its product returns reserves
is based on historical sales and return rates over the period
during which customers have a right of return. The Company also
considers current wholesale inventory levels of the
Companys products.
Because actual returns related to sales in prior periods were
lower than the Companys original estimates, it recorded a
decrease in its reserve for returns in the first quarter of 2007
and the first quarter of 2006. During the first quarter of 2007,
the Company decreased its reserve for returns by approximately
$8,000 and increased its net sales from branded prescription
pharmaceuticals, excluding the adjustment to sales classified as
discontinued operations, by the same amount. The effect of the
change in estimate on first quarter 2007 operating income was an
increase of approximately $5,000. During the first quarter of
2006, the Company decreased its reserve for returns by
approximately $8,000 and increased its net sales from branded
prescription pharmaceuticals, excluding the adjustment to sales
classified as discontinued operations, by the same amount. The
effect of the change in estimate on first quarter 2006 operating
income was an increase of approximately $6,000.
During the third quarter of 2006, the Company reduced its rebate
expense and increased net sales from branded prescription
pharmaceutical products by approximately $9,300 due to the
determination that a liability established in 2005 for a
government pricing program for military dependents and retirees
was no longer probable.
Receivables, net of allowance for doubtful accounts, consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Trade
|
|
$
|
218,027
|
|
|
$
|
159,362
|
|
Royalty
|
|
|
18,182
|
|
|
|
21,753
|
|
Other
|
|
|
8,861
|
|
|
|
2,549
|
|
|
|
|
|
|
|
|
|
|
Total Receivables
|
|
$
|
245,070
|
|
|
$
|
183,664
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Concentrations
of Credit Risk
|
A significant portion of the Companys sales is to
wholesaler customers in the branded prescription pharmaceutical
industry. The Company monitors the extension of credit to
wholesaler customers and has not experienced significant credit
losses. The following table represents the relative percentage
of accounts receivable from significant wholesaler customers
compared to net accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Customer A
|
|
|
17
|
%
|
|
|
25
|
%
|
Customer B
|
|
|
23
|
%
|
|
|
26
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
14
|
%
|
The following table represents a summary of sales to significant
wholesaler customers as a percentage of the Companys gross
sales, including revenues from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer A
|
|
|
30
|
%
|
|
|
35
|
%
|
|
|
32
|
%
|
Customer B
|
|
|
28
|
%
|
|
|
27
|
%
|
|
|
29
|
%
|
Customer C
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
F-12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
82,273
|
|
|
$
|
129,781
|
|
Work-in process
|
|
|
62,836
|
|
|
|
27,590
|
|
Finished goods (including $7,385 and $3,901 of sample inventory,
respectively)
|
|
|
176,582
|
|
|
|
61,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,691
|
|
|
|
218,695
|
|
Less inventory valuation allowance
|
|
|
(63,388
|
)
|
|
|
(108,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
258,303
|
|
|
$
|
110,308
|
|
|
|
|
|
|
|
|
|
|
In December 2007, the Companys 722 patent that
covered the Companys
Altace®
product was invalidated by the Circuit Court. For additional
information please see Note 3. As a result of the
invalidation of the 722 patent, the Company undertook an
analysis of its potential effect on future net sales of
Altace®.
Based upon that analysis, the Company concluded that it had more
Altace®
raw material inventory than is required to meet anticipated
future demand for the product. Accordingly, during 2007 the
Company recorded charges in the amount of (i) $78,812 for
an inventory valuation allowance for a portion of the
Altace®
raw material inventory on hand; and (ii) $25,755 for a
portion of the Companys estimated remaining minimum
purchase requirements for excess
Altace®
raw material. These charges are included in cost of revenues
during 2007, exclusive of depreciation, amortization and
impairments, on the Consolidated Statements of Operations.
|
|
8.
|
Property,
Plant and Equipment
|
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
16,415
|
|
|
$
|
12,072
|
|
Buildings and improvements
|
|
|
199,707
|
|
|
|
123,063
|
|
Machinery and equipment
|
|
|
333,510
|
|
|
|
213,522
|
|
Capital projects in progress
|
|
|
59,731
|
|
|
|
62,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
609,363
|
|
|
|
411,295
|
|
Less accumulated depreciation
|
|
|
(188,042
|
)
|
|
|
(154,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
421,321
|
|
|
$
|
257,093
|
|
|
|
|
|
|
|
|
|
|
Included in net property, plant and equipment as of
December 31, 2008 and 2007 are computer software costs of
$14,813 and $18,339, respectively.
Depreciation expense for the years ended December 31, 2008,
2007 and 2006 was $38,267, $41,725 and $41,785, respectively,
which includes $10,370, $7,209 and $6,815, respectively, related
to computer software.
For the years ended December 31, 2008, 2007 and 2006, the
Company capitalized interest of approximately $562, $279 and
$1,243, respectively, related to construction in process.
In July 2007, the Company entered into an asset purchase
agreement with JHP Pharmaceuticals, LLC (JHP),
pursuant to which JHP acquired the Companys Rochester,
Michigan sterile manufacturing facility, some of the
Companys legacy products that are manufactured there and
the related contract manufacturing business. The Company
retained its stand-alone
Bicillin®
(sterile penicillin products) manufacturing facility which is
also located in Rochester, Michigan. For additional discussion,
please see Note 9.
F-13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, the Company decided to proceed with the
implementation of its plan to streamline 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 the
first half of 2009. The Company believes that the assets
associated with the St. Petersburg facility are not currently
impaired based on estimated undiscounted cash flows associated
with these assets. However, during 2006, the Company shortened
the estimated useful lives of assets at the St. Petersburg
facility and therefore accelerated the depreciation of these
assets. For additional discussion, please see Note 25.
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.
|
|
9.
|
Acquisitions,
Dispositions, Co-Promotions and Alliances
|
On December 29, 2008, the Company completed its acquisition
of Alpharma Inc. (Alpharma). Alpharma is a branded
specialty pharmaceutical company with a growing specialty
pharmaceutical franchise in the U.S. pain market with its
Flector®
Patch (diclofenac epolamine topical patch) 1.3% and a pipeline
of new pain medicines led by
Embedatm,
a formulation of long-acting morphine that is designed to
provide controlled pain relief and deter certain common methods
of misuse and abuse. Alpharma is also a provider of medicated
feed additives and water-soluble therapeutics used primarily for
poultry, cattle and swine. The Company paid a cash price of
$37.00 per share for the outstanding shares of Class A
Common Stock, together with the associated preferred stock
purchase rights of Alpharma, totaling approximately $1,527,380,
$55,527 associated with Alpharma employee stock-based awards
(which were paid in the first quarter of 2009), and incurred
$29,967 of expenses related to the transaction resulting in a
total purchase price of $1,612,874.
Management believes the Companys acquisition of Alpharma
is particularly significant because it strengthens Kings
portfolio and development pipeline of pain management products,
and increases its capabilities and expertise in this market. The
development pipeline provides it with both near-term and
long-term revenue opportunities and the animal health business
further diversifies its revenue base. As a result, management
believes the acquisition of Alpharma creates a stronger
foundation for sustainable, long-term growth for the Company.
The accompanying Statements of Operations do not include any
activity for Alpharma in 2008, because the Company acquired
Alpharma close to the end of 2008 and the Company chose December
31, 2008 as the convenience date for the acquisition.
F-14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
|
|
Valuation
|
|
|
Current Assets
|
|
$
|
914,083
|
|
Current deferred income taxes
|
|
|
27,198
|
|
Property, plant and equipment
|
|
|
160,708
|
|
Intangible Assets
|
|
|
300,000
|
|
Goodwill
|
|
|
321,398
|
|
In-Process Research and Development
|
|
|
590,000
|
|
Other Long Term Assets
|
|
|
26,680
|
|
Current Liabilities
|
|
|
(235,823
|
)
|
Convertible Debentures
|
|
|
(385,227
|
)
|
Long-term deferred income taxes
|
|
|
(55,076
|
)
|
Other Long-Term Liabilities
|
|
|
(51,067
|
)
|
|
|
|
|
|
|
|
$
|
1,612,874
|
|
|
|
|
|
|
The valuation of the intangible assets acquired is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Valuation
|
|
|
Amortization Period
|
|
|
Flector®
Patch
|
|
$
|
130,000
|
|
|
|
11 years
|
|
Animal health intangibles
|
|
|
170,000
|
|
|
|
19 years
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the goodwill is expected to be deductible for tax
purposes. The goodwill has been allocated to the segments as
follows:
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
237,352
|
|
Animal health
|
|
|
84,046
|
|
|
|
|
|
|
Total
|
|
$
|
321,398
|
|
|
|
|
|
|
The above allocation of the purchase price is not yet finalized
as the acquisition was completed close to the end of the year
and management is continuing to complete its initial estimate of
the valuation of assets and liabilities.
The acquisition was financed with available cash on hand,
borrowings under the Senior Secured Revolving Credit Facility of
$425,000 and borrowings under the Term Loan of $200,000. For
additional information on the borrowings please see Note 13.
As indicated above, $590,000 of the purchase price for Alpharma
was allocated to acquired in-process research and development
for the
Embedatm,
Oxycodone NT and Hydrocodone NT projects in the amounts of
$410,000, $90,000 and $90,000, respectively. The value of the
acquired in-process research and development projects was
expensed on the date of acquisition, as they had not received
regulatory approval and had no alternative future use. The
projects were valued through the application of
probability-weighted, discounted cash flow approach. The
estimated cash flows were projected over periods of 10 to 14
years utilizing a discount rate of 25% to 30%.
The
Embedatm
NDA was submitted to the FDA in June 2008. The success of the
project is dependent upon NDA approval by the FDA. The Company
currently believes it will obtain approval of the
Embedatm
NDA during 2009.
Oxycodone NT and Hydrocodone NT are long-acting opioids for the
treatment of moderate to severe chronic pain that are in the
early stages of clinical development. These products are
designed to resist certain common methods of misuse and abuse
associated with long-acting oxycodone and hydrocodone opioids
that are
F-15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
currently available. If the clinical development program is
successful, the Company would not expect to commercialize any
sooner than 2011. The estimated cost to complete the development
of Oxycodone NT and Hydrocodone NT is approximately
$35,000 each. The Company believes there is a reasonable
probability of completing these projects successfully, however
the success of the projects depends on the outcome of the
clinical development programs and approval by the FDA.
The following unaudited pro forma summary presents the financial
information as if the acquisition of Alpharma had occurred
January 1, 2008 for the year ended December 31, 2008
and on January 1, 2007 for the year ended December 31,
2007. These pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have
occurred had the acquisition been made on January 1, 2008
or January 1, 2007, nor are they indicative of future
results. The pro forma results for the years ended
December 31, 2008 and 2007 include the $590,000 in-process
research & development expense noted above.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues
|
|
$
|
2,221,423
|
|
|
$
|
2,671,685
|
|
Net (loss) income
|
|
|
(292,339
|
)
|
|
|
(471,784
|
)
|
Basic (loss) earnings per common share
|
|
|
(1.20
|
)
|
|
|
(1.94
|
)
|
Diluted (loss) earnings per common share
|
|
|
(1.20
|
)
|
|
|
(1.94
|
)
|
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. The
Consent Order required the Company to divest the rights to
Alpharmas branded oral long-acting opioid analgesic drug
Kadian®
to Actavis Elizabeth, L.L.C. In accordance with the Consent
Order, effective upon the acquisition of Alpharma, on
December 29, 2008, the Company divested the
Kadian®
product to Actavis. Actavis is entitled to sell
Kadian®
as a branded or generic product. Prior to such divestiture,
Actavis supplied
Kadian®
to Alpharma.
Actavis 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, shall exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis 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 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 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 and its affiliates for the
period from January 1, 2009 through June 30, 2010. As
of December 31, 2008 the Company has recorded a receivable
of $115,000 million, reflecting the present value of the
estimated future purchase price payments from Actavis.
F-16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2005, the Company entered into a strategic alliance
with Pain Therapeutics, Inc. to develop and commercialize
Remoxy®
and other opioid painkillers. On June 9, 2008, the Company,
together with Pain Therapeutics, Inc., submitted a New Drug
Application (NDA) for
Remoxy®
to the U.S. Food and Drug Administration (FDA).
Remoxy®
is a unique long-acting formulation of oral oxycodone with a
proposed indication for the management of moderate to severe
pain when a continuous, around-the-clock opioid analgesic is
needed for an extended period of time. This formulation uses the
Oradurtm
technology which provides a unique physical barrier that is
designed to provide controlled pain relief and resist certain
common methods used to extract the opioid more rapidly than
intended as can occur with currently available products.
The Company has paid the following milestone payments under its
alliance with Pain Therapeutics:
|
|
|
|
|
$15,750 during 2008 as a result of the acceptance by the FDA of
the NDA filing for
Remoxy®,
|
|
|
|
$5,100 during 2008 as a result of the acceptance by the FDA of
an investigational new drug application for the third opioid
painkiller under this alliance, and
|
|
|
|
$5,000 in 2006 as a result of the acceptance of an
investigational new drug application for the second opioid
painkiller in development under this alliance.
|
In addition, the Company could make additional milestone
payments in the future of up to $125,000 in cash based on the
successful clinical and regulatory development of
Remoxy®
and other opioid products that are designed to resist certain
common methods of misuse and abuse. This includes a $15,000 cash
payment upon the approval of
Remoxy®
by the FDA.
The Company is responsible for research and development expenses
related to its alliance with Pain Therapeutics subject to
certain limitations set forth in the agreement. After regulatory
approval and commercialization of
Remoxy®
or other opioid products developed through this alliance, the
Company will pay a royalty of 15% of cumulative net sales up to
$1,000,000 and 20% of cumulative net sales over $1,000,000. King
is also responsible for the payment of third-party royalty
obligations of Pain Therapeutics related to products developed
under this collaboration.
In connection with the strategic alliance with Pain
Therapeutics, the initial collaboration fee and acquisition
costs of $153,711 were classified as in-process research and
development. The value of the in-process research and
development project was expensed on the date of acquisition as
it had not received regulatory approval and had no alternative
future use. Pain Therapeutics filed an NDA in the second quarter
of 2008. In December 2008, Pain Therapeutics received a Complete
Response Letter from the FDA for the
Remoxy®
NDA, requiring additional non-clinical information to support
approval of
Remoxy®.
The Company is working with Pain Therapeutics to complete an
assessment of the Complete Response Letter and prepare a written
response. The Company, together with PTI, plan to meet with the
FDA during the second quarter of 2009 to discuss the response.
The Company believes there is a reasonable probability of
completing the project successfully. However, the success of the
project depends on regulatory approval and the ability to
successfully manufacture the product. The in-process research
and development is part of the branded prescription
pharmaceutical segment.
The Company determined Pain Therapeutics is a variable interest
entity, but the Company is not considered to be the primary
beneficiary of this entity. Therefore, in accordance with the
provisions of FIN No. 46, the Company has not
consolidated the financial statements of this entity into the
Companys consolidated financial statements.
In June 2008, the Company and CorePharma LLC (Core)
entered into a Product Development Agreement to collaborate in
the development of new formulations of metaxalone, which the
Company currently sells under the brand name
Skelaxin®.
Under the agreement, Core and the Company 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 the Company, and the
Company will grant Core a non-exclusive, royalty-free license to
use the
F-17
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
created intellectual property with any product not containing
metaxalone. Pursuant to the agreement, the Company made a
non-refundable cash payment to Core of $2,500, which was
recognized as in-process research and development expense in the
branded prescription pharmaceuticals segment in the second
quarter of 2008. The success of the project depends on the
completion of successful development activities and upon
approval by the FDA of any new formulations of metaxalone that
are developed as a result of the collaboration. The Company will
reimburse Core for the cost to complete the development
activities incurred under the agreement, which are expected to
be approximately $2,500, subject to a cap. In addition, the
Company is required to make milestone payments based on
achievement and success of specified development activities and
achievement of net sales thresholds relating to new formulations
of metaxalone that may result from the collaboration, plus
royalty payments based on net sales attributable to these new
formulations of metaxalone.
In October 2007, the Company and Acura Pharmaceuticals, Inc.
(Acura) entered into a License, Development and
Commercialization Agreement to develop and commercialize certain
opioid analgesic products utilizing Acuras proprietary
Aversion®
Technology in the United States, Canada and Mexico. The
agreement provides the Company an exclusive license to
Acurox®
Tablets (oxycodone HCl/niacin) and another undisclosed opioid
product utilizing Acuras
Aversion®
Technology. Products formulated with the
Aversion®
Technology have properties that potentially enable them to deter
certain common methods of prescription drug misuse and abuse,
including intravenous injection of dissolved tablets, nasal
snorting of crushed tablets and intentional swallowing of
excessive numbers of tablets. In addition, the agreement
provides the Company with an option to license all future opioid
analgesic products developed utilizing Acuras
Aversion®
Technology.
In May 2008 and December 2008, the Company exercised its option
for a third and fourth immediate-release opioid product under
its agreement with Acura. In connection with the exercise of the
options, the Company paid non-refundable option exercise fees to
Acura of $3,000 for each option. These amounts were expensed as
in-process research and development in the branded prescription
pharmaceuticals segment during 2008 as these projects had not
received regulatory approval and had no alternative future use.
The Company believes there is a reasonable probability of
completing the projects successfully, however the success of the
projects depends on completion of a successful clinical
development program and the FDAs approval to market the
product. The estimated cost to complete the projects at the
exercise of the applicable option was approximately $16,000 for
each project.
In June 2008, the Company, together with Acura, reported
positive top-line results from the pivotal Phase III
clinical trial evaluating
Acurox®
Tablets. Under the agreement, these results triggered a
milestone payment to Acura of $5,000 in the second quarter of
2008, which the Company recorded as research and development
expense. On December 30, 2008, an NDA for
Acurox®
Tablets was submitted to the FDA.
In October 2007, the Company sold its Rochester, Michigan
sterile manufacturing facility, some of its legacy products that
were manufactured there and the related contract manufacturing
business to JHP Pharmaceuticals, LLC (JHP) for
$91,663, less selling costs of $5,387, resulting in a loss of
$46,354. The companies also entered into a manufacturing and
supply agreement pursuant to which JHP provides certain fill and
finish manufacturing activities with respect to the
Companys hemostatic product,
Thrombin-JMI®.
The Company retained its stand-alone
Bicillin®
(sterile penicillin products) manufacturing facility, which is
also located in Rochester, Michigan.
In August 2004, the Company entered into a Collaborative
Development and Marketing Agreement (the Agreement)
with Palatin Technologies, Inc. (Palatin), to
jointly develop and, upon obtaining necessary regulatory
approvals, commercialize Palatins bremelanotide compound
for the treatment of male and female sexual dysfunction.
Pursuant to the terms of the Agreement, Palatin granted the
Company a co-exclusive license with Palatin to bremelanotide in
North America and an exclusive right to collaborate in the
licensing or sublicensing of bremelanotide with Palatin outside
North America.
F-18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2007, representatives of the FDA communicated serious
concerns about the lack of an acceptable benefit/risk ratio to
support the progression of the proposed bremelanotide program
into Phase III studies for erectile dysfunction
(ED). After reviewing the data generated in the
Phase I and II studies, the FDA questioned the overall
efficacy results and the clinical benefit of this product in
both the general and diabetic ED populations, and cited blood
pressure increases as its greatest safety concern.
In light of the FDAs comments, and after discussions with
Palatin, in September 2007, the Company provided notice to
Palatin that the Company was terminating the Agreement. The
termination became effective in December 2007.
At December 31, 2008, the Company holds
5,675,461 shares of common stock of Palatin. For additional
information, please see Note 15.
In May 2007, the Company entered into a Product Development
Agreement with Mutual Pharmaceutical Company
(Mutual) and United Research Laboratories
(United) to jointly research and develop one or more
improved formulations of metaxalone. Under this agreement, the
Company sought Mutuals expertise in developing improved
formulations of metaxalone, including certain improved
formulations Mutual developed prior to execution of this
agreement and access to Mutuals and Uniteds rights
in intellectual property pertaining to such formulations. The
Company paid $3,100 to Mutual for previously incurred
development expenses, which was recorded in the second quarter
of 2007 as in-process research and development in the branded
prescription pharmaceuticals segment. Development activities
under this agreement ceased in December 2007.
In September 2006, the Company entered into a definitive asset
purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to Ligands product
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. The Company completed its acquisition of
Avinza®
on February 26, 2007, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289,732, consisting of $289,332 in cash consideration and $400
for the assumption of a short-term liability. Additionally, the
Company incurred acquisition costs of $6,765. Of the cash
payments made to Ligand, $15,000 was set aside in an escrow
account to fund potential liabilities Ligand could later owe the
Company, of which $7,500 of the escrow funds was released to
Ligand in each of the third quarter of 2007 and the first
quarter of 2008.
As part of the transaction, the Company has agreed to pay Ligand
an ongoing royalty and assume payment of Ligands royalty
obligations to third parties. The royalty the Company pays to
Ligand consists of a 15% royalty during the first 20 months
after the closing date, 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 $200,000 or less the royalty
payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200,000 then the
royalty payment will be 10% of all net sales up to $250,000,
plus 15% of net sales greater than $250,000.
|
In connection with the transaction, in October 2006, the Company
entered into a loan agreement with Ligand for the amount of
$37,750. The principal amount of the loan was to be used solely
for the purpose of paying a specific liability related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. In January 2007, Ligand repaid the principal amount of
the loan of $37,750 and accrued interest of $883. Pursuant to
the terms of the loan agreement with Ligand, the Company forgave
the interest on the loan and repaid Ligand the interest at the
time of closing the transaction to acquire
Avinza®.
Accordingly, the Company has not recognized interest income on
the related note receivable.
F-19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
Intangible assets
|
|
$
|
285,700
|
|
Goodwill
|
|
|
7,997
|
|
Inventory
|
|
|
2,800
|
|
|
|
|
|
|
|
|
$
|
296,497
|
|
|
|
|
|
|
At the time of the acquisition, the intangible assets were
assigned useful lives of 10.75 years. The acquisition is
allocated to the branded prescription pharmaceuticals segment.
The goodwill recognized in this transaction is expected to be
fully deductible for tax purposes. The Company financed the
acquisition using available cash on hand.
In January 2007, the Company obtained an exclusive license to
certain hemostatic products owned by Vascular Solutions, Inc.
(Vascular Solutions), including products which the
Company markets as
Thrombi-Padtm
and
Thrombi-Gel®.
The license also includes a product the Company expects to
market as
Thrombi-Pastetm,
which is currently in development. Each of these products
includes the Companys
Thrombin-JMI®
topical hemostatic agent product as a component. Vascular
Solutions manufactures
Thrombi-Padtm
and
Thrombi-Gel®
for the Company and will manufacture
Thrombi-Pastetm.
Upon acquisition of the license, the Company made an initial
payment to Vascular Solutions of $6,000, a portion of which is
refundable in the event certain FDA approvals for some of these
products are not obtained. During the second quarter of 2007,
the Company made an additional milestone payment of $1,000. The
Company could make an additional milestone payment of $1,000.
In March 2006, the Company acquired the exclusive right to
market and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD (Allerex). Under the terms of the
agreements, the initial purchase price was $23,924, plus
acquisition costs of $682. As an additional component of the
purchase price, the Company will 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, the Company will increase intangible assets by
the amount of the accrual. As of December 31, 2008, the
Company has incurred a total of $8,740 for these earn-out
payments. The aggregate of these payments will not exceed
$13,164.
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
Intangible assets
|
|
$
|
23,985
|
|
Inventory
|
|
|
618
|
|
Fixed assets
|
|
|
3
|
|
|
|
|
|
|
|
|
$
|
24,606
|
|
|
|
|
|
|
At the time of the acquisition, the intangible assets were
assigned useful lives of 9.8 years. The assets acquired and
liabilities assumed are recorded in the Meridian Auto-Injector
segment. The Company financed the acquisition using available
cash on hand.
In February 2006, the Company entered into a collaboration with
Arrow International Limited and certain of its affiliates,
excluding Cobalt Pharmaceuticals, Inc. (collectively,
Arrow), to commercialize one or more novel
formulations of ramipril, the active ingredient in the
Companys
Altace®
product. Under a series of agreements, Arrow granted King rights
to certain current and future New Drug Applications regarding
novel formulations of ramipril and intellectual property,
including patent rights and technology licenses relating to
these novel formulations.
Upon execution of the agreements, King made an initial payment
to Arrow of $35,000. During the fourth quarter of 2006 and the
first quarter and second quarters of 2007, the Company made
additional payments of $25,000 in each of the three quarters to
Arrow.
F-20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the agreement with Arrow, the Company
recognized the above payments and future payments totaling
$110,000 as in-process research and development expense during
2006. This amount was expensed as in-process research and
development as the project had not received regulatory approval
and had no alternative future use. The in-process research and
development project was recorded in the branded prescription
pharmaceutical segment. This project included a New Drug
Application (NDA) filed by Arrow for a tablet
formulation of ramipril in January 2006 (the Ramipril
Application). At the time of the acquisition, the success
of the project was dependent on additional development
activities and FDA approval. The FDA approved the Ramipril
Application on February 27, 2007. Arrow granted the Company
an exclusive option to acquire their entire right, title and
interest to the Ramipril Application or any future filed amended
Ramipril Application for the amount of $5,000. In April 2007,
the Company exercised its option and paid $5,000 to Arrow. The
Company does not currently anticipate any future revenues
associated with its rights to these Ramipril formulations.
In June 2000, the Company entered into a Co-Promotion Agreement
with Wyeth to promote
Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the
Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee of
$75,000 to King, which was classified as a liability and is
being amortized over the term of the agreement as amended. In
connection with the Co-Promotion Agreement, the Company agreed
to pay Wyeth a promotional fee based on annual net sales of
Altace®.
In July 2006, the Company entered into an Amended and Restated
Co-Promotion Agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®
which extended the term to December 31, 2010. Effective
January 1, 2007, the Company assumed full responsibility
for selling and marketing
Altace®.
For the full 2006 year, the Wyeth sales force co-promoted
the product with King and Wyeth shared in the marketing
expenses. Under the Amended Co-Promotion Agreement, the Company
will pay or has paid Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2006, 15% of
Altace®
net sales up to $165,000, 42.5% of
Altace®
net sales in excess of $165,000 and less than or equal to
$465,000, and 52.5% of
Altace®
net sales that are in excess of $465,000 and less than or equal
to $585,000.
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178,500.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134,000.
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84,500.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5,000.
|
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year.
|
|
10.
|
Intangible
Assets and Goodwill
|
Intangible assets consist primarily of patents, licenses,
trademarks and product rights. A summary of the gross carrying
amount, accumulated amortization and net book value is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1,605,910
|
|
|
$
|
1,339,257
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
671,691
|
|
|
|
558,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
934,219
|
|
|
$
|
780,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for the years ended December 31, 2008,
2007 and 2006 was $112,446, $132,138 and $105,764, respectively.
Estimated annual amortization expense for intangible assets
owned by the Company at December 31, 2008 for each of the
five succeeding fiscal years is as follows:
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
Amount
|
|
|
2009
|
|
$
|
152,273
|
|
2010
|
|
|
108,462
|
|
2011
|
|
|
71,647
|
|
2012
|
|
|
71,647
|
|
2013
|
|
|
71,647
|
|
The table above includes the effect of a
Skelaxin®
subsequent event. Please see Note 27.
During 2008, primarily as a result of a decline in end-user
demand for
Synercid®,
the Company lowered its sales forecast for this product, which
decreased the estimated undiscounted future cash flows
associated with the
Synercid®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $39,630 during 2008 to adjust the carrying value of
the
Synercid®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Synercid®
based on its estimated discounted future cash flows.
In January 2008, the Company entered into an agreement with Core
providing Core with the right to launch an authorized generic
version of
Skelaxin®
pursuant to a license in December 2012, or earlier under certain
conditions. As a result, the Company decreased the estimated
remaining useful life of Skelaxin.
In December 2007, the Companys 722 Patent that
covered the Companys
Altace®
product was invalidated by the Circuit Court. For additional
information please see Note 3. As a result of the
invalidation of the 722 Patent, the Company undertook an
analysis of its potential effect on future net sales of
Altace®.
Based upon that analysis, the Company reduced the estimated
remaining useful life of this product and forecasted net sales.
This decrease in estimated remaining useful life and forecasted
net sales reduced the estimated undiscounted future cash flows
associated with the
Altace®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $146,444 during 2007 to reflect the estimated fair
value of these assets. The Company determined the fair value of
these assets based on estimated discounted future cash flows.
During the second quarter of 2007, the Company made the decision
to no longer pursue the development of a new formulation of
Intal®
utilizing hydroflouroalkane as a propellant. As a result, the
Company lowered its future sales forecast for this product in
the second quarter of 2007 and decreased the estimated remaining
useful life of the product. During the fourth quarter of 2006,
the Company lowered its future sales forecast for
Intal®
and
Tilade®
and decreased the estimated remaining useful life of the
products as a result of prescriptions not meeting expectations.
These decreases reduced the estimated undiscounted future cash
flows associated with the
Intal®
and
Tilade®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded intangible asset impairment
charges of $29,259 during the second quarter of 2007 and $47,563
during the fourth quarter of 2006 to adjust the carrying value
of
Intal®
and
Tilade®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Intal®
and
Tilade®
based on estimated discounted future cash flows.
Altace®,
Intal®
Tilade®
and
Synercid®
are included in the Companys branded prescription
pharmaceuticals reporting segment.
As of December 31, 2008, the net intangible assets
associated with
Synercid®
totals approximately $29,008. The Company believes that these
intangible assets are not currently impaired based on estimated
F-22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
undiscounted cash flows associated with these assets. However,
if the Companys current estimates regarding future cash
flows adversely change, the Company may have to reduce the
estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
Goodwill at December 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
|
|
|
Animal Health
|
|
|
Meridian
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Goodwill at December 31, 2007
|
|
$
|
20,740
|
|
|
$
|
|
|
|
$
|
108,410
|
|
|
$
|
129,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Alpharma
|
|
|
237,352
|
|
|
|
84,046
|
|
|
|
|
|
|
|
321,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2008
|
|
$
|
258,092
|
|
|
$
|
84,046
|
|
|
$
|
108,410
|
|
|
$
|
450,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain office and manufacturing equipment
and automobiles under non-cancelable operating leases with terms
from one to ten years. Estimated future minimum lease payments
as of December 31, 2008 for leases with initial or
remaining terms in excess of one year are as follows:
|
|
|
|
|
2009
|
|
$
|
14,489
|
|
2010
|
|
|
12,536
|
|
2011
|
|
|
12,268
|
|
2012
|
|
|
12,428
|
|
2013
|
|
|
12,546
|
|
Thereafter
|
|
|
14,634
|
|
Lease expense for the years ended December 31, 2008, 2007
and 2006 was approximately $9,996, $13,182 and $12,610,
respectively.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Rebates
|
|
$
|
79,353
|
|
|
$
|
117,199
|
|
Accrued co-promotion fees
|
|
|
3,057
|
|
|
|
32,720
|
|
Product returns
|
|
|
33,471
|
|
|
|
32,860
|
|
Chargebacks
|
|
|
9,965
|
|
|
|
11,120
|
|
Royalties
|
|
|
39,003
|
|
|
|
41,397
|
|
Restructuring
|
|
|
47,878
|
|
|
|
24,399
|
|
Accrued bonuses
|
|
|
41,827
|
|
|
|
35,969
|
|
Alpharma stock compensation
|
|
|
51,201
|
|
|
|
|
|
Other
|
|
|
105,733
|
|
|
|
80,940
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,488
|
|
|
$
|
376,604
|
|
|
|
|
|
|
|
|
|
|
F-23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Convertible senior notes
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Senior secured revolving credit facility
|
|
|
425,000
|
|
|
|
|
|
Senior secured term facility
|
|
|
192,042
|
|
|
|
|
|
Alpharma convertible senior notes
|
|
|
385,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,402,269
|
|
|
|
400,000
|
|
Less current portion
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
963,222
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
Convertible
Senior Notes
During the first quarter of 2006, the Company issued $400,000 of
11/4% Convertible
Senior Notes due April 1, 2026 (Notes). The
Notes are unsecured obligations and are guaranteed by each of
the Companys U.S. subsidiaries, other than Alpharma and
its subsidiaries, on a joint and several basis. The Company
expects Alpharma and its U.S. subsidiaries to become guarantors
during the first quarter of 2009. The Notes accrue interest at
an initial rate of
11/4%.
Beginning with the six-month interest period that commences on
April 1, 2013, the Company will pay additional interest
during any six-month interest period if the average trading
price of the 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 Notes. Interest is payable on April 1
and October 1 of each year, beginning October 1, 2006.
On or after April 5, 2013, the Company may redeem for cash
some or all of the Notes at any time at a price equal to 100% of
the principal amount of the Notes to be redeemed, plus any
accrued and unpaid interest, and liquidated damages, if any, to
but excluding the date fixed for redemption. Holders may require
the Company to purchase for cash some or all of their Notes on
April 1, 2013, April 1, 2016 and April 1, 2021,
or upon the occurrence of a fundamental change (such as a change
of control or a termination of trading), at 100% of the
principal amount of the Notes to be purchased, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the purchase date.
Prior to April 1, 2012, the Notes are convertible under the
following circumstances:
|
|
|
|
|
if the price of the Companys common stock reaches a
specified threshold during specified periods,
|
|
|
|
if the Notes have been called for redemption, or
|
|
|
|
if specified corporate transactions or other specified events
occur.
|
The Notes are convertible at any time on and after April 1,
2012, until the close of business on the business day
immediately preceding maturity. Subject to certain exceptions,
the Company will deliver cash and shares of the Companys
common stock, as follows: (i) an amount in cash equal to
the lesser of (a) the principal amount of Notes surrendered
for conversion and (b) the product of the conversion rate
and the average price of the Companys common stock (the
conversion value), and (ii) if the conversion
value is greater than the principal amount, a specified amount
in cash or shares of the Companys common stock, at the
Companys election. The initial conversion price is
approximately $20.83 per share of common stock. If certain
corporate transactions occur on or prior to April 1, 2013,
the Company will increase the conversion rate in certain
circumstances.
The Company has reserved 23,732,724 shares of common stock
in the event the Notes are converted into shares of the
Companys common stock.
F-24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the issuance of the Notes, the Company
incurred approximately $10,680 of deferred financing costs that
are being amortized over seven years.
Senior
Secured Revolving Credit Facility
On April 23, 2002, the Company established a $400,000
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new $475,000
five-year Senior Secured Revolving Credit Facility, as amended
on December 5, 2008 (the Revolving Credit
Facility). The Revolving Credit Facility matures in April
2012 or on September 30, 2011 if the Convertible Senior
Notes have not been refinanced. In connection with the
Companys acquisition of Alpharma on December 29,
2008, the Company borrowed $425,000 in principal under the
Revolving Credit Facility. The Revolving Credit Facility
requires the Company to pledge as collateral 100% of the equity
of the Companys U.S. subsidiaries and 65% of the equity
of any material foreign subsidiaries. The Companys
obligations under this facility are unconditionally guaranteed
on a senior basis by all of Kings U.S. subsidiaries.
Under the Revolving Credit Facility, the Company is required to
make prepayments equal to 50% of the Companys annual
excess cash flows (as defined in the related credit agreement),
which can be reduced to 25% upon the occurrence of certain
events. In addition, the Company is 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. These mandatory prepayments will be allocated
among the Revolving Credit Facility and the Term Facility
described below in accordance with their credit agreements and
will permanently reduce the commitments under the Revolving
Credit Facility. However, commitments under the Revolving Credit
Facility, would not be reduced in any event below
$150.0 million.
In addition, under the terms of the Revolving Credit Facility,
the credit commitments will be automatically and permanently
reduced, on a quarterly basis, to the amounts set forth below:
|
|
|
|
|
December 31, 2009
|
|
$
|
403,750
|
|
December 31, 2010
|
|
$
|
308,750
|
|
December 31, 2011
|
|
$
|
213,750
|
|
March 31, 2012
|
|
$
|
190,000
|
|
The Company has the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Revolving
Credit Facility.
The Companys borrowings under the Revolving Credit
Facility bear interest at annual rates that, at the
Companys option, will be either:
|
|
|
|
|
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) an
applicable percentage of 4.0%; or
|
|
|
|
an adjusted LIBO 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) an
applicable percentage of 5.0%.
|
Interest on the Companys borrowings are 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. The Company is 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. The Company is 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.
F-25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Revolving Credit Facility requires the Company to meet
certain financial tests, including, without limitation:
|
|
|
|
|
maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50 to 1 to 3.25 to 1 (depending on dates and
the occurrence of certain events relating to certain
patents); and
|
|
|
|
maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75 to 1 to 4.00 to 1 (depending on
dates and the occurrence of certain events relating to certain
patents).
|
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 the Company to maintain
hedging agreements that will fix the interest rates on 50% of
the Companys outstanding long term debt beginning
90 days after the amendment to the facility for a period of
two years.
The remaining undrawn committed amount under the Revolving
Credit Facility after giving effect to the borrowing described
above, and after giving effect to outstanding letters of credit
totaling approximately $12,105, is approximately $37,895.
In connection with the borrowings, the Company incurred
approximately $21,620 of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date based on the automatic commitment reductions
described above.
Senior
Secured Term Facility
On December 29, 2008, the Company entered into a $200,000
term loan credit agreement, comprised of a four-year senior
secured loan facility (the Term Facility) with a
maturity date of December 28, 2012. The Company borrowed
$200,000 under the Term Facility and received proceeds of
$192,000, net of the discount at issuance. The Term Facility
requires the Company to pledge as collateral 100% of the equity
of the Companys U.S. subsidiaries and 65% of the equity of
any material foreign subsidiaries. The Companys
obligations under this facility are unconditionally guaranteed
on a senior basis by all of Kings U.S. subsidiaries.
Under the terms of the Term Facility, the Company is required to
repay the borrowings in equal quarterly payments that total the
following annual amounts:
|
|
|
|
|
2009
|
|
$
|
30,000
|
|
2010
|
|
|
40,000
|
|
2011
|
|
|
40,000
|
|
2012
|
|
|
90,000
|
|
The Company has the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Term Facility.
Under the Term Facility, the Company is required to make
prepayments equal to 50% of the Companys annual excess
cash flows (as defined in the related credit agreement), which
can be reduced to 25% upon the
F-26
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occurrence of certain events. In addition, the Company is
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. These mandatory
prepayments will be allocated among the Term Facility and the
Revolving Credit Facility in accordance with these agreements
and will reduce on a pro-rata basis any remaining scheduled
payments.
The Companys borrowings under the Term Facility bear
interest at annual rates that, at the Companys option,
will be either:
|
|
|
|
|
5.00% plus the Adjusted LIBO Rate or
|
|
|
|
4.00% plus the Alternate Base Rate.
|
The Alternate Base Rate is the highest of
(x) the federal funds rate plus 0.50%, (y) the prime
or base commercial lending rate, and (z) the Adjusted LIBO
Rate for a one-month interest period plus 1.00%. The Adjusted
LIBO Rate is the higher of (x) 3.00% and (y) the rate
per annum, determined by the administrative agent under the Term
Facility, in accordance with its customary procedures, at which
dollar deposits for applicable periods are offered to major
banks in the London interbank market, adjusted by the reserve
percentage prescribed by governmental authorities as determined
by such administrative agent.
The Term Facility requires the Company to meet certain financial
tests, including, without limitation:
|
|
|
|
|
maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50 to 1 to 3.25 to 1 (depending on dates and
the occurrence of certain events relating to certain
patents); and
|
|
|
|
maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75 to 1 to 4.00 to 1 (depending on
dates and the occurrence of certain events relating to certain
patents).
|
In addition, the Term 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
Term 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 Term Facility requires the Company to maintain hedging
agreements that will fix the interest rates on 50% of the
Companys outstanding long term debt beginning 90 days
after the borrowing under the facility for a period of two years.
In connection with the borrowings, the Company incurred
approximately $8,456 of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date based on the repayment schedule described above.
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
F-27
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Thus the fair
value of the Alpharma Notes at the time of the acquisition was
$385,227.
As of December 31, 2008, the Company had $385,227 of
Alpharma Notes included in current portion of long-term debt in
the accompanying financial statements. See Note 27 for
information about the subsequent redemption of the Alpharma
Notes.
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Income taxes payable
|
|
$
|
56,375
|
|
|
$
|
42,353
|
|
Restructuring
|
|
|
21,124
|
|
|
|
|
|
Pension and postretirement benefits
|
|
|
11,839
|
|
|
|
|
|
Other
|
|
|
20,684
|
|
|
|
20,627
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,022
|
|
|
$
|
62,980
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
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 totaled $940,212 as of
December 31, 2008, with approximately $242,800 located
outside the U.S. Cash and cash equivalents include institutional
money market funds and bank time deposits. As of
December 31, 2008, the Companys cash equivalents
consisted of money market funds and $58,158 in time deposits. As
of December 31, 2007, the Companys cash equivalents
consisted solely of money market funds. There were no cumulative
unrealized holding gains or losses associated with these money
market funds as of December 31, 2008 and December 31,
2007.
Derivatives. As a result of the acquisition of
Alpharma, at December 31, 2008, the Company had forward
foreign exchange contracts outstanding with a notional amount of
approximately $291,218. These contracts called for the exchange
of Scandinavian and other European currencies and in some cases
the U.S. Dollar to meet commitments in or sell cash flows
generated in non-functional currencies. All outstanding
contracts will expire in the first quarter of 2009 and the
unrealized gains and losses are not material. Counterparties to
these derivative agreements are major financial institutions.
Management believes the risk of incurring losses related to
credit risk is remote.
Marketable Securities. As of December 31,
2008 and December 31, 2007, the Companys investment
in marketable securities consisted solely of Palatin
Technologies, Inc. common stock with a cost basis of $511 and
$1,135, respectively. During 2007, the Company determined that
an other-than-temporary impairment had occurred on this
investment and recorded a charge of $11,107. The Company also
recorded an other-than-temporary impairment of $484 during 2007
on its investment in warrants to purchase common stock. All of
the Companys warrants to purchase Palatin common stock
have now expired. There were no cumulative unrealized holding
gains or losses in these investments as of December 31,
2008 and December 31, 2007.
F-28
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments in Debt Securities. 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.
The Company classifies auction rate securities as
available-for-sale at the time of purchase in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Temporary gains or losses are included in
accumulated other comprehensive income (loss) on the
Consolidated Balance Sheets. Other-than-temporary gains or
losses are included in income (expense) on the Consolidated
Statement of Operations.
As of December 31, 2008 and December 31, 2007, the par
value of the Companys investments in debt securities was
$417,075 and $1,344,980, 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.
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 funds associated with failed
auctions will not be accessible until a successful auction
occurs, the issuer calls or restructures the underlying
security, the underlying security matures or a buyer outside the
auction process emerges.
Although the Company has realized no loss of principal with
respect to its investments in debt securities, as of
December 31, 2008, there were cumulative unrealized holding
losses of $56,786 associated with these investments. The Company
has recorded $45,311 of the unrealized holding losses in
accumulated other comprehensive income on the Consolidated
Balance Sheets, as the Company believes the decline is temporary
and it is probable that the par amount of these auction rate
securities will be collectible under their contractual terms.
During the fourth quarter of 2008 the Company accepted an offer
from UBS Financial Services, Inc. (UBS) providing
the Company the right to sell certain auction rate securities
with a par value of $40,650 to UBS during the period from
June 30, 2010 to July 2, 2012 at par value. The
Company has elected to account for this right at fair value in
accordance with SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. 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. The right to sell the auction rate securities to UBS at
par was valued at $4,024 and has been reflected as an unrealized
gain in other income (expense) in the accompanying Consolidated
Statement of Operations. In addition, the Company transferred
the classification of the auction rate securities that are
included in this right from available-for sale securities to
trading securities and therefore recognized the unrealized
losses related to these securities of $4,643 in other income
(expense) on the accompanying Consolidated Statement of
Operations.
In addition, the Company has recognized unrealized losses of
$6,832 in other income (expense) on the accompanying
Consolidated Statement of Operations for a municipal bond for
which the holding losses were determined to be other than
temporary. There were no cumulative unrealized holding gains or
losses as of December 31, 2007.
As of December 31, 2008, the Company has classified $6,441
of auction rate securities as current assets and $353,848 as
long-term assets.
Effective January 1, 2008, the Company adopted SFAS
No. 157, Fair Value Measurements
(SFAS No. 157), which provides a
framework for measuring fair value under Generally Accepted
Accounting Principles and expands disclosures about fair value
measurements. In February 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
provides a one-year deferral on the effective date of
SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at
F-29
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
least annually. Therefore, the Company has adopted the
provisions of SFAS No. 157 with respect to financial
assets and financial liabilities only. The Company is in the
process of evaluating the effect of SFAS No. 157 as it
relates to its non-financial assets and non-financial
liabilities. The Company also adopted SFAS No. 159 on
January 1, 2008. SFAS No. 159 allows an entity
the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and
liabilities on a
contract-by-contract
basis.
The following table summarizes the Companys assets which
are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
833,653
|
|
|
$
|
833,653
|
|
|
$
|
|
|
|
$
|
|
|
Marketable Securities
|
|
|
511
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
|
|
360,289
|
|
|
|
|
|
|
|
2,400
|
|
|
|
357,889
|
|
Right to Sell Debt Securities
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,198,477
|
|
|
$
|
834,164
|
|
|
$
|
2,400
|
|
|
$
|
361,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
|
|
$
|
2,582
|
|
|
$
|
|
|
|
$
|
2,582
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2008.
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 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. As of December 31, 2008,
the Company assumed a weighted average discount rate of 5.5% and
an expected term of approximately 3 to 5 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. 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.
F-30
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable
|
|
|
|
Inputs (Level 3)
|
|
|
|
Investments in Debt
|
|
|
|
Securities
|
|
|
Beginning balance, December 31, 2007
|
|
$
|
|
|
Transfers in and/or out of Level 3
|
|
|
774,099
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
Included in earnings
|
|
|
(11,475
|
)
|
Included in other comprehensive income (loss)
|
|
|
(45,311
|
)
|
Settlements
|
|
|
(355,400
|
)
|
|
|
|
|
|
Ending balance, December 31, 2008
|
|
$
|
361,913
|
|
|
|
|
|
|
|
|
16.
|
Pension
Plans and Postretirement Benefits
|
On December 29, 2008, the Company completed its acquisition
of Alpharma (see Note 9). The Company maintains two
qualified noncontributory, defined benefit pension plans
covering its U.S. (domestic) employees at its Alpharma
subsidiary: the Alpharma Inc. Pension Plan, which was frozen
effective December 31, 2006, and the previously frozen
Faulding Inc. Pension Plan. The benefits payable from these
plans are based on years of service and the employees
highest consecutive five years compensation during the last ten
years of service. The Companys funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. Ideally, the Plan assets will approximate
the accumulated benefit obligation (ABO). The plan
assets are held by two custodians and managed by two investment
managers. Plan assets are invested in equities, government
securities and bonds. The asset allocation for the Alpharma Inc.
Pension Plan was 29% equities and 71% debt securities at the end
of 2008.
The Company also has an unfunded postretirement medical and
nominal life insurance plan (postretirement
benefits) covering certain domestic employees who were
eligible as of January 1, 1993. The plan has not been
extended to any additional employees. Retired eligible employees
are required to make premium contributions for coverage as if
they were active employees.
The Company has an unfunded benefit for selected executives
(Supplemental Pension Plan) that provides for the
payment of additional benefits upon termination of employment or
death.
The Company uses a measurement date of December 31 for its
pension plans and other postretirement plans. For both the
pension and other postretirement benefit plans, the discount
rate is evaluated on the measurement date and modified to
reflect the prevailing market rate of a portfolio of
high-quality fixed-income debt instruments that would provide
the future cash flows needed to pay the benefits included in the
benefit obligation as they come due.
F-31
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Funded
Status
The funded status at December 31, 2008, and the related
amounts recognized on the Consolidated Balance Sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
Funded status, end of year:
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
45,787
|
|
|
$
|
|
|
Benefit obligations
|
|
|
(51,081
|
)
|
|
|
(6,816
|
)
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(5,294
|
)
|
|
$
|
(6,816
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet
consist of:
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
(12
|
)
|
|
$
|
(259
|
)
|
Noncurrent liability
|
|
|
(5,282
|
)
|
|
|
(6,557
|
)
|
|
|
|
|
|
|
|
|
|
Liability recognized
|
|
$
|
(5,294
|
)
|
|
$
|
(6,816
|
)
|
|
|
|
|
|
|
|
|
|
The projected benefit obligation and fair value of plan assets
for pension plans with a projected benefit obligation in excess
of plan assets at December 31, 2008 were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Projected Benefit Obligation in Excess of Plan Assets
|
|
|
|
|
Projected benefit obligation, end of year
|
|
$
|
(51,081
|
)
|
Fair value of plan assets, end of year
|
|
|
45,787
|
|
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with an
accumulated benefit obligation in excess of plan assets at
December 31, 2008 were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Accumulated Benefit Obligation in Excess of Plan Assets
|
|
|
|
|
Projected benefit obligation, end of year
|
|
$
|
(51,081
|
)
|
Accumulated benefit obligation, end of year
|
|
|
(51,081
|
)
|
Fair value of plan assets, end of year
|
|
|
45,787
|
|
A one-percentage-point change in the assumed health care cost
trend rate would have had the following effect on the
accumulated postretirement benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Accumulated postretirement benefit obligation change
|
|
$
|
923
|
|
|
$
|
(772
|
)
|
Expected
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Expected employer contributions in 2009
|
|
$
|
12
|
|
|
$
|
259
|
|
F-32
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected
Benefit Payments
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
2009
|
|
$
|
1,143
|
|
|
$
|
259
|
|
2010
|
|
|
1,268
|
|
|
|
279
|
|
2011
|
|
|
1,470
|
|
|
|
300
|
|
2012
|
|
|
1,730
|
|
|
|
322
|
|
2013
|
|
|
1,949
|
|
|
|
380
|
|
2014 - 2018
|
|
|
13,115
|
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefit
|
|
|
Benefit
|
|
|
|
Obligation
|
|
|
Obligation
|
|
|
|
2008
|
|
|
2008
|
|
|
Weighted-average assumptions used to
determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
Health care cost trend rate
|
|
|
|
|
|
|
|
|
Initial Rate
|
|
|
N/A
|
|
|
|
8
|
%
|
Ultimate Rate
|
|
|
N/A
|
|
|
|
5
|
%
|
Number of years to ultimate rate
|
|
|
N/A
|
|
|
|
6
|
|
The net income tax expense from continuing operations is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
83,902
|
|
|
$
|
144,655
|
|
|
$
|
169,130
|
|
State
|
|
|
8,369
|
|
|
|
5,453
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
92,271
|
|
|
$
|
150,108
|
|
|
$
|
173,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
37,578
|
|
|
$
|
(83,690
|
)
|
|
$
|
(36,281
|
)
|
State
|
|
|
1,510
|
|
|
|
1,182
|
|
|
|
(1,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
$
|
39,088
|
|
|
$
|
(82,508
|
)
|
|
$
|
(37,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
131,359
|
|
|
$
|
67,600
|
|
|
$
|
135,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the difference between the federal statutory
tax rate and the effective income tax rate as a percentage of
income from continuing operations before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
(4.9
|
)
|
|
|
2.7
|
|
|
|
0.7
|
|
Research and development in process upon acquisition
|
|
|
(102.4
|
)
|
|
|
|
|
|
|
|
|
Charitable donations
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Domestic Manufacturing Deduction
|
|
|
2.4
|
|
|
|
(3.7
|
)
|
|
|
(1.2
|
)
|
Tax-exempt interest income
|
|
|
4.3
|
|
|
|
(5.4
|
)
|
|
|
(2.0
|
)
|
Other
|
|
|
0.5
|
|
|
|
(1.6
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(65.1
|
)%
|
|
|
27.0
|
%
|
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued expenses and reserves
|
|
$
|
93,934
|
|
|
$
|
98,483
|
|
Net operating losses
|
|
|
300,057
|
|
|
|
1,824
|
|
Intangible assets
|
|
|
295,400
|
|
|
|
353,250
|
|
Charitable contribution carryover
|
|
|
|
|
|
|
3,576
|
|
Other
|
|
|
41,843
|
|
|
|
31,812
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
731,234
|
|
|
|
488,945
|
|
Valuation allowance
|
|
|
(276,416
|
)
|
|
|
(9,094
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
454,818
|
|
|
|
479,851
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(57,530
|
)
|
|
|
(20,069
|
)
|
Other
|
|
|
(4,053
|
)
|
|
|
(15,944
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(61,583
|
)
|
|
|
(36,013
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
393,235
|
|
|
$
|
443,838
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) on January 1, 2007. As a result
of the implementation of FIN 48, the Company recorded a
$1,523 increase to the net liability for unrecognized tax
positions, which was recorded as a reduction to the opening
balance of retained earnings as of January 1, 2007. The
total gross liability under FIN 48, as of January 1,
2007, was $44,291, including interest and penalties of $4,842
and $2,702, respectively.
As of December 31, 2008, the total gross liability under
FIN 48 was $61,866. The total amount of unrecognized tax
benefits excluding the impact of penalties and interest as of
December 31, 2008 was $37,336, all of which would benefit
the effective tax rate if recognized. In accordance with its
accounting policy, the Company recognizes accrued interest and
penalties related to unrecognized tax benefits as a component of
tax expense. During the year ended December 31, 2008, the
Company recognized a reduction of approximately $334 in interest
and penalties. The Companys Consolidated Balance Sheet as
of December 31, 2008 includes interest and penalties of
$8,062 and $3,858, respectively.
F-34
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Liability For
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
Balance at January 1, 2007
|
|
$
|
36,748
|
|
Additions based on tax positions of the current year
|
|
|
5,279
|
|
Additions for tax provisions of prior years
|
|
|
51
|
|
Reduction for expiration of applicable Statute of Limitations
|
|
|
(7,568
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
34,510
|
|
|
|
|
|
|
Additions based on tax positions of the current year
|
|
|
4,017
|
|
Additions for tax positions of prior years
|
|
|
4,101
|
|
Reduction for expiration of applicable Statute of Limitations
|
|
|
(4,195
|
)
|
Alpharma acquisition
|
|
|
11,514
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
49,947
|
|
|
|
|
|
|
Included in the balance of gross unrecognized tax benefits at
December 31, 2008 was $7,484 related to tax positions for
which it is reasonably possible that the total amounts could
significantly change during the next twelve months. This amount
is comprised primarily of items related to expiring statutes.
As of December 31, 2008, the Company is subject to
U.S. Federal income tax examinations for the tax years 2005
through 2007, and to
non-U.S. income
tax examinations for the tax years of 2002 through 2007. In
addition, the Company is subject to state and local income tax
examinations for the tax years 2002 through 2007.
The Company has $111,625 of federal net operating losses and
$9,746 of tax credit carryforwards which expire between 2021 and
2028. These carryforwards are subject to limitations under
Internal Revenue Code Section 382. The Company has foreign
net operating losses of $825,744 which expire from 2009 through
an indefinite period. The Company also has state net operating
loss carryforwards of $378,302 which will expire between 2009
and 2028. A valuation allowance has been provided for the loss
carryforwards for which it is more likely than not that the
related deferred tax assets will not be fully realized.
Additionally, a valuation allowance has been provided against
certain state deferred tax assets where it is more likely than
not that the asset will not be fully realized.
As of December 31, 2008, the Company had an aggregate of
$218,500 of unremitted earnings of foreign subsidiaries
that are intended to be permanently reinvested for continued use
in foreign operations and that, if distributed, would result in
taxes of approximately $62,775.
The Company sponsors a defined contribution employee retirement
savings 401(k) plan that covers all employees over 21 years
of age. As a result of the acquisition of Alpharma on
December 29, 2008, the employees of Alpharma have been
enrolled in the Companys plan. The plan allows for
employees contributions, which are matched by the Company
up to a specific amount under provisions of the plan. Company
contributions during the years ended December 31, 2008,
2007 and 2006 were $6,542, $7,806 and $5,904, respectively. The
plan also provides for discretionary profit-sharing
contributions by the Company. There were no discretionary
profit-sharing contributions during the years ended
December 31, 2008, 2007 and 2006.
F-35
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Commitments
and Contingencies
|
Intellectual
Property Matters
Altace®
Lupin Ltd. (Lupin) filed an ANDA with the FDA
seeking permission to market a generic version of
Altace®.
In addition to its Abbreviated New Drug Application
(ANDA), Lupin filed a Paragraph IV
certification challenging the validity and infringement of the
722 patent, a composition of matter patent covering
Altace®,
and seeking to market its generic version of
Altace®
before expiration of the 722 patent. The companies
litigated the matter and the court ultimately invalidated the
Companys 722 patent. On June 9, 2008, Lupin
received approval from the FDA to market its generic ramipril
product.
The Company was previously involved in patent infringement
litigation with Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, regarding an ANDA it filed with
the FDA seeking permission to market a generic version of
Altace®.
The parties submitted a joint stipulation of dismissal on
April 4, 2006 and the Court granted dismissal. Following
the courts decision in the Companys litigation with
Lupin, Cobalt launched a generic substitute for
Altace®
in December 2007. A number of other competitors launched generic
substitutes for
Altace®
in June 2008.
The Company has received civil investigative demands
(CIDs) for information from the FTC. The CIDs
required the Company to provide information related to the
Companys collaboration with Arrow International Limited
(Arrow) to develop novel formulations of
Altace®,
the dismissal without prejudice of the Companys patent
infringement litigation against Cobalt under the Hatch-Waxman
Act of 1984 and other information. Arrow and Cobalt are
affiliates of one another. The Company is cooperating with the
FTC in this investigation.
Skelaxin®
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(Core) and Mutual Pharmaceutical Co., Inc.
(Mutual) each filed an ANDA with the 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 Core each filed
Paragraph IV certifications against the 128 and
102 patents alleging noninfringement, invalidity and
unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the 102 patent
alleging noninfringement 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 Core 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 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 Core case. In January
2008, the Company entered into an agreement with CorePharma
providing, among other things, Core with 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 Core
submitted a joint stipulation of dismissal without prejudice. On
January 15, 2008, the Court entered an order dismissing the
case without prejudice.
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
F-36
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 on January 10, 2005 and has not
expired. The Court lifted the tolling of the
30-month
stay as of April 30, 2007. Although the Court has reserved
judgment on the length of the tolling period, the stay should
not expire until early August 2009 unless the Court rules
otherwise. Eon Labs asked for a determination of the length of
the tolling period in a March 14, 2008 letter to the Court.
The Court declined to make any determination. 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 June 6, 2008, the
Company responded to Eon Labs motion for summary judgment
on the issue of validity. On May 8, 2008, Eon Labs filed
amended pleadings. On May 22, 2008, the Company moved to
dismiss certain defenses and counterclaims. 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 Company plans to appeal, upon the entry of an
appropriate judgment, and 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
Inc. (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 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, who 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.
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 have filed
responses and
F-37
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $446,243 in 2008. As of December 31, 2008, the Company
had net intangible assets related to
Skelaxin®
of $116,979. If a generic version of
Skelaxin®
enters the market, 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 materially adversely affected. See Note 27
for information regarding a
Skelaxin®
subsequent event.
Avinza®
Actavis, Inc. (Actavis) filed an ANDA with the FDA,
seeking permission to market a generic version of
Avinza®.
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
United States 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, and fact discovery
has formally begun.
The Company intends to vigorously defend its rights under the
339 patent to the full extent of the law. Net sales of
Avinza®
were $135,452 in 2008. As of December 31, 2008, the Company
had net intangible assets related to
Avinza®
of $236,767. If a generic form of
Avinza®
enters the market, 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.
Adenoscan®
On February 15, 2008, the Company, along with co-plaintiffs
Astellas US LLC and Astellas Pharma US, Inc. (collectively
Astellas), and Item Development AB
(Item) initiated suit in the U.S. District
Court for the Central District of California against Anazao
Health Corp. (Anazao), NuView Radiopharmaceuticals,
Inc. (NuView), Paul J. Crowe (Crowe) and
Keith Rustvold (Rustvold) for the unauthorized sale
and attempted sale of generic adenosine to hospitals and
outpatient imaging clinics for use in Myocardial Perfusion
Imaging procedures for an indication that has not been approved
by the FDA. The Company and co-plaintiffs have alleged
infringement of U.S. Patent Nos. 5,731,296 (the
296 patent) and 5,070,877 (the 877
patent), which cover a method of using adenosine in
Myocardial Perfusion Imaging and which Astellas sells under the
tradename,
Adenoscan®;
unfair competition in violation of the California Business and
Professions Code, and violations of various other sections of
the California Business and Professions Code, concerning the
labeling, advertising and dispensing of drugs; and intentional
interference with Company and co-plaintiffs prospective
economic advantage. On June 30, 2008, NuView, Crowe and
Rustvold filed an answer raising defenses and counterclaims of
non-infringement, invalidity, unenforceability due to
inequitable conduct and patent misuse,
F-38
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and unfair competition under California State Law. On
August 28th, the Company filed a reply. On
November 20, 2008, the Company and other plaintiffs amended
their complaint to add MTS Health Supplies, Inc., Nabil Saba and
Ghassan Salaymeg (collectively MTS) as defendants.
On November 21, 2008, defendant NuView amended its answer
and counterclaims to allege patent misuse antitrust violations
by plaintiffs. The parties are currently in the midst of fact
discovery. Trial is not anticipated until August 2009.
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 United States 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 in the
District of Massachusetts except for the Erie, Oswego and
Schenectady County cases, which were removed in October 2006 and
remanded to State Court in September 2007. Motions to dismiss
were granted in part and denied in part for all defendants in
all New York City and County cases pending in the MDL. 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. It is not anticipated
that any trials involving the Company will be set in any of
these cases within the next year.
In January 2005, the State of Alabama filed a lawsuit in State
Court 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 did require 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. The
first three of these defendants have already appealed their
verdicts. Several other defendants have had their cases set for
trial this year and in 2009. It is not anticipated that a trial
involving the Company will be set during 2009.
In October 2005, the State of Mississippi filed a lawsuit in
State Court 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.
The Company has filed a motion to dismiss the Iowa complaint. On
February 20, 2008, the Iowa case was transferred to the
MDL. The relief sought in all of these cases is similar to the
relief sought in
F-39
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the NYC lawsuit. The MDL 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.
Governmental
Pricing Investigation and Related Matters
As previously reported, during the first quarter of 2006, the
Company paid approximately $129,268 related to underpayment of
rebates owed to Medicaid and other governmental pricing programs
during the period from 1994 to 2002. On October 31, 2005,
the Company also entered into a five-year corporate integrity
agreement with HHS/OIG.
Also as previously reported, the Securities and Exchange
Commission (the SEC) conducted an investigation
relating to the Companys underpayments to governmental
programs and to the Companys previously disclosed errors
relating to reserves for product returns. On December 12,
2007, the Company received notice from the Staff of the SEC that
the investigation was closed.
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, a number of purported
class action complaints were filed by holders of the
Companys securities against the Company, its directors,
former directors, executive officers, former executive officers,
a Company subsidiary and a former director of the subsidiary in
the United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the
Securities Exchange Act of 1934 in connection with the
Companys underpayment of rebates owed to Medicaid and
other governmental pricing programs, and certain transactions
between the Company and the Benevolent Fund, a nonprofit
organization affiliated with certain former members of the
Companys senior management. These cases were consolidated.
On July 31, 2006, the parties entered into a stipulation of
settlement and a supplemental agreement (together, the
Settlement Agreement) to resolve the litigation. On
January 9, 2007, the Court granted final approval of the
Settlement Agreement. The Settlement Agreement provided for a
settlement amount of $38,250, which was fully funded by the
Companys insurance carriers on the Companys behalf.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee State Court alleging a
breach of fiduciary duty, among other things, by some of the
Companys current and former officers and directors, with
respect to the same events at issue in the federal securities
litigation described above. These cases were consolidated. The
parties reached agreement on a stipulation of settlement on
August 21, 2008. The settlement requires the Company to
maintain
and/or adopt
certain corporate governance measures and provides for payment
of attorneys fees and expenses to plaintiffs counsel
in the amount of $13,500. This amount has been paid by the
Companys insurance carriers. The stipulation of settlement
was filed with the Court on August 22, 2008. The Court
entered an order approving the settlement on December 17,
2008. A shareholder has appealed the Courts approval of
the settlement, and this appeal is pending.
During the third quarter of 2006, the second quarter of 2007,
the second quarter of 2008 and the third quarter of 2008, the
Company recorded an anticipated insurance recovery of legal fees
in the amount of $6,750, $3,398, $3,001 and $8,000,
respectively, for the class action and derivative suits
described above. In November 2006, July 2007, August 2008 and
October 2008, respectively, the Company received payments from
its insurance carriers for the recovery of these legal fees.
The Company is currently unable to predict the outcome of the
appeal of the derivative suit settlement described above. If the
appeal were to succeed, the Companys business, financial
condition, results of operations and cash flows could be
materially adversely affected.
F-40
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Philadelphia, 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 60 multi-plaintiff
(approximately 1,100 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 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.
In addition, as previously reported, the Company was one of many
defendants in six multi-plaintiff lawsuits that claim damages
for personal injury arising from its production of the
anorexigenic drug phentermine under contract for
GlaxoSmithKline. These six lawsuits have been dismissed without
payment of settlement proceeds. The Company was being
indemnified in the six lawsuits by GlaxoSmithKline, for which
the Company manufactured phentermine.
F-41
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 23 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 by the Court for lack of product identification.
The remaining 23 lawsuits were filed in Alabama, Arkansas,
Missouri, Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court has been
established in Little Rock, Arkansas, 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 and Pfizer. The
trials against Wyeth have resulted in verdicts for and against
Wyeth, with several verdicts against Wyeth reversed on
post-trial motions. Pfizer 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.
Alpharma
Litigation
The following litigation matters relate to our Alpharma
subsidiary
and/or
certain of its subsidiaries.
Department
of Justice Investigation
On February 28, 2007, Alpharma received a subpoena from the
U.S. Department of Justice (DOJ) requesting
certain documents in connection with its investigation into
various marketing practices with respect to
Kadian®
capsules. The DOJ has requested interviews with former Alpharma
employees, and has subpoenaed records from physicians who
performed research on
Kadian®
and/or wrote
articles about
Kadian®
and from third-party vendors who were retained to provide
services relating to clinical studies of
Kadian®.
The DOJ has also asked Alpharma to provide documents relating to
post-approval studies of
Kadian®
that were submitted to the FDA. Alpharma and its subsidiary,
Alpharma Pharmaceuticals, have responded and are continuing to
respond to this subpoena and additional information requests and
are fully cooperating with the DOJ. On February 2, 2009,
the Company was informed by the DOJ that its investigation would
be expanded to include Alpharmas marketing practices with
respect to
Flector®
Patch.
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.
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). Alpharma provided notice to its insurance carriers
and its primary insurance carriers have
F-42
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
responded by accepting their obligations to defend or pay
Alpharmas defense costs, subject to reservation of rights
to later reject coverage for these lawsuits. In addition, 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. In addition, 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. Furthermore, 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 re-trial of the
first case against the poultry company co-defendants is
scheduled for April 2009, and subsequent cases are expected to
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 $19,600, $20,400 and $22,200 in 2008, 2007 and
2006, respectively.
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 states: Alaska, Florida, Illinois, Iowa, Mississippi,
New York, and South Carolina. The Company expects the
Mississippi case to be dismissed.
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, and declaratory
and injunctive relief, 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.
F-43
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Contingencies
The following summarizes the Companys unconditional
purchase obligations at December 31, 2008:
|
|
|
|
|
2009
|
|
$
|
201,527
|
|
2010
|
|
|
55,638
|
|
2011
|
|
|
35,665
|
|
2012
|
|
|
27,510
|
|
2013
|
|
|
25,860
|
|
Thereafter
|
|
|
85,741
|
|
|
|
|
|
|
Total
|
|
$
|
431,941
|
|
|
|
|
|
|
The unconditional purchase obligations of the Company are
primarily related to minimum purchase requirements under
contracts with suppliers to purchase raw materials and finished
goods related to the Companys branded prescription
pharmaceutical products and commitments associated with research
and development projects.
The Company has a supply agreement with a third party to produce
metaxalone, the active ingredient in
Skelaxin®.
This supply agreement requires the Company to purchase certain
minimum levels of metaxalone and expires in 2010. If sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments for
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
The Companys business is classified into six reportable
segments: branded prescription pharmaceuticals, animal health,
Meridian Auto-Injector, royalties, contract manufacturing and
all 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 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. The contract manufacturing segment consists
primarily of pharmaceutical manufacturing services provided to
the Companys branded prescription pharmaceutical segment.
Royalties 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, segment profit (excluding depreciation, amortization
and impairments) and total assets. Revenues among the segments
are presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded prescription pharmaceuticals segment.
F-44
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated.
Note that the tables for revenues and segment profit below do
not include revenues and segment profit for the animal health
segment or
Flector®
Patch product within the branded prescription pharmaceuticals
segment since these are part of Alpharma, a company that was
acquired by King at the end of December 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
1,263,488
|
|
|
$
|
1,857,813
|
|
|
$
|
1,724,701
|
|
Meridian Auto-Injector
|
|
|
218,448
|
|
|
|
183,860
|
|
|
|
164,760
|
|
Royalties
|
|
|
79,442
|
|
|
|
82,589
|
|
|
|
80,357
|
|
Contract manufacturing(1)
|
|
|
481,044
|
|
|
|
707,667
|
|
|
|
555,362
|
|
All other
|
|
|
2,356
|
|
|
|
3,419
|
|
|
|
2,181
|
|
Eliminations(1)
|
|
|
(479,717
|
)
|
|
|
(698,466
|
)
|
|
|
(538,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues
|
|
$
|
1,565,061
|
|
|
$
|
2,136,882
|
|
|
$
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
964,627
|
|
|
$
|
1,390,306
|
|
|
$
|
1,407,024
|
|
Meridian Auto-Injector
|
|
|
132,898
|
|
|
|
107,810
|
|
|
|
90,185
|
|
Royalties
|
|
|
69,722
|
|
|
|
72,431
|
|
|
|
70,609
|
|
Contract manufacturing
|
|
|
647
|
|
|
|
(233
|
)
|
|
|
(1,135
|
)
|
All other
|
|
|
2,342
|
|
|
|
34
|
|
|
|
2,009
|
|
Other operating costs and expenses
|
|
|
(1,389,881
|
)
|
|
|
(1,342,835
|
)
|
|
|
(1,166,146
|
)
|
Other income (expense)
|
|
|
17,941
|
|
|
|
23,305
|
|
|
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax
|
|
$
|
(201,704
|
)
|
|
$
|
250,818
|
|
|
$
|
424,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
3,063,511
|
|
|
$
|
3,097,153
|
|
Animal health
|
|
|
860,524
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
307,425
|
|
|
|
299,098
|
|
Royalties
|
|
|
26,175
|
|
|
|
30,562
|
|
Contract manufacturing
|
|
|
61
|
|
|
|
9
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
4,257,696
|
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contract manufacturing revenues include $479,717, $698,466 and
$538,861 of intercompany sales for the years ended
December 31, 2008, 2007 and 2006, respectively. |
F-45
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents branded prescription pharmaceutical
revenues by therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
$
|
612,853
|
|
|
$
|
627,244
|
|
|
$
|
500,982
|
|
Hospital
|
|
|
267,913
|
|
|
|
292,380
|
|
|
|
274,136
|
|
Legacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
299,951
|
|
|
|
809,888
|
|
|
|
829,166
|
|
Other
|
|
|
82,771
|
|
|
|
128,301
|
|
|
|
120,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded prescription pharmaceutical revenues
|
|
$
|
1,263,488
|
|
|
$
|
1,857,813
|
|
|
$
|
1,724,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures of $57,455, $49,602 and $45,816 for the
years ended December 31, 2008, 2007 and 2006, respectively,
are substantially related to the branded prescription
pharmaceuticals and contract manufacturing segments.
Geographic Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,514,185
|
|
|
$
|
2,096,920
|
|
|
$
|
1,963,398
|
|
Other
|
|
|
50,876
|
|
|
|
39,962
|
|
|
|
25,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,565,061
|
|
|
$
|
2,136,882
|
|
|
$
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived assets
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total long lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,724,658
|
|
|
$
|
1,164,114
|
|
|
$
|
1,276,572
|
|
Other
|
|
|
81,430
|
|
|
|
3,103
|
|
|
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,806,088
|
|
|
$
|
1,167,217
|
|
|
$
|
1,279,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
Stock-Based
Compensation
|
For the years ended 2008, 2007 and 2006 the Company incurred
$34,514, $27,652 and $21,130, respectively, in compensation
costs and $13,041, $10,015 and $6,610, respectively, of income
tax benefits related to the Companys stock-based
compensation agreements.
Restricted
Stock Awards, Restricted Stock Units and Long-Term Performance
Unit Awards
Under its Incentive Plan (which has been approved by the
Companys shareholders) the Company has granted Restricted
Stock Awards (RSAs) and Long-Term Performance Unit
Awards (LPUs) to certain employees and has granted
Restricted Stock Units (RSUs) to its non-employee
directors.
RSAs are grants of shares of common stock restricted from sale
or transfer for a period of time, 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.
F-46
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 grant.
The fair value of RSAs and RSUs is based upon the market price
of the underlying common stock as of the date of grant.
Compensation expense is recognized on a straight-line basis,
including an estimate for forfeitures, over the vesting period.
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. The Company has granted
LPUs with two different performance criteria. LPUs were granted
with a one-year performance cycle, followed by a two-year
restriction period, at the end of which shares of common stock
will be earned based on operating targets. LPUs were also
granted based on a three-year performance cycle, at the end of
which shares of common stock will be earned based on
market-related performance targets over a three-year performance
period. At the end of the applicable performance period, the
number of shares of common stock awarded is determined by
adjusting upward or downward from the performance target in a
range between 0% and 200%. The final performance percentage, on
which the number of shares of common stock issued is based,
considering performance metrics established for the performance
period, would be determined by the Companys Board of
Directors or a committee of the Board at its sole discretion.
The fair value of LPUs with a one-year performance cycle is
based upon the market price of the underlying common stock as of
the date of grant. At each reporting period, compensation
expense is recognized based on the most probable performance
outcome, including an estimate for forfeitures, on a
straight-line basis over the vesting period. Total compensation
expense for each award is based on the actual number of shares
of common stock that vest multiplied by market price of the
common stock as of the date of grant.
The fair value of LPUs with a three-year performance cycle is
based on long-term market-based performance targets using a
Monte Carlo simulation model which considers the likelihood of
all possible outcomes and determines the number of shares
expected to vest under each simulation and the expected stock
price at that level. The fair value on grant date of the LPU is
recognized over the required service period and will not change
regardless of the Companys actual performance versus the
long-term market-based performance targets.
F-47
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following activity has occurred under the Companys
existing plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted Stock Awards:
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007
|
|
|
2,757,936
|
|
|
$
|
13.67
|
|
Granted
|
|
|
543,430
|
|
|
|
8.89
|
|
Vested
|
|
|
(528,511
|
)
|
|
|
15.43
|
|
Forfeited
|
|
|
(24,740
|
)
|
|
|
9.66
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008
|
|
|
2,748,115
|
|
|
$
|
12.40
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units:
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007
|
|
|
41,069
|
|
|
$
|
20.45
|
|
Granted
|
|
|
96,139
|
|
|
|
9.96
|
|
Vested
|
|
|
(41,069
|
)
|
|
|
20.45
|
|
Forfeited
|
|
|
(490
|
)
|
|
|
8.91
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008
|
|
|
95,649
|
|
|
$
|
9.97
|
|
|
|
|
|
|
|
|
|
|
Long-Term Performance Unit Awards (one-year performance
cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007
|
|
|
1,928,665
|
|
|
$
|
19.52
|
|
Granted
|
|
|
412,200
|
|
|
|
8.91
|
|
Vested
|
|
|
(155,648
|
)
|
|
|
19.51
|
|
Forfeited
|
|
|
(105,106
|
)
|
|
|
19.47
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008
|
|
|
2,080,111
|
|
|
$
|
17.37
|
|
|
|
|
|
|
|
|
|
|
Long-Term Performance Unit Awards (three-year performance
cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007
|
|
|
277,625
|
|
|
$
|
29.39
|
|
Granted
|
|
|
178,570
|
|
|
|
12.25
|
|
Vested
|
|
|
(10,630
|
)
|
|
|
29.88
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008
|
|
|
445,565
|
|
|
$
|
22.51
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $20,791 of total
unrecognized compensation costs related to RSAs which the
Company expects to recognize over a weighted average period of
2.00 years. The expense recognized over the service period
includes an estimate of awards that will be forfeited. As of
December 31, 2008, there was $13,381 of total unrecognized
compensation costs related to LPUs which the Company expects to
recognize over a weighted average period of 1.13 years.
Stock
Options
The Company has granted nonqualified and incentive stock options
to its officers, employees and directors under its stock option
plans. In connection with the plans, options to purchase common
stock of the Company are granted at option prices not less than
the fair market value of the common stock at the date of grant
and either vest immediately or ratably over a designated period,
generally one-third on each of the first three anniversaries of
the grant date. Compensation expense is recognized on a
straight-line basis, including an estimate for forfeitures, over
the vesting period.
F-48
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
43.9
|
%
|
|
|
43.7
|
%
|
|
|
52.4
|
%
|
Expected term (in years)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Risk-free interest rate
|
|
|
2.98
|
%
|
|
|
4.40
|
%
|
|
|
4.64
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
For the years ended December 31, 2008, 2007 and 2006, the
Company utilized the short-cut method to estimate
the expected term for stock options granted. The expected
volatility is determined based on the historical volatility of
King common stock over the expected term. The risk-free rate is
based on the U.S. Treasury rate for the expected term at
the date of grant.
A summary of option activity under the plans for 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding options, December 31, 2007
|
|
|
4,964,430
|
|
|
$
|
18.37
|
|
|
|
5.72
|
|
|
$
|
461
|
|
Granted
|
|
|
2,152,320
|
|
|
|
9.31
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(68,333
|
)
|
|
|
6.43
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(673,601
|
)
|
|
|
19.42
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(109,676
|
)
|
|
|
18.14
|
|
|
|
|
|
|
|
|
|
Outstanding options, December 31, 2008
|
|
|
6,265,140
|
|
|
$
|
15.44
|
|
|
|
6.60
|
|
|
$
|
2,964
|
|
Exercisable, December 31, 2008
|
|
|
3,911,387
|
|
|
$
|
18.27
|
|
|
|
5.17
|
|
|
$
|
280
|
|
Expected to vest, December 31, 2008
|
|
|
1,921,969
|
|
|
$
|
10.93
|
|
|
|
8.96
|
|
|
$
|
2,283
|
|
As of December 31, 2008, there was $8,117 of total
unrecognized compensation costs related to stock options. These
costs are expected to be recognized over a weighted average
period of 1.97 years.
Cash received from stock option exercises for 2008 was $439. The
income tax benefits from stock option exercises for 2008 totaled
$30.
During 2008, 2007 and 2006, tax benefits in excess of recognized
compensation costs associated with stock option exercises were
$82, $705 and $484, respectively, and are reflected as cash
inflows from financing activities.
During the year ended December 31, 2008, the following
activity occurred under the Companys plans which cover
stock options, RSAs and LPUs:
|
|
|
|
|
|
|
2008
|
|
|
Total intrinsic value of stock options exercised
|
|
$
|
224
|
|
Total fair value of RSAs vested
|
|
$
|
8,202
|
|
Total fair value of LPUs vested
|
|
$
|
3,354
|
|
As of December 31, 2008, an aggregate of
18,823,868 shares were available for future grant under the
Companys stock plans. Awards that expire or are cancelled
without delivery of shares generally become available for
issuance under the King Pharmaceuticals, Inc. Incentive Plan.
F-49
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Shares
The Company is authorized to issue 15 million shares of
blank-check preferred stock, the terms and
conditions of which will be determined by the Board of
Directors. As of December 31, 2008 and 2007, there were no
shares issued or outstanding.
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income consists of the following
components:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net unrealized losses on investments in debt securities, net of
tax
|
|
$
|
(28,092
|
)
|
|
$
|
|
|
Foreign currency translation
|
|
|
(195
|
)
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,287
|
)
|
|
$
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
23.
|
Income
per Common Share
|
The basic and diluted income per common share was determined
based on the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,539,157
|
|
|
|
242,854,421
|
|
|
|
242,196,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,539,157
|
|
|
|
242,854,421
|
|
|
|
242,196,414
|
|
Effect of stock options
|
|
|
|
|
|
|
402,208
|
|
|
|
304,004
|
|
Effect of dilutive share awards
|
|
|
|
|
|
|
872,765
|
|
|
|
298,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,539,157
|
|
|
|
244,129,394
|
|
|
|
242,798,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, the dilutive effect
of options to purchase 43,656 shares of common stock and
1,811,506 share awards were not included in the computation
of diluted loss per share because their inclusion would have
reduced the loss per share.
For the year ended December 31, 2008, the weighted average
shares that were anti-dilutive, and therefore excluded from the
calculation of diluted income per share included options to
purchase 5,914,275 shares of common stock, 356,240 RSAs and
341,636 LPUs. For the year ended December 31, 2007, the
weighted average shares that were anti-dilutive, and therefore
excluded from the calculation of diluted income per share
included options to purchase 3,014,058 shares of common
stock, 271,808 RSAs and 673,147 LPUs. For the year ended
December 31, 2006, the weighted average shares that were
anti-dilutive, and therefore excluded from the calculation of
diluted income per share included options to purchase
5,621,470 shares of common stock, 2,573 RSAs and
111,990 LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into the
Companys common stock in the future, subject to certain
contingencies (see Note 13). Shares of the Companys
common stock associated with this right of conversion were
excluded from the calculation of diluted income per share
because these notes are anti-dilutive since the conversion price
of the notes was greater than the average market price of the
Companys common stock during the 2008, 2007 and
2006 years.
F-50
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
24.
|
Recently
Issued Accounting Standards
|
In May 2008, the FASB issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion (FSP APB
14-1).
FSP APB 14-1
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuers nonconvertible debt
borrowing rate. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years; early adoption is not permitted.
Retrospective application to all periods presented is required
except for instruments that were not outstanding during any of
the periods that will be presented in the annual financial
statements for the period of adoption but were outstanding
during an earlier period. Upon adoption of FSP APB
14-1, the
Companys accounting for its $400,000
11/4% Convertible
Senior Notes due April 1, 2026 will be affected. The
Company is currently evaluating the potential effect of FSP APB
14-1 on its
financial statements; but estimates that implementation would
result in a reduction in the carrying value of the outstanding
$400,000
11/4%
Convertible Senior Notes due April 1, 2026 by approximately
$130,000, with a corresponding increase in equity. The Company
also estimates that upon adoption, the retrospective application
of FSP APB 14-1 will result in increased interest expense of
approximately $18,000 for the year ending December 31,
2009. The Company will adopt FSP APB
14-1 as of
January 1, 2009.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies
for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. SFAS No. 161 also requires entities to
disclose additional information about the amounts and location
of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied and the impact
that hedges have on an entitys financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after
November 15, 2008. The Company does not anticipate
SFAS No. 161 will have a material effect on its
financial statements and is planning to adopt the standard in
the first quarter of 2009.
In December 2007, the Emerging Issues Task Force issued EITF
Issue 07-01,
Accounting for Collaborative Arrangements (Issue
07-01).
Issue 07-01
requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable Generally Accepted Accounting Principles
(GAAP) or, in the absence of other applicable GAAP,
based on analogy to authoritative accounting literature or a
reasonable, rational and consistently applied accounting policy
election. Issue
07-01 is
effective for fiscal years beginning after December 15,
2008. The Company does not anticipate Issue
07-01 will
have a material effect on its financial statements and is
planning to adopt this standard in the first quarter of 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business Combinations
(SFAS No. 141(R)). This statement
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase. This statement also requires an
acquirer to recognize and measure in-process research and
development projects as intangible assets at fair value on the
acquisition date. SFAS No. 141(R) also sets forth the
disclosures required to be made in the financial statements to
evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Accordingly,
SFAS No. 141(R) will be applied by the Company to
business combinations occurring on or after January 1, 2009.
F-51
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
25.
|
Restructuring
Activities
|
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 $66,529 associated
with this restructuring plan, $61,174 of which has been included
in the liabilities assumed in the purchase price of Alpharma.
The restructuring plan includes employee termination costs
associated with a workforce reduction of
approximately 234 employees. The restructuring plan
also includes contract termination costs of $16,801 and
other exit costs of $182 as a result of the acquisition.
All employee termination costs are expected to be paid by the
end of 2011. All contract termination costs are expected to be
paid by the end of 2018.
Third
Quarter of 2008 Action
During the third quarter of 2008, the Company completed a
restructuring initiative at its Rochester, Michigan facility.
This initiative is in response to a decline in unit volume of
the Companys
Bicillin®
CR product, an anti-infective. As a result of this
initiative, the Company incurred employee termination costs of
$272 associated with a workforce reduction of approximately
14 employees in the third quarter of 2008. The employee
termination costs are expected to be paid by the end of 2009.
Third
Quarter of 2007 Action
During 2007, following the Circuit Courts decision in
September 2007 regarding the Companys 722 Patent
that covered the Companys
Altace®
product, the Company developed a restructuring initiative. This
initiative included a reduction in personnel, staff leverage,
expense reductions and additional controls over spending,
reorganization of sales teams and a realignment of research and
development priorities.
The Company incurred total costs of approximately $67,000
associated with this initiative, including approximately $65,000
in restructuring charges, $1,000 in accelerated depreciation
associated with general support assets and approximately $1,000
for implementation costs of reorganizing the sales teams.
Expenses related to this initiative were primarily incurred in
the third and fourth quarters of 2007.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 440 employees
in the Companys sales force. Restructuring charges also
include contract termination costs, including the termination of
the promotion agreement for
Glumetzatm
and other exit costs associated with this initiative.
Specifically, the restructuring charges associated with this
initiative included employee termination costs, contract
termination costs, and other exit costs of $32,049, $31,238, and
$1,200, respectively. Substantially all of the restructuring
charges were paid by the end of the first quarter of 2008.
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
2009. As a result of these steps, the Company expects to incur
restructuring charges totaling approximately $16,000 through the
end of 2009, of which approximately $11,500 is associated with
accelerated depreciation and approximately $4,500 is associated
with employee termination costs. The employee termination costs
are expected to be fully paid in the first half of 2009.
F-52
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the types of costs accrued and incurred are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
Alpharma
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Impact in 2008
|
|
|
Acquisition
|
|
|
Payments
|
|
|
Costs
|
|
|
2008
|
|
|
Fourth quarter of 2008 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
|
|
|
$
|
5,350
|
|
|
$
|
44,196
|
|
|
$
|
|
|
|
$
|
109
|
|
|
$
|
49,437
|
|
Contract termination
|
|
|
|
|
|
|
5
|
|
|
|
16,796
|
|
|
|
|
|
|
|
|
|
|
|
16,801
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
Third quarter of 2008 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
261
|
|
|
|
2
|
|
|
|
9
|
|
Third quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
21,144
|
|
|
|
1,530
|
|
|
|
|
|
|
|
22,571
|
|
|
|
|
|
|
|
103
|
|
Contract termination
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
(291
|
)
|
|
|
197
|
|
|
|
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
Other
|
|
|
880
|
|
|
|
174
|
|
|
|
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
First quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
1,061
|
|
|
|
(1,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter of 2006 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
3,475
|
|
|
|
180
|
|
|
|
|
|
|
|
1,009
|
|
|
|
184
|
|
|
|
2,462
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
2,685
|
|
|
|
|
|
Fourth quarter of 2005 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
774
|
|
|
|
743
|
|
|
|
|
|
|
|
1,509
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,334
|
|
|
$
|
9,696
|
|
|
$
|
61,174
|
|
|
$
|
26,113
|
|
|
$
|
3,089
|
|
|
$
|
69,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Consolidated
Statements of Income. |
The restructuring charges in 2008 and 2007 primarily relate to
the branded prescription pharmaceutical segment. The accrued
employee separation payments as of December 31, 2008 are
expected to be paid by the end of 2011.
F-53
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
26.
|
Quarterly
Financial Information (unaudited)
|
The following table sets forth summary financial information for
the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2008 By Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
432,033
|
|
|
$
|
396,851
|
|
|
$
|
388,445
|
|
|
$
|
347,732
|
|
Operating income (loss)
|
|
|
121,449
|
|
|
|
57,839
|
|
|
|
122,999
|
|
|
|
(521,932
|
)
|
Net income (loss)
|
|
|
87,633
|
|
|
|
43,021
|
|
|
|
84,750
|
|
|
|
(548,467
|
)
|
Basic income (loss) per common share(1)
|
|
$
|
0.36
|
|
|
$
|
0.18
|
|
|
$
|
0.35
|
|
|
$
|
(2.25
|
)
|
Diluted income (loss) per common share(1)
|
|
$
|
0.36
|
|
|
$
|
0.18
|
|
|
$
|
0.34
|
|
|
$
|
(2.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2007 By Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
516,030
|
|
|
$
|
542,726
|
|
|
$
|
544,854
|
|
|
$
|
533,272
|
|
Operating income (loss)
|
|
|
167,855
|
|
|
|
88,311
|
|
|
|
(78,127
|
)
|
|
|
49,474
|
|
Net income (loss)
|
|
|
115,913
|
|
|
|
64,785
|
|
|
|
(40,538
|
)
|
|
|
42,821
|
|
Basic income (loss) per common share(1)
|
|
$
|
0.48
|
|
|
$
|
0.27
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.18
|
|
Diluted income (loss) per common share(1)
|
|
$
|
0.48
|
|
|
$
|
0.26
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.18
|
|
|
|
|
(1) |
|
Quarterly amounts may not total to annual amounts due to the
effect of rounding on a quarterly basis. |
Skelaxin®
As previously disclosed, the Company has been involved in
multiple legal proceedings over patents relating to its product
Skelaxin®
(metaxalone). On January 20, 2009, the U.S. District
Court for the Eastern District of New York issued an Order
ruling invalid two of these patents, United States Patent Nos.
6,407,128 and 6,683,102. The Order was issued in response to Eon
Labs motion for summary judgment without the benefit of a
hearing. The Company plans to appeal, upon the entry of an
appropriate judgment, and intends to vigorously defend its
interests. The entry of the Order may lead to generic versions
of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Companys sales of
Skelaxin®
to decline significantly as a result. Net sales of
Skelaxin®
were $446,243 in 2008. For additional information regarding
Skelaxin®
litigation, please see Note 19.
Restructuring
Following the decision of the District Court, the Companys
senior management team conducted an extensive examination of the
Company and developed a restructuring initiative designed to
partially offset the potential decline in
Skelaxin®
sales in the event that a generic competitor enters the market.
This initiative includes, based on an analysis of the
Companys 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.
The Company estimates that, in connection with the restructuring
initiative, it will incur total restructuring costs of between
$50,000 and $55,000, all of which are expected to be incurred
and expensed during the first half of 2009 and almost all of
which will be cash expenditures. These costs all relate to
severance pay and other employee termination expenses.
F-54
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The restructuring charges include employee termination costs
associated with a workforce reduction of
approximately 520 employees, including
approximately 380 members of our sales force.
Intangible
Assets
As of December 31, 2008, the net intangible assets
associated with
Skelaxin®
total approximately $116,979. The Company believes that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
as a result of the Order described above, the Company reduced
the estimated remaining useful life of the intangible assets of
Skelaxin®
during the first quarter of 2009. If the Companys current
estimates regarding future cash flows adversely change, the
Company may have to further reduce the estimated remaining
useful life
and/or write
off a portion or all of these intangible assets.
Alpharma
Convertible Senior Notes
During the first quarter of 2009, the Company paid $385,227 to
redeem the Alpharma Convertible Senior Notes. See Note 13
for a description of the Alpharma Notes.
|
|
28.
|
Guarantor
Financial Statements
|
Each of the Companys U.S. subsidiaries, other than
Alpharma and its subsidiaries, guaranteed on a full,
unconditional and joint and several basis the Companys
performance under the $400,000 aggregate principal amount of the
11/4%
Convertible Senior Notes due April 1, 2026
(the Notes). We expect Alpharma and its
subsidiaries to become guarantors during the first quarter of
2009.
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
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.
F-55
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
401,657
|
|
|
$
|
52
|
|
|
$
|
538,503
|
|
|
$
|
|
|
|
$
|
940,212
|
|
|
$
|
9,718
|
|
|
$
|
4,645
|
|
|
$
|
5,646
|
|
|
$
|
|
|
|
$
|
20,009
|
|
Investments in debt securities
|
|
|
6,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,441
|
|
|
|
1,344,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344,980
|
|
Marketable securities
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,135
|
|
Accounts receivable, net
|
|
|
61
|
|
|
|
140,502
|
|
|
|
104,507
|
|
|
|
|
|
|
|
245,070
|
|
|
|
9
|
|
|
|
182,575
|
|
|
|
1,080
|
|
|
|
|
|
|
|
183,664
|
|
Inventories
|
|
|
59,279
|
|
|
|
26,406
|
|
|
|
172,618
|
|
|
|
|
|
|
|
258,303
|
|
|
|
76,981
|
|
|
|
33,361
|
|
|
|
269
|
|
|
|
(303
|
)
|
|
|
110,308
|
|
Deferred income tax assets
|
|
|
36,041
|
|
|
|
26,146
|
|
|
|
27,326
|
|
|
|
|
|
|
|
89,513
|
|
|
|
54,917
|
|
|
|
45,182
|
|
|
|
39
|
|
|
|
|
|
|
|
100,138
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,721
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
20,175
|
|
Prepaid expenses and other current assets
|
|
|
14,090
|
|
|
|
8,283
|
|
|
|
106,841
|
|
|
|
|
|
|
|
129,214
|
|
|
|
28,315
|
|
|
|
10,926
|
|
|
|
4
|
|
|
|
|
|
|
|
39,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
518,080
|
|
|
|
201,389
|
|
|
|
949,795
|
|
|
|
|
|
|
|
1,669,264
|
|
|
|
1,534,776
|
|
|
|
278,143
|
|
|
|
7,038
|
|
|
|
(303
|
)
|
|
|
1,819,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
137,544
|
|
|
|
122,828
|
|
|
|
160,949
|
|
|
|
|
|
|
|
421,321
|
|
|
|
125,847
|
|
|
|
131,246
|
|
|
|
|
|
|
|
|
|
|
|
257,093
|
|
Intangible assets, net
|
|
|
|
|
|
|
633,300
|
|
|
|
300,919
|
|
|
|
|
|
|
|
934,219
|
|
|
|
|
|
|
|
778,248
|
|
|
|
2,726
|
|
|
|
|
|
|
|
780,974
|
|
Goodwill
|
|
|
|
|
|
|
129,150
|
|
|
|
321,398
|
|
|
|
|
|
|
|
450,548
|
|
|
|
|
|
|
|
129,150
|
|
|
|
|
|
|
|
|
|
|
|
129,150
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
18,216
|
|
|
|
340,404
|
|
|
|
(54,898
|
)
|
|
|
|
|
|
|
303,722
|
|
|
|
4,529
|
|
|
|
339,107
|
|
|
|
64
|
|
|
|
|
|
|
|
343,700
|
|
Investments in debt securities
|
|
|
353,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
74,390
|
|
|
|
23,704
|
|
|
|
26,680
|
|
|
|
|
|
|
|
124,774
|
|
|
|
42,315
|
|
|
|
53,936
|
|
|
|
|
|
|
|
|
|
|
|
96,251
|
|
Investments in subsidiaries
|
|
|
2,891,214
|
|
|
|
|
|
|
|
|
|
|
|
(2,891,214
|
)
|
|
|
|
|
|
|
1,671,776
|
|
|
|
|
|
|
|
|
|
|
|
(1,671,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,993,292
|
|
|
$
|
1,450,775
|
|
|
$
|
1,704,843
|
|
|
$
|
(2,891,214
|
)
|
|
$
|
4,257,696
|
|
|
$
|
3,379,243
|
|
|
$
|
1,709,830
|
|
|
$
|
9,828
|
|
|
$
|
(1,672,079
|
)
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
61,255
|
|
|
$
|
20,107
|
|
|
$
|
59,546
|
|
|
$
|
|
|
|
$
|
140,908
|
|
|
$
|
52,664
|
|
|
$
|
23,408
|
|
|
$
|
409
|
|
|
$
|
|
|
|
$
|
76,481
|
|
Accrued expenses
|
|
|
32,456
|
|
|
|
165,460
|
|
|
|
213,572
|
|
|
|
|
|
|
|
411,488
|
|
|
|
69,849
|
|
|
|
306,732
|
|
|
|
23
|
|
|
|
|
|
|
|
376,604
|
|
Income taxes payable
|
|
|
1,288
|
|
|
|
169
|
|
|
|
8,991
|
|
|
|
|
|
|
|
10,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt
|
|
|
|
|
|
|
|
|
|
|
5,230
|
|
|
|
|
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long term debt
|
|
|
53,820
|
|
|
|
|
|
|
|
385,227
|
|
|
|
|
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
148,819
|
|
|
|
185,736
|
|
|
|
672,566
|
|
|
|
|
|
|
|
1,007,121
|
|
|
|
122,513
|
|
|
|
330,140
|
|
|
|
432
|
|
|
|
|
|
|
|
453,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
963,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
963,222
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Other liabilities
|
|
|
54,355
|
|
|
|
4,595
|
|
|
|
51,072
|
|
|
|
|
|
|
|
110,022
|
|
|
|
55,227
|
|
|
|
7,753
|
|
|
|
|
|
|
|
|
|
|
|
62,980
|
|
Intercompany payable (receivable)
|
|
|
649,565
|
|
|
|
(655,145
|
)
|
|
|
5,580
|
|
|
|
|
|
|
|
|
|
|
|
290,443
|
|
|
|
(291,114
|
)
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,815,961
|
|
|
|
(464,814
|
)
|
|
|
729,218
|
|
|
|
|
|
|
|
2,080,365
|
|
|
|
868,183
|
|
|
|
46,779
|
|
|
|
1,103
|
|
|
|
|
|
|
|
916,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,177,331
|
|
|
|
1,915,589
|
|
|
|
975,625
|
|
|
|
(2,891,214
|
)
|
|
|
2,177,331
|
|
|
|
2,511,060
|
|
|
|
1,663,051
|
|
|
|
8,725
|
|
|
|
(1,672,079
|
)
|
|
|
2,510,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,993,292
|
|
|
$
|
1,450,775
|
|
|
$
|
1,704,843
|
|
|
$
|
(2,891,214
|
)
|
|
$
|
4,257,696
|
|
|
$
|
3,379,243
|
|
|
$
|
1,709,830
|
|
|
$
|
9,828
|
|
|
$
|
(1,672,079
|
)
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended 12/31/2008
|
|
|
Twelve Months Ended 12/31/2007
|
|
|
Twelve Months Ended 12/31/2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
430,901
|
|
|
$
|
1,456,260
|
|
|
$
|
36,770
|
|
|
$
|
(438,312
|
)
|
|
$
|
1,485,619
|
|
|
$
|
578,050
|
|
|
$
|
2,049,800
|
|
|
$
|
437
|
|
|
$
|
(573,994
|
)
|
|
$
|
2,054,293
|
|
|
$
|
431,105
|
|
|
$
|
1,903,630
|
|
|
$
|
1,478
|
|
|
$
|
(428,070
|
)
|
|
$
|
1,908,143
|
|
Royalty revenue
|
|
|
|
|
|
|
79,442
|
|
|
|
|
|
|
|
|
|
|
|
79,442
|
|
|
|
|
|
|
|
82,589
|
|
|
|
|
|
|
|
|
|
|
|
82,589
|
|
|
|
|
|
|
|
80,357
|
|
|
|
|
|
|
|
|
|
|
|
80,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
430,901
|
|
|
|
1,535,702
|
|
|
|
36,770
|
|
|
|
(438,312
|
)
|
|
|
1,565,061
|
|
|
|
578,050
|
|
|
|
2,132,389
|
|
|
|
437
|
|
|
|
(573,994
|
)
|
|
|
2,136,882
|
|
|
|
431,105
|
|
|
|
1,983,987
|
|
|
|
1,478
|
|
|
|
(428,070
|
)
|
|
|
1,988,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
128,399
|
|
|
|
690,554
|
|
|
|
14,488
|
|
|
|
(438,616
|
)
|
|
|
394,825
|
|
|
|
284,626
|
|
|
|
855,196
|
|
|
|
403
|
|
|
|
(573,691
|
)
|
|
|
566,534
|
|
|
|
155,472
|
|
|
|
691,399
|
|
|
|
1,007
|
|
|
|
(428,070
|
)
|
|
|
419,808
|
|
Selling, general and administrative
|
|
|
250,830
|
|
|
|
191,774
|
|
|
|
3,416
|
|
|
|
|
|
|
|
446,020
|
|
|
|
301,522
|
|
|
|
389,218
|
|
|
|
294
|
|
|
|
|
|
|
|
691,034
|
|
|
|
269,512
|
|
|
|
445,137
|
|
|
|
(684
|
)
|
|
|
|
|
|
|
713,965
|
|
Research and development
|
|
|
6,556
|
|
|
|
147,117
|
|
|
|
590,000
|
|
|
|
|
|
|
|
743,673
|
|
|
|
6,414
|
|
|
|
178,321
|
|
|
|
|
|
|
|
|
|
|
|
184,735
|
|
|
|
4,670
|
|
|
|
248,926
|
|
|
|
|
|
|
|
|
|
|
|
253,596
|
|
Depreciation and amortization
|
|
|
19,559
|
|
|
|
130,836
|
|
|
|
318
|
|
|
|
|
|
|
|
150,713
|
|
|
|
19,489
|
|
|
|
154,134
|
|
|
|
240
|
|
|
|
|
|
|
|
173,863
|
|
|
|
20,818
|
|
|
|
126,491
|
|
|
|
240
|
|
|
|
|
|
|
|
147,549
|
|
Asset impairments
|
|
|
114
|
|
|
|
39,315
|
|
|
|
1,566
|
|
|
|
|
|
|
|
40,995
|
|
|
|
|
|
|
|
223,025
|
|
|
|
|
|
|
|
|
|
|
|
223,025
|
|
|
|
|
|
|
|
47,842
|
|
|
|
|
|
|
|
|
|
|
|
47,842
|
|
Restructuring charges
|
|
|
3,750
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
7,098
|
|
|
|
37,729
|
|
|
|
32,449
|
|
|
|
|
|
|
|
|
|
|
|
70,178
|
|
|
|
202
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
3,194
|
|
Acquisition related costs
|
|
|
1,381
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
410,589
|
|
|
|
1,202,945
|
|
|
|
609,788
|
|
|
|
(438,616
|
)
|
|
|
1,784,706
|
|
|
|
649,780
|
|
|
|
1,832,343
|
|
|
|
937
|
|
|
|
(573,691
|
)
|
|
|
1,909,369
|
|
|
|
450,674
|
|
|
|
1,562,787
|
|
|
|
563
|
|
|
|
(428,070
|
)
|
|
|
1,585,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
20,312
|
|
|
|
332,757
|
|
|
|
(573,018
|
)
|
|
|
304
|
|
|
|
(219,645
|
)
|
|
|
(71,730
|
)
|
|
|
300,046
|
|
|
|
(500
|
)
|
|
|
(303
|
)
|
|
|
227,513
|
|
|
|
(19,569
|
)
|
|
|
421,200
|
|
|
|
915
|
|
|
|
|
|
|
|
402,546
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
36,873
|
|
|
|
64
|
|
|
|
33
|
|
|
|
|
|
|
|
36,970
|
|
|
|
42,376
|
|
|
|
106
|
|
|
|
9
|
|
|
|
|
|
|
|
42,491
|
|
|
|
31,911
|
|
|
|
239
|
|
|
|
2
|
|
|
|
|
|
|
|
32,152
|
|
Interest expense
|
|
|
(7,914
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,943
|
)
|
|
|
(7,764
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,818
|
)
|
|
|
(9,694
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,857
|
)
|
Loss on investment
|
|
|
(7,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,451
|
)
|
|
|
(11,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
Other, net
|
|
|
(2,798
|
)
|
|
|
150
|
|
|
|
(987
|
)
|
|
|
|
|
|
|
(3,635
|
)
|
|
|
(1,093
|
)
|
|
|
827
|
|
|
|
489
|
|
|
|
|
|
|
|
223
|
|
|
|
(650
|
)
|
|
|
(1,022
|
)
|
|
|
515
|
|
|
|
|
|
|
|
(1,157
|
)
|
Equity in (loss) earnings of subsidiaries
|
|
|
(335,454
|
)
|
|
|
|
|
|
|
|
|
|
|
335,454
|
|
|
|
|
|
|
|
211,051
|
|
|
|
|
|
|
|
|
|
|
|
(211,051
|
)
|
|
|
|
|
|
|
315,395
|
|
|
|
|
|
|
|
|
|
|
|
(315,395
|
)
|
|
|
|
|
Intercompany interest income (expense)
|
|
|
(11,682
|
)
|
|
|
28,909
|
|
|
|
(17,227
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,729
|
)
|
|
|
8,807
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
(49,739
|
)
|
|
|
50,287
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(328,426
|
)
|
|
|
29,094
|
|
|
|
(18,181
|
)
|
|
|
335,454
|
|
|
|
17,941
|
|
|
|
224,250
|
|
|
|
9,686
|
|
|
|
420
|
|
|
|
(211,051
|
)
|
|
|
23,305
|
|
|
|
287,851
|
|
|
|
49,341
|
|
|
|
(31
|
)
|
|
|
(315,395
|
)
|
|
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(308,114
|
)
|
|
|
361,851
|
|
|
|
(591,199
|
)
|
|
|
335,758
|
|
|
|
(201,704
|
)
|
|
|
152,520
|
|
|
|
309,732
|
|
|
|
(80
|
)
|
|
|
(211,354
|
)
|
|
|
250,818
|
|
|
|
268,282
|
|
|
|
470,541
|
|
|
|
884
|
|
|
|
(315,395
|
)
|
|
|
424,312
|
|
Income tax expense (benefit)
|
|
|
24,949
|
|
|
|
105,389
|
|
|
|
1,021
|
|
|
|
|
|
|
|
131,359
|
|
|
|
(30,764
|
)
|
|
|
97,669
|
|
|
|
695
|
|
|
|
|
|
|
|
67,600
|
|
|
|
(20,667
|
)
|
|
|
156,305
|
|
|
|
92
|
|
|
|
|
|
|
|
135,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(333,063
|
)
|
|
|
256,462
|
|
|
|
(592,220
|
)
|
|
|
335,758
|
|
|
|
(333,063
|
)
|
|
|
183,284
|
|
|
|
212,063
|
|
|
|
(775
|
)
|
|
|
(211,354
|
)
|
|
|
183,218
|
|
|
|
288,949
|
|
|
|
314,236
|
|
|
|
792
|
|
|
|
(315,395
|
)
|
|
|
288,582
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
572
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(333,063
|
)
|
|
$
|
256,462
|
|
|
$
|
(592,220
|
)
|
|
$
|
335,758
|
|
|
$
|
(333,063
|
)
|
|
$
|
183,284
|
|
|
$
|
211,826
|
|
|
$
|
(775
|
)
|
|
$
|
(211,354
|
)
|
|
$
|
182,981
|
|
|
$
|
288,949
|
|
|
$
|
314,603
|
|
|
$
|
792
|
|
|
$
|
(315,395
|
)
|
|
$
|
288,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
Cash flows provided by (used in) operating activities of
continuing operations
|
|
$
|
104,480
|
|
|
$
|
383,528
|
|
|
$
|
3,383
|
|
|
$
|
|
|
|
$
|
491,391
|
|
|
$
|
50,989
|
|
|
$
|
620,503
|
|
|
$
|
1,157
|
|
|
$
|
|
|
|
$
|
672,649
|
|
|
$
|
(20,771
|
)
|
|
$
|
485,704
|
|
|
$
|
694
|
|
|
$
|
|
|
|
$
|
465,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments in debt securities
|
|
|
(279,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279,175
|
)
|
|
|
(2,744,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,744,575
|
)
|
|
|
(1,705,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705,517
|
)
|
|
|
|
|
Proceeds from maturity and sale of investments in debt securities
|
|
|
1,207,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207,080
|
|
|
|
2,289,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,289,780
|
|
|
|
1,309,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309,995
|
|
|
|
|
|
Transfer (to)/from restricted cash
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
|
128,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,561
|
|
|
|
|
|
Acquisition of Alpharma, net of cash acquired
|
|
|
(1,557,347
|
)
|
|
|
|
|
|
|
532,586
|
|
|
|
|
|
|
|
(1,024,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
(23
|
)
|
|
|
(296,414
|
)
|
|
|
|
|
|
|
|
|
|
|
(296,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(43,676
|
)
|
|
|
(13,766
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
(57,455
|
)
|
|
|
(31,844
|
)
|
|
|
(17,758
|
)
|
|
|
|
|
|
|
|
|
|
|
(49,602
|
)
|
|
|
(22,505
|
)
|
|
|
(23,311
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,816
|
)
|
|
|
|
|
Purchases of product rights and intellectual property
|
|
|
|
|
|
|
(12,065
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,065
|
)
|
|
|
|
|
|
|
(98,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(98,942
|
)
|
|
|
|
|
|
|
(85,795
|
)
|
|
|
|
|
|
|
|
|
|
|
(85,795
|
)
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
10,350
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
10,410
|
|
|
|
8
|
|
|
|
86,279
|
|
|
|
|
|
|
|
|
|
|
|
86,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to Ligand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
|
|
(37,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,750
|
)
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(662,912
|
)
|
|
|
(25,771
|
)
|
|
|
532,573
|
|
|
|
|
|
|
|
(156,110
|
)
|
|
|
(449,416
|
)
|
|
|
(326,835
|
)
|
|
|
|
|
|
|
|
|
|
|
(776,251
|
)
|
|
|
(327,210
|
)
|
|
|
(109,105
|
)
|
|
|
|
|
|
|
|
|
|
|
(436,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439
|
|
|
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,656
|
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,338
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
(2,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,441
|
)
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
705
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
617,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
Payments on other long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342,691
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(30,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,076
|
)
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
|
|
(10,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,680
|
)
|
|
|
|
|
Intercompany
|
|
|
365,449
|
|
|
|
(362,350
|
)
|
|
|
(3,099
|
)
|
|
|
|
|
|
|
|
|
|
|
297,101
|
|
|
|
(297,772
|
)
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
367,938
|
|
|
|
(368,921
|
)
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
950,371
|
|
|
|
(362,350
|
)
|
|
|
(3,099
|
)
|
|
|
|
|
|
|
584,922
|
|
|
|
306,935
|
|
|
|
(297,772
|
)
|
|
|
671
|
|
|
|
|
|
|
|
9,834
|
|
|
|
422,389
|
|
|
|
(368,921
|
)
|
|
|
983
|
|
|
|
|
|
|
|
54,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
391,939
|
|
|
|
(4,593
|
)
|
|
|
532,857
|
|
|
|
|
|
|
|
920,203
|
|
|
|
(91,492
|
)
|
|
|
(4,104
|
)
|
|
|
1,828
|
|
|
|
|
|
|
|
(93,768
|
)
|
|
|
74,408
|
|
|
|
7,678
|
|
|
|
1,677
|
|
|
|
|
|
|
|
83,763
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
9,718
|
|
|
|
4,645
|
|
|
|
5,646
|
|
|
|
|
|
|
|
20,009
|
|
|
|
101,210
|
|
|
|
8,749
|
|
|
|
3,818
|
|
|
|
|
|
|
|
113,777
|
|
|
|
26,802
|
|
|
|
1,071
|
|
|
|
2,141
|
|
|
|
|
|
|
|
30,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
401,657
|
|
|
$
|
52
|
|
|
$
|
538,503
|
|
|
$
|
|
|
|
$
|
940,212
|
|
|
$
|
9,718
|
|
|
$
|
4,645
|
|
|
$
|
5,646
|
|
|
$
|
|
|
|
$
|
20,009
|
|
|
$
|
101,210
|
|
|
$
|
8,749
|
|
|
$
|
3,818
|
|
|
$
|
|
|
|
$
|
113,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
KING PHARMACEUTICALS, INC.
|
|
|
|
By:
|
/s/ Brian
A. Markison
|
Brian A. Markison
Chairman of the Board,
President and Chief Executive Officer
February 27, 2009
In accordance with the requirements of the Securities Exchange
Act, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ BRIAN
A. MARKISON
Brian
A. Markison
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
February 27, 2009
|
|
|
|
|
|
/s/ JOSEPH
SQUICCIARINO
Joseph
Squicciarino
|
|
Chief Financial Officer (principal financial and accounting
officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ TED
G. WOOD
Ted
G. Wood
|
|
Lead Independent Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ EARNEST
W. DEAVENPORT, JR.
Earnest
W. Deavenport, Jr.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ ELIZABETH
M. GREETHAM
Elizabeth
M. Greetham
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ PHILIP
A. INCARNATI
Philip
A. Incarnati
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ GREGORY
D. JORDAN
Gregory
D. Jordan
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ R.
CHARLES MOYER
R.
Charles Moyer
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ D.
GREG ROOKER
D.
Greg Rooker
|
|
Director
|
|
February 27, 2009
|
II-1
KING
PHARMACEUTICALS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C Additions
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
Charged to
|
|
|
(Credited)
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Cost and
|
|
|
to Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts, deducted from accounts
receivable in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
5,297
|
|
|
|
266
|
|
|
|
863
|
|
|
|
1,713
|
|
|
|
4,713
|
|
Year ended December 31, 2007
|
|
|
5,437
|
|
|
|
950
|
|
|
|
|
|
|
|
1,090
|
|
|
|
5,297
|
|
Year ended December 31, 2006
|
|
|
12,280
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
6,705
|
|
|
|
5,437
|
|
Valuation allowance for deferred tax assets, deducted from
deferred income tax assets in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
9,094
|
|
|
|
885
|
|
|
|
267,090
|
|
|
|
653
|
|
|
|
276,416
|
|
Year ended December 31, 2007
|
|
|
8,085
|
|
|
|
2,248
|
|
|
|
|
|
|
|
1,239
|
|
|
|
9,094
|
|
Year ended December 31, 2006
|
|
|
9,214
|
|
|
|
1,040
|
|
|
|
|
|
|
|
2,169
|
|
|
|
8,085
|
|
|
|
|
(1) |
|
Amounts represent write-offs of accounts. |
|
(2) |
|
Reserve related to certain state and foreign net operating
losses and certain other deferred tax assets of Alpharma. |
S-1