ptx_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended: September 30, 2014
o
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from: _______ to _____________
001-14494
Commission File Number
PERNIX THERAPEUTICS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Maryland
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33-0724736
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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10 North Park Place, Suite 201, Morristown, NJ
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07960
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(Address of principal executive offices)
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(Zip Code)
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(800) 793-2145
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨.
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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o
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Accelerated filer
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þ
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Non-accelerated filer
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o
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Smaller reporting company
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o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
On November 7, 2014, there were 38,291,749 shares outstanding of the Registrant’s common stock, par value $0.01 per share.
PERNIX THERAPEUTICS HOLDINGS, INC.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended September 30, 2014
INDEX
PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
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4
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Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013
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5
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Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2014
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6
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Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2014 and 2013
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7
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Notes to Condensed Consolidated Financial Statements (unaudited)
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8
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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31
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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44
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Item 4.
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Controls and Procedures
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44
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PART II.
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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46
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Item 1A.
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Risk Factors
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46
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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75
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Item 3.
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Defaults upon Senior Securities
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75
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Item 4.
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Mine Safety Disclosures
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75
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Item 5.
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Other Information
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76
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Item 6.
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Exhibits
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76
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Signatures
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77
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Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of these “safe harbor” provisions with regard to the forward-looking statements in this Form 10-Q and in the documents that are incorporated herein by reference. These forward-looking statements reflect our current views with respect to future events and financial performance. Specifically, forward-looking statements may include:
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●
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projections of revenues, expenses, income, income per share and other performance measures;
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●
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statements regarding expansion of operations, including entrance into new markets and development of products; and
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●
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statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.
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These forward-looking statements express our best judgment based on currently available information and we believe that the expectations reflected in our forward-looking statements are reasonable.
By their nature, however, forward-looking statements often involve assumptions about the future. Such assumptions are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. As such, we cannot guarantee you that the expectations reflected in our forward-looking statements will actually be achieved. Actual results may differ materially from those in the forward-looking statements due to, among other things, the following factors:
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●
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changes in general business, economic and market conditions;
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●
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volatility in the securities markets generally or in the market price of our stock specifically; and
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●
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the risks outlined in the section entitled “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2014.
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We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-Q. Except as required by law, we do not undertake any obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERNIX THERAPEUTICS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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September 30,
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December 31,
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2014
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2013
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ |
16,429 |
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$ |
15,647 |
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Accounts receivable, net
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51,844 |
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25,681 |
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Inventory, net
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11,592 |
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13,810 |
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Note receivable, net of unamortized discount of $172 and $101, respectively
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4,675 |
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4,749 |
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Prepaid expenses and other current assets
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10,512 |
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5,879 |
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Income tax receivable
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5,403 |
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1,318 |
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Deferred income taxes
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12,152 |
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9,301 |
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Total current assets
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112,607 |
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76,385 |
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Property and equipment, net
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1,066 |
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6,872 |
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Other assets:
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Goodwill
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45,890 |
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42,497 |
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Intangible assets, net
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319,139 |
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80,022 |
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Note receivable, net of unamortized discount of $0 and $319, respectively
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─
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4,531 |
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Other long-term assets
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11,490 |
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1,079 |
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Total assets
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$ |
490,192 |
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$ |
211,386 |
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LIABILITIES
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Current liabilities:
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Accounts payable
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$ |
9,507 |
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$ |
3,444 |
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Accrued personnel expenses
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2,715 |
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3,803 |
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Accrued allowances
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45,082 |
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34,286 |
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Other accrued expenses
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10,428 |
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5,533 |
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Contingent consideration – Cypress acquisition
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─
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1,330 |
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Other liabilities
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5,327 |
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4,072 |
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Debt
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18,782 |
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17,000 |
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Total current liabilities
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91,841 |
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69,468 |
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Long-term liabilities:
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Other liabilities
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11,390 |
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14,386 |
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Debt
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─
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1,310 |
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Senior convertible notes
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65,000 |
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─
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Senior secured notes – TREXIMET®
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220,000 |
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─
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Deferred income taxes
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13,006 |
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15,499 |
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Total liabilities
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401,237 |
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100,663 |
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Commitments and contingencies (Note 18)
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STOCKHOLDERS’ EQUITY
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Common stock, $.01 par value, 90,000 shares authorized, 40,623 and 39,318 issued and 38,204 and 37,189 outstanding at September 30, 2014 and December 31, 2013, respectively
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|
382 |
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372 |
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Treasury stock, at cost, 2,419 and 2,129 shares held at September 30, 2014 and December 31, 2013, respectively
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(5,075 |
) |
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(4,001 |
) |
Additional paid-in capital
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126,317 |
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119,554 |
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Accumulated deficit
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(32,669 |
) |
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(5,202 |
) |
Total stockholders’ equity
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88,955 |
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|
110,723 |
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Total liabilities and stockholders’ equity
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$ |
490,192 |
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|
$ |
211,386 |
|
See accompanying notes to condensed consolidated financial statements.
PERNIX THERAPEUTICS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per share data, unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2014
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2013
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2014
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2013
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Net revenues
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$ |
31,479 |
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$ |
18,295 |
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$ |
67,913 |
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$ |
60,946 |
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Costs and operating expenses:
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Cost of product sales
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11,689 |
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9,572 |
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30,350 |
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33,812 |
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Selling, general and administrative expenses
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15,049 |
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11,740 |
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42,415 |
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38,960 |
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Research and development expense
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290 |
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633 |
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1,604 |
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|
3,633 |
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Depreciation and amortization expense
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|
10,159 |
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|
2,317 |
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14,319 |
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6,419 |
|
(Gain) / loss on disposal of assets
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|
7 |
|
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|
(4 |
) |
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160 |
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|
1 |
|
(Gain) / loss on sale of PML (including impairment charge)
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(13 |
) |
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─
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6,659 |
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─
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Total costs and operating expenses
|
|
|
37,181 |
|
|
|
24,258 |
|
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|
95,507 |
|
|
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82,825 |
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|
|
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|
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Loss from operations
|
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|
(5,702 |
) |
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(5,963 |
) |
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|
(27,594 |
) |
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|
(21,879 |
) |
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|
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|
|
|
|
|
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|
|
|
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Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Change in fair value of put right
|
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─
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|
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|
(2,146 |
) |
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─
|
|
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|
(6,116 |
) |
Change in fair value of contingent consideration
|
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─
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|
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|
522 |
|
|
─
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|
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|
805 |
|
Interest expense, net
|
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|
(5,335 |
) |
|
|
(783 |
) |
|
|
(8,833 |
) |
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|
(3,492 |
) |
Gain on sale of investment
|
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─
|
|
|
─
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|
|
─
|
|
|
|
3,605 |
|
Total (loss) income, net
|
|
|
(5,335 |
) |
|
|
(2,407 |
) |
|
|
(8,833 |
) |
|
|
(5,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
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|
(11,037 |
) |
|
|
(8,370 |
) |
|
|
(36,427 |
) |
|
|
(27,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
655 |
|
|
|
(2,547 |
) |
|
|
(8,960 |
) |
|
|
(7,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,692 |
) |
|
$ |
(5,823 |
) |
|
$ |
(27,467 |
) |
|
$ |
(19,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Unrealized gains during the period, net of tax of $411 for the nine months ended September 30, 2013
|
|
|
|
|
|
|
|
|
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|
(702 |
) |
Reclassification adjustment for net realized gain included in net loss, net of tax of $1,322 for the nine months ended September 30, 2013
|
|
─
|
|
|
─
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|
|
─
|
|
|
|
(2,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(11,692 |
) |
|
$ |
(5,823 |
) |
|
$ |
(27,467 |
) |
|
$ |
(22,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss per share, basic
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|
$ |
(0.31 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.54 |
) |
Net loss per share, diluted
|
|
$ |
(0.31 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.54 |
) |
Weighted-average common shares, basic
|
|
|
38,121 |
|
|
|
37,121 |
|
|
|
37,743 |
|
|
|
36,204 |
|
Weighted-average common shares, diluted
|
|
|
38,121 |
|
|
|
37,121 |
|
|
|
37,743 |
|
|
|
36,204 |
|
See accompanying notes to condensed consolidated financial statements.
PERNIX THERAPEUTICS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
|
|
Common Stock Shares
|
|
|
Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Treasury Stock
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
|
37,189 |
|
|
$ |
372 |
|
|
$ |
119,554 |
|
|
$ |
(4,001 |
) |
|
$ |
(5,202 |
) |
|
$ |
110,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
─
|
|
|
─
|
|
|
|
1,402 |
|
|
─
|
|
|
─
|
|
|
|
1,402 |
|
Stock options
|
|
─
|
|
|
─
|
|
|
|
1,906 |
|
|
─
|
|
|
─
|
|
|
|
1,906 |
|
Employee stock purchase plan
|
|
─
|
|
|
─
|
|
|
|
89 |
|
|
─
|
|
|
─
|
|
|
|
89 |
|
Issuance of stock options for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services from non-employees
|
|
─
|
|
|
─
|
|
|
|
119 |
|
|
─
|
|
|
─
|
|
|
|
119 |
|
Cancellation of ParaPro stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
termination of contract
|
|
─
|
|
|
─
|
|
|
|
(1,294 |
) |
|
─
|
|
|
─
|
|
|
|
(1,294 |
) |
Issuance of warrants in connection with acquisition of TREXIMET®
|
|
─
|
|
|
─
|
|
|
|
2,359 |
|
|
─
|
|
|
─
|
|
|
|
2,359 |
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon the exercise of options, net of tax
|
|
|
718 |
|
|
|
7 |
|
|
|
2,312 |
|
|
|
(321 |
) |
|
─
|
|
|
|
1,998 |
|
Issuance of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the cashless exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from non-employees
|
|
|
35 |
|
|
|
1 |
|
|
|
(1 |
) |
|
─
|
|
|
─
|
|
|
─
|
|
Issuance of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with the Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock purchase plan
|
|
|
11 |
|
|
─
|
|
|
|
20 |
|
|
─
|
|
|
─
|
|
|
|
20 |
|
Issuance of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the vesting of restricted stock
|
|
|
434 |
|
|
|
4 |
|
|
|
(4 |
) |
|
─
|
|
|
─
|
|
|
─
|
|
Forfeiture of restricted common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock resulting from payment of
|
|
|
(183 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
(753 |
) |
|
─
|
|
|
|
(753 |
) |
employee income tax liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
based awards
|
|
─
|
|
|
─
|
|
|
|
(147 |
) |
|
─
|
|
|
─
|
|
|
|
(147 |
) |
Net loss
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
|
(27,467 |
) |
|
|
(27,467 |
) |
Balance at September 30, 2014
|
|
|
38,204 |
|
|
$ |
382 |
|
|
$ |
126,317 |
|
|
$ |
(5,075 |
) |
|
$ |
(32,669 |
) |
|
$ |
88,955 |
|
See accompanying notes to condensed consolidated financial statements.
PERNIX THERAPEUTICS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(27,467 |
) |
|
$ |
(19,411 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
262 |
|
|
|
489 |
|
Amortization of intangibles and interest accretion of contingent consideration
|
|
|
14,057 |
|
|
|
5,931 |
|
Amortization of deferred financing costs
|
|
|
1,391 |
|
|
|
1,120 |
|
Accretion of notes receivable
|
|
|
(243 |
) |
|
|
(28 |
) |
Deferred income tax benefit
|
|
|
(5,344 |
) |
|
|
(10,230 |
) |
Gain on sale of investment
|
|
─
|
|
|
|
(3,605 |
) |
Loss on disposal of assets
|
|
|
160 |
|
|
|
1 |
|
Loss on sale of PML (including impairment charge)
|
|
|
6,659 |
|
|
─
|
|
Stock-based compensation expense
|
|
|
3,397 |
|
|
|
1,516 |
|
Expense from stock options issued in exchange for services
|
|
─
|
|
|
|
426 |
|
Expense from stock options issued in exchange for services
|
|
|
119 |
|
|
─
|
|
Cancellation of ParaPRO stock options in connection with termination of contract
|
|
|
(1,294 |
) |
|
─
|
|
Change in fair value of put right
|
|
─
|
|
|
|
6,116 |
|
Change in fair value of contingent consideration
|
|
─
|
|
|
|
(805 |
) |
Changes in operating assets and liabilities (net of effect of acquisitions and dispositions):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26,197 |
) |
|
|
14,507 |
|
Inventory
|
|
|
1,650 |
|
|
|
4,903 |
|
Prepaid expenses and other assets
|
|
|
(2,547 |
) |
|
|
(2,969 |
) |
Accounts payable
|
|
|
6,157 |
|
|
|
100 |
|
Income taxes
|
|
|
(4,085 |
) |
|
|
1,507 |
|
Accrued expenses
|
|
|
10,072 |
|
|
|
(8,995 |
) |
Net cash provided by (used in) operating activities
|
|
|
(23,253 |
) |
|
|
(9,427 |
) |
Cash flows provided by (used) in investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of TREXIMET®
|
|
|
(253,000 |
) |
|
─
|
|
Payments received on notes receivable
|
|
|
4,850 |
|
|
─
|
|
Proceeds from sale of investment
|
|
─
|
|
|
|
4,605 |
|
Acquisition of Cypress
|
|
─
|
|
|
|
(310 |
) |
Proceeds from the sale of PML
|
|
|
1,137 |
|
|
─
|
|
Proceeds from sale of certain Cypress intangible assets
|
|
|
135 |
|
|
|
19,588 |
|
Proceeds from sale of property and equipment
|
|
|
43 |
|
|
|
27 |
|
Purchase of property, plant and equipment
|
|
|
(561 |
) |
|
|
(510 |
) |
Net cash provided by (used in) investing activities
|
|
|
(247,396 |
) |
|
|
23,400 |
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Cash acquired in connection with acquisition of Somaxon
|
|
─
|
|
|
|
2,881 |
|
Payments on original Midcap loan
|
|
─
|
|
|
|
(12,497 |
) |
Payments on Midcap term loan
|
|
─
|
|
|
|
(10,000 |
) |
Proceeds from issuance of secured senior notes – TREXIMET®
|
|
|
220,000 |
|
|
─
|
|
Proceeds from issuance of convertible senior notes
|
|
|
65,000 |
|
|
─
|
|
Payments on financing costs
|
|
|
(14,064 |
) |
|
─
|
|
Net proceeds (payments) on Midcap revolving credit facility
|
|
|
1,923 |
|
|
|
(5,761 |
) |
Payments on contracts payable
|
|
|
(2,500 |
) |
|
|
(1,700 |
) |
Payments on mortgages and capital leases
|
|
|
(46 |
) |
|
|
(120 |
) |
Income tax benefit on stock-based awards
|
|
|
(147 |
) |
|
|
(84 |
) |
Proceeds from exercise of stock options, net of tax
|
|
|
2,018 |
|
|
|
184 |
|
Payments of employee income tax liability with surrender
|
|
|
|
|
|
|
|
|
of employee restricted stock
|
|
|
(753 |
) |
|
|
(208 |
) |
Net cash provided by (used in) financing activities
|
|
|
271,431 |
|
|
|
(27,305 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
782 |
|
|
|
(13,332 |
) |
Cash and cash equivalents, beginning of period
|
|
|
15,647 |
|
|
|
23,023 |
|
Cash and cash equivalents, end of period
|
|
$ |
16,429 |
|
|
$ |
9,691 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
615 |
|
|
$ |
1,370 |
|
Interest paid during the period
|
|
$ |
4,609 |
|
|
$ |
839 |
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Accrued bonus paid in restricted common stock
|
|
$ |
─
|
|
|
$ |
104 |
|
Acquisition of license – contract payable
|
|
$ |
1,950 |
|
|
$ |
500 |
|
Acquisition of Cypress and Somaxon – purchase price adjustment
|
|
$ |
─
|
|
|
$ |
5,916 |
|
Acquisition of Somaxon – fair value of common stock
|
|
$ |
─
|
|
|
$ |
23,840 |
|
Acquisition of TREXIMET® - warrants issued to Pozen
|
|
$ |
2,359 |
|
|
$ |
─
|
|
See accompanying notes to condensed consolidated financial statements.
PERNIX THERAPEUTICS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pernix Therapeutics Holdings, Inc. (“Pernix”, the “Company”, “we”, “our” and "us") is a specialty pharmaceutical company focused on the acquisition, development and commercialization of prescription drugs, primarily for the U.S. market. The Company targets underserved therapeutic areas, such as central nervous system (CNS), including neurology and psychiatry, and has an interest in expanding into additional specialty segments. The Company promotes its branded products to physicians through its Pernix sales force, uses contracted sales organizations to market its non-core cough and cold products, and markets its generic portfolio through its wholly owned subsidiaries, Macoven Pharmaceuticals, LLC (“Macoven”) and Cypress Pharmaceuticals, Inc. (“Cypress”).
The Company’s branded products include TREXIMET®, a medication indicated for the acute treatment of migraine pain and inflammation, SILENOR®, a non-controlled substance and approved medication for the treatment of insomnia characterized by difficulty with sleep, CEDAX®, an antibiotic for middle ear infections, and a family of prescription products for cough and cold (ZUTRIPRO®, REZIRA®, and VITUZ®). The Company recently entered into an agreement with a third party to promote the Company’s prescription treatments for cough and cold (ZUTRIPRO, REZIRA, and VITUZ). The Company also has an Exclusive License Agreement with Osmotica Pharmaceutical Corp. to promote KHEDEZLA™, Extended-Release Tablets, 50 and 100 mg for major depressive disorder. As described below, the Company completed the acquisition of the United States (“U.S.”) intellectual property rights to the migraine product, TREXIMET on August 20, 2014.
The Company promotes its branded products through its sales and marketing organization that covers approximately 100 sales territories. The Company will also supplement its sales effort from time to time by contracting with other third party marketing organizations to assist in promoting certain of its products.
The Company sells its generic products in the areas of cough and cold, pain, vitamins, dermatology, antibiotics and gastroenterology through its wholly-owned subsidiaries, Macoven and Cypress.
Acquisition of TREXIMET®.
On August 20, 2014, the Company, through a wholly owned subsidiary Pernix Ireland Limited (“PIL”), formerly known as Worrigan Limited, completed the acquisition of the U.S. intellectual property rights to the pharmaceutical product, TREXIMET from GlaxoSmithKline plc and certain of its related affiliates (together “GSK”). See Note 10, Business Combination, for further discussion.
Note 2.
|
Basis of Presentation and Summary of Significant Accounting Policies
|
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements. Operating results for the three and nine-month periods ended September 30, 2014 are not necessarily indicative of the results for future periods or the full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Pernix’s wholly-owned subsidiaries Pernix Therapeutics, LLC, GTA GP, Inc., GTA LP, Inc., Gaine, Inc., Macoven, Pernix Manufacturing, LLC, or PML (sold on April 2), Respicopea, Inc., Cypress, Cypress’ subsidiary, Hawthorn Pharmaceuticals, Inc., Pernix Sleep, Inc., also known as Somaxon Pharmaceuticals, Inc., or Somaxon (acquired March 6, 2013) and Pernix Ireland Limited, or PIL, formerly known as Worrigan Linited. Pernix Sleep is included only for the period subsequent to its acquisition. Transactions between and among the Company and its consolidated subsidiaries are eliminated.
Management’s Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity with GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the condensed consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates of the Company include: revenue recognition, sales allowances such as returns on product sales, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales incentive-based pay, amortization, depreciation, stock-based compensation, the determination of fair values of assets and liabilities in connection with business combinations, and deferred income taxes.
Fair Value of Financial Instruments
A financial instrument is defined as cash equivalent, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from another party. The Company’s financial instruments consist primarily of cash equivalents (including our Regions Trust Account which invests in short-term securities consisting of sweep accounts, money market accounts and money market mutual funds), notes receivable, our credit facility and senior convertible notes. The carrying values of these assets and liabilities approximate their fair value.
Revenue Recognition
The Company records all of its revenue from product sales, manufacturing sales and co-promotion agreements when realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed and are billable; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company records revenue from product sales when the customer takes ownership and assumes risk of loss (free-on-board destination). At the time of a product sale, estimates for a variety of sales deductions, such as returns on product sales, government program rebates, price adjustments and prompt pay discounts are recorded.
For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The estimated selling price of each deliverable is determined using the following hierarchy of values: (i) vendor-specific objective evidence of fair value, (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“BESP”). The BESP reflects the best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis. In most cases the Company expects to use TPE or BESP for allocating consideration to each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation.
The Company recognizes revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance and its achievability was not reasonably assured at the inception of the collaboration arrangement and (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone earned and (iii) it would result in additional payments being due to the Company. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone. Any amounts received under the promotion arrangement in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations.
The following table sets forth a summary of Pernix’s consolidated net revenues for the three and nine months ended September 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales – TREXIMET
|
|
$ |
16,246 |
|
|
$ |
─
|
|
|
$ |
16,246 |
|
|
$ |
─
|
|
Net product sales Other
|
|
|
14,168 |
|
|
|
17,150 |
|
|
|
48,215 |
|
|
|
55,991 |
|
Net product sales
|
|
|
30,414 |
|
|
|
17,150 |
|
|
|
64,461 |
|
|
|
55,991 |
|
Manufacturing revenue
|
|
─
|
|
|
|
487 |
|
|
|
1,025 |
|
|
|
2,222 |
|
Co-promotion and other revenue
|
|
|
1,065 |
|
|
|
658 |
|
|
|
2,427 |
|
|
|
2,733 |
|
Total Net Revenues
|
|
$ |
31,479 |
|
|
$ |
18,295 |
|
|
$ |
67,913 |
|
|
$ |
60,946 |
|
Significant Customers
The Company’s customers consist of drug wholesalers, retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its products directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies, chain drug stores, and other third parties. The following tables list the Company’s customers that individually comprised greater than 10% of total gross product sales for the three and nine months ended September 30, 2014 and 2013, or 10% of total accounts receivable as of September 30, 2014 and December 31, 2013.
|
|
Gross Product Sales
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
McKesson Corporation
|
|
|
38 |
% |
|
|
30 |
% |
|
|
37 |
% |
|
|
34 |
% |
AmerisourceBergen Drug Corporation (1)
|
|
|
25 |
% |
|
|
26 |
% |
|
|
28 |
% |
|
|
17 |
% |
Cardinal Health, Inc.
|
|
|
29 |
% |
|
|
22 |
% |
|
|
24 |
% |
|
|
27 |
% |
Total
|
|
|
92 |
% |
|
|
78 |
% |
|
|
89 |
% |
|
|
78 |
% |
(1) The gross sales shifted between Cardinal and AmerisourceBergen for the nine months ended September 30, 2014 due to the fact that AmerisourceBergen entered into a strategic, long-term relationship with Walgreens in March 2013 which includes a ten-year comprehensive primary pharmaceutical distribution contract with Walgreens among other things. Previously, Cardinal was the primary distributor for Walgreens.
|
|
Accounts Receivable
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
McKesson Corporation
|
|
|
33 |
% |
|
|
35 |
% |
AmerisourceBergen Drug Corporation
|
|
|
30 |
% |
|
|
23 |
% |
Cardinal Health, Inc.
|
|
|
28 |
% |
|
|
16 |
% |
Total
|
|
|
91 |
% |
|
|
74 |
% |
Cost of Product Sales
Cost of product sales is comprised of (i) costs to manufacture or acquire products sold to customers; (ii) royalty, co-promotion and other revenue sharing payments under license and other agreements granting the Company rights to sell related products; (iii) direct and indirect distribution costs incurred in the sale of products; and (iv) the value of any write-offs or donations of obsolete or damaged inventory that cannot be sold. The Company acquired the rights to sell certain of its commercial products through license and assignment agreements with the original developers or other parties with interests in these products. These agreements obligate the Company to make payments under varying payment structures based on its net revenue from related products.
In connection with the acquisitions of Cypress and Somaxon, the Company adjusted the predecessor cost basis, increasing inventory to fair value as required by Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. As a result, the Company recorded adjustments to increase the inventory to fair value in the amount of $8.6 million and $695,000 at the time of acquisition for Cypress and Somaxon, respectively. For the three months ended September 30, 2014 and 2013, $194,000 and $412,000 of the increase in the basis of the inventory was amortized and included in cost of product sales, as the inventory was subsequently sold. For the nine months ended September 30, 2014 and 2013, $2.6 million and $5.1 million of the increase in the basis of the inventory was amortized and included in cost of product sales, as the inventory was subsequently sold. The balance remaining of the increase in the basis of the inventory acquired was $124,000 as of September 30, 2014.
Net Revenues
Product Sales
The Company recognizes revenue from its product sales in accordance with its revenue recognition policy discussed above. The Company sells its products primarily to large national wholesalers, which have the right to return the products they purchase. The Company is required to estimate the amount of future returns at the time of revenue recognition. The Company recognizes product sales net of estimated allowances for product returns, government program rebates, price adjustments, and prompt pay discounts.
Product Returns
Consistent with industry practice, the Company offers contractual return rights that allow its customers to return short-dated or expiring products within an 18-month period, commencing from six months prior to and up to twelve months subsequent to the product expiration date. The Company’s products have a 15 to 42 month expiration period from the date of manufacture. The Company adjusts its estimate of product returns if it becomes aware of other factors that it believes could significantly impact its expected returns. These factors include its estimate of inventory levels of its products in the distribution channel, the shelf life of the product shipped, review of consumer consumption data as reported by external information management companies, actual and historical return rates for expired lots, the forecast of future sales of the product, competitive issues such as new product entrants and other known changes in sales trends. The Company estimates returns at percentages up to 10% of sales of branded and generic products and, from time to time, higher on launch return percentages for sales of new products. Returns estimates are based upon historical data and other facts and circumstances that may impact future expected returns to derive an average return percentage for our products. The returns reserve may be adjusted as sales history and returns experience is accumulated on this portfolio of products. The Company reviews and adjusts these reserves quarterly.
Government Program Rebates
The liability for Medicaid, Medicare and other government program rebates is estimated based on historical and current rebate redemption and utilization rates contractually submitted by each state’s program administrator and assumptions regarding future government program utilization for each product sold.
Price Adjustments
The Company’s estimates of price adjustments, which include coupons, customer rebates, service fees, chargebacks, shelf stock adjustments, and other fees and discounts, are based on its estimated mix of sales to various third-party payors who are entitled, either contractually or statutorily, to discounts from the listed prices of our products and contracted service fees with our wholesalers. In the event that the sales mix to third-party payors or the contract fees paid to the wholesalers are different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments that differ from its original estimates and such difference may be significant.
The Company’s estimates of discounts are applied pursuant to the contracts negotiated with certain customers and are primarily based on sales volumes. The Company, from time to time, offers certain promotional product-related incentives to its customers. These programs include sample cards to retail consumers, certain product incentives to pharmacy customers and other sales stocking allowances. For example, the Company has initiated coupon programs for certain of its promoted products whereby the Company offers a point-of-sale subsidy to retail consumers. The Company estimates its liabilities for these coupon programs based on redemption and utilization information provided by a third-party claims processing organization. The Company accounts for the costs of these special promotional programs as price adjustments, resulting in a reduction in gross revenue.
Any price adjustments that are not contractual or are non-recurring but that are offered at the time of sale or when a specific triggering event occurs, such as sales stocking allowances or price protection adjustments, are recorded as a reduction in revenue when the sales order is recorded or when the triggering event occurs. These allowances may be offered at varying times throughout the year or may be associated with specific events such as a new product launch, the reintroduction of a product or product price changes.
Prompt Payment Discounts
The Company typically requires its customers to remit payments within the first 30 days for branded products (60 to 120 days for generics, depending on the customer and the products purchased). The Company offers wholesale distributors a prompt payment discount if they make payments within these deadlines. This discount is generally 2%, but may be higher in some instances due to product launches and/or industry expectations. Because the Company’s wholesale distributors typically take advantage of the prompt pay discount, the Company accrues 100% of the prompt pay discounts, based on the gross amount of each invoice, at the time of our original sale, and apply earned discounts at the time of payment. This allowance is recorded as a reduction of accounts receivable and revenue. The Company adjusts the accrual periodically to reflect actual prompt payment discounts taken by the Company’s wholesale distributors. Historically, these adjustments have not been material. The Company does not anticipate that future changes to its estimates of prompt payment discounts will have a material impact on our net revenue.
Research and Development Costs
Research and development costs in connection with the Company’s internal programs for the development of products are expensed as incurred. Pernix either expenses research and development costs as incurred or will advance third parties a research and development fee which is amortized over the term of the related agreement. Research and development expenses were approximately $290,000 and $633,000 for the three months ended September 30, 2014 and 2013, respectively, and $1.6 million and $3.6 million for the nine months ended September 30, 2014 and 2013, respectively.
Segment Information
The Company currently markets two major product lines: a branded pharmaceuticals product line and a generic pharmaceuticals product line. These product lines qualify for reporting as a single segment in accordance with GAAP because they are similar in the nature of the products and services, production processes, types of customer, distribution methods and regulatory environment. The Company had a manufacturing subsidiary, Pernix Manufacturing, LLC (“PML”), until April 21, 2014, when it was sold (see Note 9, Disposal of PML), but the majority of its revenue was generated through intercompany sales and was eliminated in consolidation. It is deemed immaterial for segment reporting purposes. The Company believes that its sale of PML does not qualify as discontinued operations in accordance with ASC 205, Presentation of Financial Statements.
Income Taxes
Temporary differences are differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred taxes represent the future tax consequences on income taxes when the reported amount of the asset or liability is recovered or settled. Deferred taxes are measured using the enacted tax rates expected to apply to taxable income in periods in which the deductible or taxable temporary difference is expected to be recovered or settled. The effect on changes in tax rates and laws are recognized in income from continuing operations in the period that includes the enactment date. The Company will recognize deferred tax assets for deductible temporary differences, operating loss and tax credit carryforwards. In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future realization of deferred tax assets ultimately is dependent on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period under the tax law. Management considers the four sources of taxable income in making this assessment. Management believes that it is more likely than not that the Company will realize the benefits. Management has also evaluated the potential impact in accounting for uncertainties in income taxes and has determined that it has no significant uncertain income tax positions as of September 30, 2014. Income tax returns subject to review by taxing authorities include 2010, 2011, 2012 and 2013.
Earnings per Share
Earnings per common share is presented under two formats: basic earnings per common share and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, plus the potentially dilutive impact of common stock equivalents (i.e. restricted stock, stock options, warrants and convertible notes). Dilutive common share equivalents consist of the incremental common shares issuable upon exercise of stock options.
The following table sets forth the computation of basic and diluted net loss per share (in thousands except per share data):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,692 |
) |
|
$ |
(5,823 |
) |
|
$ |
(27,467 |
) |
|
$ |
(19,411 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, basic
|
|
|
38,121 |
|
|
|
37,121 |
|
|
|
37,743 |
|
|
|
36,204 |
|
Dilutive effect of stock options
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, diluted
|
|
|
38,121 |
|
|
|
37,121 |
|
|
|
37,743 |
|
|
|
36,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$ |
(0.31 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.54 |
) |
As of September 30, 2014, total outstanding options are approximately 4.1 million and total non-vested restricted stock are approximately 217,000. As of September 30, 2013, the total outstanding options were approximately 1.6 million and total non-vested restricted stock were approximately 663,000. Options and non-vested restricted stock are not included above as their effect is anti-dilutive. See Note 16, Employee Compensation and Benefits, for information regarding the Company’s outstanding options.
As of September 30, 2014, total outstanding warrants are 969,000 issued in connection with the acquisitions of Somaxon Pharmaceuticals, Inc. (“Somaxon” or “Pernix Sleep”) and TREXIMET. Warrants are not included above as their effect is anti-dilutive.
As discussed in Note 14, Debt, in February 2014, the Company issued $65 million aggregate principal amount of 8.00% Convertible Senior Notes due 2019 (the “February 2014 Notes”) pursuant to Rule Regulation D and Section 4(2) under the Securities Act. Upon conversion, the February 2014 Notes may be settled in shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the February 2014 Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the February 2014 Notes is excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2014 causes such securities to be anti-dilutive. The potential dilutive effect of these securities is shown in the chart below (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Conversion of the February 2014 Notes
|
|
|
18,056 |
|
|
|
─
|
|
|
|
14,683 |
|
|
|
─
|
|
Pozen warrants
|
|
|
229 |
|
|
─
|
|
|
|
66 |
|
|
─
|
|
Somaxon warrants
|
|
|
7 |
|
|
─
|
|
|
─
|
|
|
─
|
|
Total potential dilutive effect of warrants
|
|
|
18,292 |
|
|
─
|
|
|
|
14,749 |
|
|
─
|
|
Investment in Marketable Securities and Other Comprehensive Income
During 2013, the Company held investments in marketable equity securities as available-for-sale and the change in the market value gave rise to other comprehensive income during the nine months ended September 30, 2013. The components of other comprehensive loss are recorded in the condensed consolidated statements of comprehensive loss, net of the related income tax effect. The Company liquidated its investments in marketable equity securities in June 2013 as described below.
On October 5, 2011, the Company acquired 2.6 million shares of TherapeuticsMD for a purchase price of $1.0 million, or $0.38 per share, representing approximately 3.2% of TherapeuticsMD’s outstanding common stock at that time. On June 14, 2013, the Company sold all its shares of TherapeuticsMD for approximately $4.6 million in cash proceeds, recognizing a gain on the investment of approximately $3.6 million.
Impairment of Long-lived Assets
The Company reviews long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. If any long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In connection with the sale of PML, the Company recorded impairment charges of $6.5 million against the net assets of PML in March 2014. See Note 9, Disposal of PML, for additional information.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) which changes the requirements for reporting discontinued operations. ASU 2014-08 changes the threshold for disclosing discontinued operations and the related disclosure requirements. Pursuant to ASU 2014-08, only disposals representing a strategic shift, such as a major line of business, a major geographical area or majority equity investment, should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under ASU 2014-08, the entity will be required to provide expanded disclosures. The guidance will be applied prospectively to new disposals and new classifications of disposal groups held for sale after the effective date. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014 with early adoption permitted but only for disposals or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance. The Company adopted ASU 2014-08 as of January 1, 2014. The Company believes its sale of PML does not qualify as discontinued operations upon its adoption of ASU 2014-08 as the Company’s manufacturing facility was not a major line of business and was not a significant component of its financial results during our period of ownership, July 1, 2012 through April 21, 2014. See Note 9, Disposal of PML, for additional information.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Presently, the Company is assessing what effect the adoption of ASU 2014-09 will have on its consolidated financial statements and accompanying notes.
There have been no other recent accounting pronouncements that have not yet been adopted by us that are expected to have a material impact on our condensed consolidated financial statements from the accounting pronouncements previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
Note 3.
|
Fair Value Measurement
|
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
Level 1
|
Quoted prices in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level 2
|
Inputs other than level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities as of the reporting date.
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
|
|
September 30, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund and trust cash sweep investments (1)
|
|
$ |
11,744 |
|
|
$ |
─ |
|
|
$ |
─ |
|
|
|
11,744 |
|
Total Assets
|
|
$ |
11,744 |
|
|
$ |
─ |
|
|
$ |
─ |
|
|
|
11,744 |
|
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund and trust cash sweep investments (1)
|
|
$ |
6,312 |
|
|
$ |
─ |
|
|
$ |
─ |
|
|
|
6,312 |
|
Total Assets
|
|
$ |
6,312 |
|
|
$ |
─ |
|
|
$ |
─ |
|
|
|
6,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (2)
|
|
$ |
─ |
|
|
$ |
─ |
|
|
$ |
1,330 |
|
|
$ |
1,330 |
|
Total Liabilities
|
|
$ |
─ |
|
|
$ |
─ |
|
|
$ |
1,330 |
|
|
$ |
1,330 |
|
(1)
|
The Company’s money market and trust cash sweep investments are included in cash and cash equivalents.
|
|
|
(2)
|
Contingent consideration consists of certain holdback payments and contingent cash and equity payments with respect to our acquisition of Cypress. The fair value of the contingent consideration is included in put option and contingent consideration on the accompanying condensed consolidated balance sheets. The fair value of contingent consideration was originally estimated using probability weighted discounted cash flow models (DCF). The DCF incorporates level 3 inputs including estimated discount rates that the Company believes market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to the Cypress acquisition agreement. The Company analyzes and evaluates these fair value measurements quarterly to determine whether valuation inputs continue to be relevant and appropriate or whether current period developments warrant adjustments to valuation inputs and related measurements. Any increases or decreases in discount rates would have an inverse impact on the value of related fair value measurements, while increases or decreases in expected cash flows would result in a corresponding increase or decrease in fair value measurements. The Company settled the matter of contingent consideration and paid the former shareholders of Cypress $1.3 million in January 2014.
|
The Company believes the carrying amount of its debt, notes payable and contracts payable, are a reasonable estimate of their fair value due to the short remaining maturity of these items and/or their fluctuating interest rates. There were no transfers between levels of the fair value hierarchy in 2014 or 2013.
Note 4.
|
Accounts Receivable
|
Accounts receivable consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Trade accounts receivable
|
|
$
|
50,179
|
|
|
$
|
25,585
|
|
Less allowance for prompt pay discounts
|
|
|
(1,042
|
)
|
|
|
(532
|
)
|
Less allowance for doubtful accounts
|
|
|
(228
|
)
|
|
|
(84
|
)
|
Total trade receivables
|
|
|
48,909
|
|
|
|
24,969
|
|
|
|
|
|
|
|
|
|
|
Receivables from third parties – revenue sharing arrangements
|
|
|
2,862
|
|
|
|
655
|
|
Other miscellaneous receivables
|
|
|
73
|
|
|
|
57
|
|
Total accounts receivable
|
|
$
|
51,844
|
|
|
$
|
25,681
|
|
The Company typically requires customers to remit payments within the first 30 days for brand purchases or 60 to 120 days for generic purchases (depending on the customer and the products purchased). The Company offers wholesale distributors a prompt payment discount, which is generally 2%-3%, as an incentive to remit payment within these deadlines. Accounts receivable are stated net of the estimated prompt pay discount.
The Company received two promissory notes from Breckenridge Pharmaceutical, Inc. (“Breckenridge”) in connection with the sale of its generic assets held by Cypress to Breckenridge on September 11, 2013. The notes mature on the first and second anniversary dates of the closing. The one year promissory note was paid in full during the three months ended September 30, 2014 in the amount of $4.9 million. The remaining two year promissory note in the amount of $4.9 million matures on September 11, 2015. The promissory note is recorded net of a present value discount (at an assumed rate of 4.25% on the two year note).
Inventories consist of the following (in thousands):
|
|
September 30,
2014
|
|
|
December 31,
2013
|
|
Raw materials
|
|
$
|
533
|
|
|
$
|
1,460
|
|
Packaging materials
|
|
|
62
|
|
|
|
841
|
|
Samples
|
|
|
154
|
|
|
|
732
|
|
Finished goods
|
|
|
12,893
|
|
|
|
13,411
|
|
Inventory, gross
|
|
|
13,642
|
|
|
|
16,444
|
|
Reserve for obsolescence
|
|
|
(2,050
|
)
|
|
|
(2,634
|
)
|
I Inventory, net
|
|
$
|
11,592
|
|
|
$
|
13,810
|
|
An increase in the basis of inventory related to the acquisitions of Cypress and Somaxon are included in the balances above as of September 30, 2014 and December 31, 2013. The increase included in raw materials was $124,000 and $221,000 as of September 30, 2014 and December 31, 2013. The increase included in finished goods was $0 and $2.7 million as of September 30, 2014 and December 31, 2013, respectively.
Note 7.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
September 30,
2014
|
|
|
December 31,
2013
|
|
Prepaid expenses
|
|
$ |
6,580 |
|
|
$ |
4,123 |
|
Deposits on inventory
|
|
|
516 |
|
|
|
236 |
|
Prepaid contracts
|
|
─
|
|
|
|
66 |
|
Capitalized financing costs
|
|
|
3,092 |
|
|
|
787 |
|
Deposits under leases and contracts
|
|
|
324 |
|
|
|
227 |
|
Deferred expenses
|
|
─
|
|
|
|
440 |
|
Total
|
|
$ |
10,512 |
|
|
$ |
5,879 |
|
Note 8.
|
Property, Plant and Equipment
|
Property, plant and equipment (“PP&E”) consist of the following (in thousands):
|
|
September 30,
2014
|
|
|
December 31,
2013
|
|
Land
|
|
$ |
572 |
|
|
$ |
1,356 |
|
Buildings and improvements
|
|
|
6 |
|
|
|
3,986 |
|
Vehicles
|
|
─
|
|
|
|
15 |
|
Equipment
|
|
|
619 |
|
|
|
2,344 |
|
Furniture and fixtures
|
|
|
279 |
|
|
|
189 |
|
Computer software and website
|
|
|
5 |
|
|
|
94 |
|
Total carrying value of PP&E, gross
|
|
|
1,481 |
|
|
|
7,984 |
|
Less accumulated depreciation
|
|
|
(415 |
) |
|
|
(1,112 |
) |
Total PP&E, net
|
|
$ |
1,066 |
|
|
$ |
6,872 |
|
Depreciation expense was $52,000 and $262,000 for the three and nine months ended September 30, 2014 and $181,000 and $489,000 for the three and nine months ended September 30, 2013, respectively.
On March 31, 2014, the Company entered into a definitive agreement to divest its manufacturing operations, PML, to Woodfield Pharmaceutical LLC. Accordingly, during the three months ended March 31, 2014, the Company adjusted PML’s net assets to fair value and, as a result, recorded the assets as held for sale, net of an impairment charge of approximately $6.5 million. The Company closed on the sale of PML on April 21, 2014. The Company received approximately $1.2 million in proceeds, net of the assumed mortgage and working capital liabilities at closing. The entire PML operation and the mortgage was assumed by the acquirer. The Company recorded an additional loss on the sale of approximately $215,000 at closing. The Company does not believe the disposal of PML qualifies as discontinued operations as the manufacturing facility was not a major line of business and was not a significant component of the Company’s financial results during our period of ownership.
Note 10.
|
Business Combination
|
Consideration paid by the Company for the business it purchased is allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition.
TREXIMET® Acquisition
On August 20, 2014, the Company, through a wholly owned subsidiary Pernix Ireland Limited (“PIL”), formerly known as Worrigan Limited, completed the acquisition of the U.S. intellectual property rights to the pharmaceutical product, TREXIMET, from GlaxoSmithKline plc and certain of its related affiliates (together “GSK”). There were no other tangible or intangible assets acquired or liabilities assumed related to TREXIMET intellectual property from GSK.
The total purchase price consisted of an upfront cash payment of $250.0 million paid to GSK upon closing of the transaction, and $17.0 million payable to GSK upon receipt of an updated Written Request for pediatric exclusivity from the U.S. Food & Drug Administration ("FDA"), subject to certain deductions based on delays in supplying the commercial product to the Company. Subsequently, the deductions resulting from delays in supplying the commercial product reduced the $17.0 million payable amount to $1.95 million. The Company funded this acquisition with $220.0 million in debt, plus approximately $32.0 million from available cash.
TREXIMET is a medication indicated for the acute treatment of migraine pain and inflammation and is manufactured by GSK under a license from Pozen Inc. (“Pozen”). The product is a combination of 85 mg of sumatriptan and 500 mg of naproxen sodium. In June 2003, Pozen licensed the U.S. only rights to TREXIMET to GSK. GSK was responsible for all commercialization activities in the U. S. The product was approved by the FDA in April 2008. In November 2011, Pozen sold most of the future royalty and milestone payments covering TREXIMET sales in the U.S. to CPPIB Credit Investments Inc. (“CPPIB”). TREXIMET is covered by three patents in the U.S. which expire August 14, 2017. In addition, the Company will be seeking pediatric exclusivity and other potential FDA exclusivity options which may provide an additional six months to three years of exclusivity.
In connection with the transaction, GSK assigned to PIL the Product Development and Commercialization Agreement, (the “PDC Agreement”) between GSK and Pozen. In connection with the assignment of the PDC Agreement, PIL paid $3.0 million to CPPIB (which owns the rights to the royalty payments under the PDC Agreement), and the Company granted Pozen a warrant (the “Warrant”) to purchase 500,000 shares of the Company’s common stock at an exercise price of $4.28 per share (the closing price of the Company’s common stock on May 13, 2014 as reported on NASDAQ). The Warrant is exercisable from the closing date (August 20, 2014) of the Agreement until February 28, 2018. The Company will continue to pay a royalty to Pozen under the PDC Agreement, equal to 18% of net sales with quarterly minimum royalty amounts of $4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.
The TREXIMET acquisition was accounted for as a business combination in accordance with ASC No. 805, Business Combinations which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The purchase price allocation is preliminary with respect to taxes and certain accruals and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. The Company believes the estimates used are reasonable and the significant effects of the TREXIMET acquisition are properly reflected. However, the estimates are subject to change as additional information becomes available and is assessed by the Company.
The following table summarizes the consideration paid to acquire TREXIMET and the estimated values of assets acquired and liabilities assumed in the accompanying unaudited condensed consolidated balance sheet based on their fair values on August 20, 2014 (in thousands):
Purchase price:
|
|
|
|
Cash consideration paid to GSK
|
|
$ |
250,000 |
|
Fair value of contingent consideration payable to GSK(i)
|
|
|
1,950 |
|
Cash paid to CPPIB (ii)
|
|
|
3,000 |
|
Fair value of Warrant issued to Pozen (ii)
|
|
|
2,359 |
|
Total purchase price
|
|
$ |
257,309 |
|
Estimated fair value of assets acquired:
|
|
|
|
Intangible assets (iii):
|
|
|
|
Developed technologies
|
|
$ |
230,000 |
|
In-process research and development
|
|
|
23,000 |
|
Amount attributable to assets acquired
|
|
$ |
253,000 |
|
Goodwill (iv)
|
|
$ |
4,309 |
|
(i)
|
Represents fair value of the contingent consideration payable to GSK upon receipt of an updated Written Request for pediatric exclusivity from the FDA and subject to certain deductions based on delays in supplying the commercial product to the Company.
|
(ii)
|
Cash payment of $3.0 million to CPPIB and issuance of Warrant with fair value of $2.4 million to Pozen are considered as consideration paid by the Company to acquire the exclusive U.S. rights to TREXIMET. These payments were made in exchange for the consent of the respective parties to permit GSK to transfer the U.S. rights to TREXIMET to the Company. The $2.4 fair value of the warrants was calculated using a Black-Scholes valuation model with assumptions for the following variables: price of Pernix stock on the closing date of the acquisition; risk free interest rates; and expected volatility. The warrants have been classified as equity.
|
(iii)
|
As of the effective time of the acquisition, the identifiable intangible assets are required to be measured at fair value and these assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of the valuation, it is assumed that all assets will be used in the manner that represents the highest and best use of those assets, but it is not assumed that any market synergies will be achieved. The consideration of synergies has been excluded because they are not considered to be factually supportable.
|
The fair value of identifiable assets is determined primarily using the “income method,” which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income tax expense, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors.
The unaudited condensed consolidated financial statements include estimated identifiable intangible assets representing core technology intangibles valued at $230.0 million, and in-process research and development (“IPR&D”) intangibles valued at $23.0 million. The core technology intangible assets represent developed technology of products approved for sales in the market, which we refer to as marketed products, and have a finite useful lives. They are amortized on a straight line basis over a weighted average of 3.5 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation generates results, including corresponding useful lives and related amortization methods, which differ from the pro forma estimates, or if the above scope of intangible assets is modified. The IPR&D are considered indefinite-lived intangible assets until the completion of abandonment of the associated research and development efforts. Accordingly, during the development period, these assets are not amortized but subject to an annual impairment review. The final valuation is expected to be completed within 12 months from the completion of the acquisition.
(iv)
|
Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired. Goodwill is not amortized but tested for impairment on an annual basis or when indications for impairment exist.
|
Pro forma Impact of Acquisition (Unaudited)
The following unaudited pro forma combined results of operations are provided for the three months and nine months ended September 30, 2014 and 2013, as though the TREXIMET acquisition had been completed as of January 1, 2013.These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the TREXIMET acquisition or any estimated costs that will be incurred to integrate the TREXIMET product line. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.
(in thousands, except per share data)
|
|
Three months Ended
September 30,
|
|
|
Nine months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$ |
37,805 |
|
|
$ |
36,637 |
|
|
$ |
104,535 |
|
|
$ |
118,728 |
|
Net loss
|
|
$ |
(15,785 |
) |
|
$ |
(13,014 |
) |
|
$ |
(46,511 |
) |
|
$ |
(34,249 |
) |
Pro forma net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.41 |
) |
|
$ |
(0.35 |
) |
|
$ |
(1.23 |
) |
|
$ |
(0.95 |
) |
Diluted
|
|
$ |
(0.41 |
) |
|
$ |
(0.35 |
) |
|
$ |
(1.23 |
) |
|
$ |
(0.95 |
) |
The Company’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the TREXIMET acquisition and factually supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition with the following adjustments:
●
|
Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;
|
●
|
Adjustment to recognize interest expense for debt issued in connection with the acquisition
|
●
|
Eliminate transaction costs and non-recurring charges directly related to the acquisition that were included in the historical results of operations for Pernix
|
●
|
Adjustment to recognize pro forma income tax based on income tax benefit on the amortization of intangible asset at the statutory tax rate of Ireland (12.50%), and the income tax benefit on the interest expense at the statutory tax rate of the United States (36.95%).
|
The Company has recognized net product sales and earnings for TREXIMET subsequent to the closing of August 20, 2014 in the amount of $16.2 million and $0.6 million respectively. Non-recurring transaction costs of $0.5 million and $0.7 million related to the acquisition for the three months and nine months ended, respectively, are included in the unaudited condensed consolidated statements of operations in selling, general and administrative expenses; these non-recurring transaction costs have been excluded from the pro forma results in the above table.
Note 11.
|
Intangible Assets and Goodwill
|
Intangible assets consist of the following (in thousands, except years):
|
|
|
|
As of September 30, 2014
|
|
|
|
Weighted
Average Life
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying
Amount
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademark rights
|
|
Indefinite
|
|
$ |
400 |
|
|
$ |
─
|
|
|
$ |
400 |
|
In-process research and development
|
|
Indefinite
|
|
|
48,300 |
|
|
─
|
|
|
|
48,300 |
|
Total unamortized intangible assets
|
|
|
|
|
48,700 |
|
|
─
|
|
|
|
48,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
11 years
|
|
|
500 |
|
|
|
(344 |
) |
|
|
156 |
|
Brand
|
|
8 years
|
|
|
3,887 |
|
|
|
(2,186 |
) |
|
|
1,701 |
|
Product licenses
|
|
11.5 years
|
|
|
17,581 |
|
|
|
(3,632 |
) |
|
|
13,949 |
|
Non-compete and supplier contracts
|
|
5.3 years
|
|
|
5,194 |
|
|
|
(3,949 |
) |
|
|
1,245 |
|
Acquired developed technologies
|
|
5 years
|
|
|
269,866 |
|
|
|
(16,478 |
) |
|
|
253,388 |
|
Total amortized intangible assets
|
|
|
|
|
297,028 |
|
|
|
(26,589 |
) |
|
|
270,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$ |
345,728 |
|
|
$ |
(26,589 |
) |
|
$ |
319,139 |
|
|
|
|
|
As of December 31, 2013
|
|
|
|
Weighted
Average Life
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying
Amount
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademark rights
|
|
Indefinite
|
|
$ |
400 |
|
|
$ |
─
|
|
|
$ |
400 |
|
In-process research and development
|
|
Indefinite
|
|
|
25,300 |
|
|
─
|
|
|
|
25,300 |
|
Total unamortized intangible assets
|
|
|
|
|
25,700 |
|
|
─
|
|
|
|
25,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
11 years
|
|
|
500 |
|
|
|
(306 |
|
|
|
194 |
|
Brand
|
|
8 years
|
|
|
3,887 |
|
|
|
(1,822 |
|
|
|
2,065 |
|
Product licenses
|
|
11.1 years
|
|
|
15,964 |
|
|
|
(2,383 |
|
|
|
13,581 |
|
Customer relationships
|
|
6 years
|
|
|
1,848 |
|
|
|
(462 |
|
|
|
1,386 |
|
Non-compete and supplier contracts
|
|
5.3 years
|
|
|
5,194 |
|
|
|
(3,609 |
|
|
|
1,585 |
|
Acquired developed technologies
|
|
12.2 years
|
|
|
40,000 |
|
|
|
(4,489 |
|
|
|
35,511 |
|
Total amortized intangible assets
|
|
|
|
|
67,393 |
|
|
|
(13,071 |
|
|
|
54,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$ |
93,093 |
|
|
$ |
(13,071 |
|
|
$ |
80,022 |
|
In connection with the acquisition of the TREXIMET intangible assets (see Note 10, Business Combination for further information), the Company recorded, at fair value, intangible assets consisting of intellectual property valued at $230.0 million and in-process research and development intangibles valued at $23.0 million. Intellectual property will be amortized on a straight line basis over 3.5 years. In-process research and development will be amortized on a straight line basis over its useful life once the receipt of regulatory approval is obtained.
As of September 30, 2014, the weighted average life for our definite-lived intangible assets in total was approximately 4.86 years.
Estimated amortization expense related to intangible assets with definite lives for each of the five succeeding years and thereafter is as follows (in thousands):
|
|
Amount
|
|
2014 (October – December)
|
|
$
|
18,337
|
|
2015
|
|
|
73,334
|
|
2016
|
|
|
73,334
|
|
2017
|
|
|
71,441
|
|
2018
|
|
|
12,904
|
|
Thereafter
|
|
|
21,089
|
|
Total
|
|
$
|
270,439
|
|
Amortization expense was $10.1 million and $2.1 million for the three months ended September 30, 2014 and 2013, respectively, and $14.1 million and $5.9 million for the nine months ended September 30, 2014 and 2013, respectively.
Goodwill
Changes in the carrying amount of goodwill for the nine months ended September 30, 2014 is as follows (in thousands):
|
|
September 30,
2014
|
|
Beginning Balance at December 31, 2013
|
|
$
|
42,497
|
|
Acquisition of TREXIMET Product Line (see Note 10)
|
|
4,309
|
|
Goodwill impairment – PML (see Note 9)
|
|
(916
|
)
|
Ending balances at September 30, 2014
|
|
$
|
45,890
|
|
Accrued allowances consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accrued returns allowance
|
|
$
|
8,435
|
|
|
$
|
12,049
|
|
Accrued price adjustments
|
|
|
30,634
|
|
|
|
18,301
|
|
Accrued government program rebates
|
|
|
6,013
|
|
|
|
3,936
|
|
Total
|
|
$
|
45,082
|
|
|
$
|
34,286
|
|
Note 13.
|
Other Liabilities
|
Other liabilities consist of the following (in thousands):
|
|
September 30,
2014
|
|
|
December 31,
2013
|
|
Settlement obligations (see Note 18)
|
|
$
|
10,863
|
|
|
$ |
14,115
|
|
Deferred revenue
|
|
|
3,871
|
|
|
|
4,279
|
|
Contingent consideration (See Note 10)
|
|
|
1,950
|
|
|
─
|
|
Other
|
|
|
33
|
|
|
64
|
|
Total contracts payable and other obligations
|
|
$
|
16,717
|
|
|
$
|
18,458
|
|
|
|
|
|
|
|
|
|
|
Other liabilities – current
|
|
$
|
5,327
|
|
|
$
|
4,072
|
|
Other liabilities – long term
|
|
$
|
11,390
|
|
|
$
|
14,386
|
|
Debt consists of the following (in thousands):
|
|
September 30,
2014
|
|
|
December 31,
2013
|
|
Amounts outstanding under the Midcap Credit Facility
|
|
$ |
18,782 |
|
|
$ |
16,860 |
|
Stancorp mortgage
|
|
─
|
|
|
|
1,450 |
|
Senior secured notes (the “August 2014 Notes”)
|
|
|
220,000 |
|
|
─
|
|
Senior convertible notes (the “February 2014 Notes”)
|
|
|
65,000 |
|
|
─
|
|
Total debt
|
|
$ |
303,782 |
|
|
$ |
18,310 |
|
|
|
|
|
|
|
|
|
|
Debt – current
|
|
$ |
18,782 |
|
|
$ |
17,000 |
|
Debt – long term
|
|
$ |
285,000 |
|
|
$ |
1,310 |
|
Credit Facility – MidCap Funding V, LLC
On February 21, 2014, in connection with the February 2014 Notes offering discussed below, the Company entered into Amendment No. 1 to the Amended and Restated Credit Agreement (the “Amendment” and together with the Amended and Restated Credit Agreement, as amended by the Amendment, the “Amended Credit Agreement”) with MidCap Funding IV, LLC, as Agent and as a lender (“MidCap”), and the other lenders from time to time parties thereto. In addition to allowing for the note issuance, the Amendment provides for the addition of a $20.0 million uncommitted accordion feature to the lenders’ existing $20.0 million revolving loan commitment. Pursuant to the Amendment, MidCap and the other lenders released their liens on certain Company assets. The obligations under the Amended Credit Agreement are secured by a first priority security interest in the Company’s accounts, inventory, deposit accounts, securities accounts, securities entitlements, permits and cash. On April 23, 2014 the Company entered into Amendment No. 2 to the Amended and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. On August 19, 2014 the Company, MidCap, and certain subsidiaries of the Company entered into Amendment No. 3 to the Amended and Restated Credit Agreement dated as of May 8, 2013 to permit the Company to consummate the purchase of the TREXIMET assets from GSK.
The covenants contained in the Amended Credit Agreement require the Company to maintain a minimum amount of earnings before interest, tax, depreciation and amortization (“EBITDA”) and net invoiced revenues unless the Company demonstrate minimum liquidity of at least $30.0 million. The Amended Credit Agreement continues to include customary covenants for a secured credit facility, which include, among other things, (a) restrictions on (i) the incurrence of indebtedness, (ii) the creation of or existence of liens, (iii) the incurrence or existence of contingent obligations, (iv) making certain dividends or other distributions, (v) certain consolidations, mergers or sales of assets and (vi) purchases of assets, investments and acquisitions; and (b) requirements to deliver financial statements, reports and notices to the agent and the other lenders, provided that, the restrictions described in (a)(i)-(vi) above are subject to certain exceptions and permissions limited in scope and dollar value. The Amended Credit Agreement also contains customary representations and warranties and event of default provisions for a secured credit facility.
The loans under this facility bear interest at a rate equal to the sum of the LIBOR (with a floor of 1.5%) plus an applicable margin of 7.50% per annum (9% at September 30, 2014). The expiration date of the agreement has been extended to February 21, 2017. Amounts outstanding under this agreement are recorded on the balance sheet as current debt as of September 30, 2014 and December 31, 2013.
February 2014 Note Offering
On February 21, 2014, the Company issued $65.0 million aggregate principal amount 8% Convertible Senior Notes. The February 2014 Notes mature on February 15, 2019, unless earlier converted. The Company received net proceeds from the sale of the February 2014 Notes of $58.8 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Interest on the February 2014 Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning June 15, 2014. The note balance of $65.0 million is recorded as long term debt on the balance sheet as of September 30, 2014.
The February 2014 Notes are governed by the terms of an indenture (the “February 2014 Indenture”), between the Company and Wilmington Trust, National Association (the “February 2014 Trustee”), each of which were entered into on February 21, 2014.
The February 2014 Notes are senior unsecured obligations and are: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the February 2014 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The Company may not redeem the February 2014 Notes prior to the maturity date (February 15, 2019). However, the holders may convert their February 2014 Notes at any time prior to the close of business on the business day immediately preceding February 15, 2019. Upon conversion, the Company will deliver a number of shares of the Company’s common stock equal to the conversion rate in effect on the conversion date. The initial conversion rate will be 277.7778 shares of the Company’s common stock for each $1,000 principal amount of the February 2014 Notes, which represents an initial conversion price of approximately $3.60 per share. Following certain corporate transactions that can occur on or prior to the stated maturity date, the Company will increase the conversion rate for a holder that elects to convert its February 2014 Notes in connection with such a corporate transaction.
As the Company was not required to separate the conversion option in the February 2014 Notes under ASC 815, Derivatives and Hedging, it considered whether the cash conversion guidance contained in ASC 470-20, Debt with Conversion and Other Options, is applicable to the February 2014 Notes. However, as the conversion option may not be settled in cash upon the Company’s election, the Company concluded that the cash conversion guidance is not applicable to the February 2014 Notes, and the Company therefore recorded the entire proceeds of the February 2014 Notes as a liability, without allocating any portion to equity.
Because the conversion option is not bifurcated as a derivative pursuant to ASC 815 and is not separately accounted for under the cash conversion guidance, the Company further evaluated the conversion option to determine whether it is considered a beneficial conversion option at inception. The Company determined the effective conversion price at issuance to be $3.60 per share. Because the fair value of the common stock at the close of trading on the date of issuance was $3.08, no beneficial conversion feature existed at the issuance date.
For the three and nine months ended September 30, 2014, total interest expense related to the outstanding principal balance of the February 2014 Notes was $1.3 million and $3.2 million at the stated interest rate of 8.0% per annum, respectively. As of September 30, 2014, the Company had outstanding borrowings of $65.0 million related to the February 2014 Notes. The Company has $5.5 million in deferred financing costs related to the February 2014 notes as of September 30, 2014. This is recorded on the balance sheet in Prepaid Expenses and Other Current Assets and Other Long-Term Assets.
August 2014 Note Offering
On August 19, 2014, the Company issued $220.0 million aggregate principal amount of its 12% Senior Secured Notes due 2020 (the “August Notes”) pursuant to an Indenture (the “August 2014 Indenture”) dated as of August 19, 2014 among the Company, certain of its subsidiaries (the “Guarantors”) and U.S. Bank National Association (the “August 2014 Trustee”), as trustee and collateral agent.
The August Notes mature on August 1, 2020 and bear interest at a rate of 12% per annum, payable in arrears on February 1 and August 1 of each year (each, a “Payment Date”), beginning on February 1, 2015. On each Payment Date, commencing August 1, 2015, the Company will pay an installment of principal of the August Notes in an amount equal to 50% of net sales of Treximet for the two consecutive fiscal quarters immediately preceding such Payment Date (less the amount of interest paid on the August Notes on such Payment Date). Pursuant to the August 2014 Indenture, there is no principal payment applicable to TREXIMET sales in the third and fourth quarters. The first principal payment is due on August 1, 2015 and will be calculated on net sales for the first and second quarters of 2015; therefore, the entire note balance is recorded as long-term as of September 30, 2014. Once these actual sales are recorded, the Company will classify the appropriate amount as current portion of the debt.
The August Notes are unconditionally guaranteed, jointly and severally, by the Guarantors. The August Notes and the guarantees of the Guarantors are secured by a continuing first-priority security interest in substantially all of the assets of the Company and the Guarantors related to TREXIMET, other than inventory and certain inventory related assets, including accounts arising from the sale of the inventory.
The Company may redeem the August Notes at its option, in whole at any time or in part from time to time, on any business day, on not less than 30 days’ nor more than 60 days prior notice provided to each holder’s registered address. If such redemption is prior to August 1, 2015, the redemption price is equal to the greater of (i) the principal amount of the August Notes being redeemed and (ii) the present value, discounted at the applicable treasury rate of the principal amount of the August Notes being redeemed plus 1.00%, of such principal payment amounts and interest at the rate per annum shown above on the outstanding principal balance of the August Notes being redeemed assuming the principal balances are amortized at the times and in the assumed amounts set forth on Schedule A to the August 2014 Indenture, as filed in Exhibit 4.1 to the 8-K dated August 22, 2014). If such redemption occurs (i) on or after August 1, 2015 and prior to August 1, 2016, the redemption price will equal 106% of the outstanding principal amount of August Notes being redeemed plus accrued and unpaid interest thereon, (ii) on or after August 1, 2016 and prior to August 1, 2017, the redemption price will equal 103% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid interest thereon and (iii) on or after August 1, 2017, the redemption price will equal 100% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid interest thereon.
The August 2014 Indenture contains covenants that limit the ability of the Company and the Guarantors to, among other things: incur certain additional indebtedness; pay dividends on, redeem or repurchase stock or make other distributions in respect of its capital stock; repurchase, prepay or redeem certain indebtedness; make certain investments; create restrictions on the ability of the Guarantors to pay dividends to the Company or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge or sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. Upon the occurrence of certain events constituting a change of control, the Company is required to make an offer to repurchase all of the August Notes (unless otherwise redeemed) at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any to the repurchase date.
The August 2014 Indenture provides that an Event of Default (as defined in the August 2014 Indenture) will occur if, among other things, (a) the Company defaults in any payment of interest on any note when due and payable, and such default continues for a period of 30 days (b) the Company defaults in the payment of principal of or premium, if any, on any note when due and payable on the maturity date, upon declaration of acceleration or otherwise, or to pay the change of control repurchase price, when due and payable, and such default continues for a period of five days; (c) failure to make a repurchase offer in the event of a change in control when required under the August 2014 Indenture, which continues for three business days; (d) the Company or any Guarantor fails to comply with certain covenants after receiving written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding August Notes; (e) the Company or any Guarantor defaults with respect to other indebtedness for borrowed money in excess of $8.0 million and such default is not cured within 30 days after written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding August Notes; (f) the Company or any Guarantor has rendered against it a final judgment for the payment of $8.0 million (or its foreign currency equivalent) or more (excluding any amounts covered by insurance) under certain circumstances; (g) certain bankruptcy, insolvency, liquidation, reorganization or similar events occur with respect to the Company or any Guarantor; (h) a guarantee of the August Notes (with certain exceptions) is held to be unenforceable or invalid in a judicial proceeding or ceases to be in full force and effect or a Guarantor disaffirms its obligations under its guarantee of the August Notes, and (i) certain changes in control of a Guarantor.
On August 19, 2014, the Company entered into the First Supplemental Indenture to the August 2014 Indenture for the Company’s February 2014 Notes due 2019 (the “First Supplemental Indenture”) to permit the Company to consummate the purchase of the TREXIMET assets from GSK described in Note 10, Business Combination, and to issue the August 2014 Notes. On August 19, 2014, the Company also entered into the Second Supplemental Indenture to the August 2014 Indenture for the Company’s February 2014 Notes due 2019 (the “Second Supplemental Indenture”) to add Worrigan Limited, a wholly owned subsidiary of the Company, as a guarantor.
For the three and nine months ended September 30, 2014, total interest expense related to the outstanding principal balance of the August 2014 Notes was $3.0 million at the stated interest rate of 8.0% per annum, respectively. As of September 30, 2014, the Company had outstanding borrowings of $220.0 million related to the August 2014 Notes. The Company has $7.7 million in deferred financing costs related to the August 2014 notes as of September 30, 2014. This is recorded on the balance sheet in Prepaid Expenses and Other Current Assets and Other Long-Term Assets.
Note 15.
|
Stockholders’ Equity
|
Warrants Issued in Acquisition of Somaxon
In connection with the acquisition of Somaxon in March 2013, the Company assumed approximately 469,000 outstanding warrants in the acquisition of Somaxon. These warrants have exercise prices ranging from $7.70 to $90.72 and expiration dates ranging from July 2016 through August 2021.
Warrants Issued in Acquisition of TREXIMET
In connection with the acquisition of TREXIMET in August 2014, the Company granted Pozen a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $4.28 per share (equal to the closing price of the Company’s common stock on May 13, 2014 as reported on NASDAQ). The Warrant is exercisable from the closing date (August 20, 2014) of the Agreement until February 28, 2018.
Note 16.
|
Employer Compensation and Benefits
|
The Company participates in a 401(k) plan, which covers substantially all full-time employees. This plan is funded by employee contributions and discretionary matching contributions determined by management. At the Company’s discretion, it may match up to 100 percent of each employee’s contribution, not to exceed the first six percent of the employee’s individual salary. There is a six-month waiting period from date of hire to participate in the plan. Employees are 100 percent vested in employee and employer contributions once they are eligible to participate. Contribution expense was $73,000 and $287,000 for the three and nine months ended September 30, 2014, respectively. Contribution expense was $95,000 and $349,000 for the three and nine month periods ended September 30, 2013, respectively.
The Company’s 2009 Stock Incentive Plan (the “2009 Plan”) was approved concurrent with its merger with Golf Trust of America (“GTA”), Inc. on March 9, 2010 and subsequently amended. The maximum number of shares that can be offered under this plan, as amended, is 7.75 million. Incentives may be granted under the 2009 Plan to eligible participants in the form of (a) incentive stock options, (b) non-qualified stock options, (c) restricted stock, (d) restricted stock units, (e) stock appreciation rights and (f) other stock-based awards. Incentive grants under the 2009 Plan generally vest based on four years of continuous service and have 10-year contractual terms.
Stock Options
As of September 30, 2014, approximately 4.1 million options are outstanding that have been issued to current officers and employees under former incentive plans of GTA. The remaining average contractual life of these options is approximately eight years.
The Company currently uses the Black-Scholes option pricing model to determine the fair value of its stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends.
The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those value using the Black-Scholes option pricing mode were as follows:
|
|
Nine Months Ended September 30,
2014
|
|
|
Nine Months Ended September 30,
2013
|
|
|
|
|
|
|
|
|
Weighted average expected stock price volatility
|
|
|
74.6 |
% |
|
|
66.8 |
% |
Estimated dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate
|
|
|
1.9 |
% |
|
|
1.0 |
% |
Expected life of option (in years)
|
|
|
6.2 |
|
|
|
6.0 |
|
Weighted average fair value of the options granted
|
|
$ |
3.04 |
|
|
$ |
2.46 |
|
The expected stock price volatility for the stock options is based on historical volatility of the Company’s stock. The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend rate is assumed to be 0%. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The expected life of the stock options granted was estimated based on the historical exercise patterns over the option lives.
The following table shows the option activity, described above, during the nine months ended September 30, 2014 (share and intrinsic values in thousands):
|
|
Shares
|
|
|
Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life Years
|
|
|
Aggregate Intrinsic Value
|
|
Options outstanding at December 31, 2013
|
|
|
1,605 |
|
|
$ |
4.45 |
|
|
|
|
|
|
|
Granted
|
|
|
3,969 |
|
|
|
4.54 |
|
|
|
|
|
|
|
Exercised(1)
|
|
|
(894 |
) |
|
|
3.32 |
|
|
|
|
|
$ |
2,742 |
|
Cancelled(1)
|
|
|
(589 |
) |
|
|
4.44 |
|
|
|
|
|
|
|
|
Expired
|
|
─
|
|
|
─
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2014
|
|
|
4,091 |
|
|
$ |
4.78 |
|
|
|
9.3 |
|
|
$ |
12,675 |
|
Options vested and exercisable, end of period
|
|
|
378 |
|
|
$ |
5.79 |
|
|
|
6.6 |
|
|
$ |
849 |
|
(1) Cancelled includes 390,000 options granted to ParaPRO, LLC (“ParaPRO”) on August 3, 2011, that were to vest over seven years, pursuant to the commercial terms of the co-promotion arrangement between the Company and ParaPRO for the marketing and sale of Natroba which was terminated on April 30, 2014. Exercised includes 70,000 vested options exercised by ParaPRO in June 2014. For additional information, see Note 18, Commitments and Contingencies.
As of September 30, 2014, there was approximately $8.2 million of total unrecognized compensation cost related to non-vested stock options issued to employees and directors of the Company, which is expected to be recognized ratably over a weighted-average period of 3.6 years.
Restricted Stock
The following table shows the Company's non-vested restricted stock activity during the nine months ended September 30, 2014 (share and intrinsic values in thousands):
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Aggregate Intrinsic Value
|
|
Non-vested restricted stock outstanding at December 31, 2013
|
|
|
629 |
|
|
$ |
5.60 |
|
|
|
|
Granted
|
|
|
100 |
|
|
|
3.00 |
|
|
|
|
Vested
|
|
|
(434 |
) |
|
|
4.93 |
|
|
$ |
3,575 |
|
Forfeited
|
|
|
(78 |
) |
|
|
7.53 |
|
|
|
|
|
Non-vested restricted stock outstanding at September 30, 2014
|
|
|
217 |
|
|
$ |
5.06 |
|
|
|
|
|
As of September 30, 2014, there was approximately $586,000 of total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company, which is expected to be recognized ratably over a weighted-average period of 1.5 years.
Employee Stock Purchase Plan
Effective July 22, 2010, the Company adopted the 2010 Employee Stock Purchase Plan to provide substantially all employees an opportunity to purchase shares of its common stock through payroll deduction, up to 10% of eligible compensation with a $25,000 maximum deferral. Semi-annually (on May 1 and November 1), participant account balances will be used to purchase shares of stock at the lesser of 85 percent of the fair market value of shares at the beginning or end of such six-month period. The Employee Stock Purchase Plan expires on July 22, 2020. A total of 1.0 million shares are available for purchase under this plan of which 139,554 have been issued. Compensation expense related to the Employee Stock Purchase Plan for the three months ended September 30, 2014 and 2013 was approximately $49,000 and $19,000, respectively. Compensation expense related to the Employee Stock Purchase Plan for the nine months ended September 30, 2014 and 2013 was approximately $89,000 and $59,000, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense for the three months ended September 30, 2014 and 2013 was $878,000 and $491,000, respectively. Stock-based compensation expense for the nine months ended September 30, 2014 and 2013 was $3.3 million and $1.5 million, respectively. Stock-based compensation expense for the periods presented are included within the selling, general and administrative expenses line of the unaudited condensed consolidated statements of comprehensive loss.
The Company’s income tax provision (benefit) was $655,000 and $(2.5) million for the three months ended September 30, 2014 and 2013, respectively and was $(9.0) million and $(7.7) million for the nine months ended September 30, 2014 and 2013, respectively. The Company’s effective tax rate was 5.9% in expense for the three months ended September 30, 2014, compared to an effective tax rate of 30.4% in benefit for the three months ended September 30, 2013. The Company’s effective tax rate was 24.6% in benefit for the nine months ended September 30, 2014, compared to an effective tax rate of 28.3% in benefit for the nine months ended September 30, 2013. The change in the effective tax rate for the three months ended September 30, 2014 was primarily attributable to the acquisition of TREXIMET and the inclusion of its impact on our 2014 year-end forecast in our tax provision as well as the formation of a controlled foreign corporation in Ireland during the third quarter of 2014, the earnings of which are subject to U.S. tax under the Subpart F income tax rules.
Note 18.
|
Commitments and Contingencies
|
Legal Proceedings
The Company is subject to various claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material effect on the Company’s financial position or results of operations.
Purchase obligations include fixed or minimum payments under manufacturing and supply agreements with third-party manufacturers and other providers of goods and services. The Company’s failure to satisfy minimum sales requirements under its co-promotion agreements generally allows the counterparty to terminate the agreement and/or results in a loss of the Company’s exclusivity rights. In addition to minimum sales requirements under the Company’s co-promotion agreements, it has commitments under open purchase orders for inventory of approximately $13.0 million that can be cancelled without penalty.
Leases
The Company leases facilities space and equipment under operating lease arrangements that have terms expiring at various dates through 2020. Certain lease arrangements include renewal options and escalation clauses. In addition, various lease agreements to which the Company is a party require that it complies with certain customary covenants throughout the term of the leases. If the Company is unable to comply with these covenants and cannot reach a satisfactory resolution in the event of noncompliance, these agreements could terminate.
The Company signed a lease for office space for its corporate headquarters in Morristown, New Jersey. The lease agreement is a seven year lease, beginning on or about May 19, 2014. The total lease obligation is approximately $1.1 million over the term of the lease.
During the third quarter 2014, the Company entered in to a lease for office space in Mount Pleasant, South Carolina where the Company’s accounting functions are based. The term of this lease is 62 months and the total financial obligation under this lease is approximately $615,000. This lease will replace an existing office lease, which the Company will sublease.
Future minimum lease payments under non-cancelable operating leases are as follows as of September 30, 2014 (in thousands):
2014 (September – December)
|
|
$
|
65
|
|
2015
|
|
|
309
|
|
2016
|
|
|
309
|
|
2017
|
|
|
295
|
|
2018
|
|
|
305
|
|
Thereafter
|
|
|
382
|
|
Total
|
|
$
|
1,665
|
|
Total rent expense was $139,000 and $182,000 for the three months ended September 30, 2014 and 2013, respectively, and was $470,000 and $567,000 for the nine months ended September 30, 2014 and 2013, respectively.
Milestone Payments
The Company is party to certain license agreements and acquisition agreements. Generally, these agreements require that the Company make milestone payments in cash upon the achievement of certain product development and commercialization goals and payments of royalties upon commercial sales. The amount and timing of future milestone payments may vary depending on when related milestones will be attained, if at all.
Other Revenue Sharing Agreements
The Company has entered into certain revenue sharing arrangements that require payments based on a specified percentage of net sales or a specified cost per unit sold. For the three and nine months ended September 30, 2014, the Company recognized $4.9 million and $8.9 million, respectively, in expense included in cost of goods sold from payments pursuant to co-promotion and other revenue sharing arrangements. For the three and nine months ended September 30, 2013, the Company recognized $2.0 million and $5.1 million, respectively.
In connection with an amendment to the license and supply agreement between the Company and GastroEntero-Logic, LLC effective May 15, 2014, the Company must remit to GEL a minimum royalty payment of $750,000 per quarter from sale of OMECLAMOX-PAK®.
In connection with the acquisition of TREXIMET, the Company is responsible for the payment of royalties to Pozen of 18% of net sales with quarterly minimum royalty amounts of $4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.
Other Commitments
In July 2012 and January 2013, Somaxon settled two patent litigation claims with parties seeking to market generic equivalents of SILENOR. As of September 30, 2014, remaining payment obligations owed by Somaxon under these settlement agreements are $1.25 million, payable in equal annual installments of $250,000 through 2019, and $1.5 million, payable in equal installments of $500,000 through 2017.
During the first quarter of 2014, the Company settled all claims arising from certain actions by Cypress under the Texas Medicaid Fraud Prevention Act prior to its acquisition by the Company. As part of the settlement, the Company agreed to pay $12.0 million, payable in annual amounts of $2.0 million until the settlement is paid in full.
Uninsured Liabilities
The Company is exposed to various risks of losses related to torts, theft of, damage to, and destruction of assets, errors and omissions, injuries to employees, and natural disasters for which the Company maintains general liability insurance with limits and deductibles that management believes prudent in light of the exposure of the Company to loss and the cost of the insurance.
The Company is subject to various claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material effect on the consolidated financial position or results of operations of the Company.
Note 19.
|
Subsequent Events
|
Resignation of Executive Officer. Effective October 3, 2014, the Company’s Senior Vice President Research & Development and a named executive officer (“Former Employee”) of the Company terminated his employment with the Company. In connection with such resignation, the Company and the Former Employee entered into an agreement pursuant to which, among other things, the Former Employee agreed to provide certain transition services to the Company and the Company agreed to issue to the Former Employee 50,000 shares of common stock of the Company that were previously issuable subject to satisfaction of certain conditions and the Company released restrictions on approximately 30,000 additional shares of common stock of the Company that had previously been issued to the Former Employee. The financial impact of the accelerated vesting of the common stock in the fourth quarter of 2014 is approximately $377,000 of stock compensation expense. In addition, the Company agreed to provide severance compensation in the amount of approximately $200,000 payable semi-monthly through May of 2015.
Legal Complaint. On October 24, 2014, a complaint styled Frontline Pharmaceuticals LLC vs. Pernix Therapeutics Holdings, Inc. was filed in the United States District Court for the Southern District of New York. The complaint asserts claims for breach of contract and unjust enrichment, alleging that Frontline was promised warrants to purchase 500,000 shares of Pernix common stock at an exercise price of $3.60 per share in connection with consulting and other work allegedly performed by Frontline in connection with the company’s February 2014 convertible note offering. The response to the complaint is not due until December 29, 2014 and no discovery or other proceedings have occurred in the matter to date. The Company intends to defend the lawsuit vigorously; however, due to the early stage of the case, it is not yet possible to determine the likelihood of success or likely cost of the litigation. The Company does not believe this matter, even if adversely adjudicated or settled, would have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
TREXIMET Contingent Consideration. In connection with the TREXIMET acquisition, the Company paid GSK contingent consideration of $1.95 million in October of 2014. This consideration was recorded in current Other Liabilities as of September 30, 2014.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impact our performance and a summary of our operating results. You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations together with our unaudited condensed consolidated financial statements and the related notes included in “Part I—Item 1. Financial Statements” of this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors including, but not limited to, those set forth under “Part I—Item1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 and “Part II—Item1A. Risk Factors” of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2014.
Executive Overview
We are a specialty pharmaceutical company focused on the acquisition, development and commercialization of prescription drugs, primarily for the United States (“U.S.”) market. We target underserved therapeutic areas, such as central nervous system (CNS), including neurology and psychiatry, and have an interest in expanding into additional specialty segments. We promote our branded products to physicians through our sales force, use contracted sales organizations to market our non-core cough and cold products, and market our generic portfolio through our wholly owned subsidiaries, Macoven Pharmaceuticals, LLC (“Macoven”) and Cypress Pharmaceuticals, Inc. (“Cypress”).
Acquisition of TREXIMET®. On August 20, 2014, we, through our wholly owned subsidiary Pernix Ireland Limited (“PIL”), formerly known as Worrigan Limited, completed the acquisition of the U.S. intellectual property rights to the pharmaceutical product, TREXIMET®, from GlaxoSmithKline plc and certain of its related affiliates (together “GSK”).
The total purchase price consisted of upfront cash payment of $250.0 million paid to GSK upon closing of the transaction, and $17.0 million payable to GSK upon receipt of an updated Written Request for pediatric exclusivity from the U.S. Food & Drug Administration (“FDA”) and subject to certain deductions based on delays in supplying the commercial product to us. Subsequently, the deductions resulting from delays in supplying the commercial product reduced the $17.0 million payable amount to $1.95 million. We funded this acquisition with $220.0 million in debt, plus approximately $32.0 million from available cash.
TREXIMET is a medication indicated for the acute treatment of migraine attacks, with or without aura, in adults manufactured by GSK under a license from Pozen Inc. (“Pozen”). The product is a combination of 85 mg of sumatriptan and 500 mg of naproxen sodium. In June 2003, Pozen licensed the U.S. only rights to TREXIMET to GSK, which was responsible for all commercialization activities in the U.S. The product was approved by the FDA in April 2008. In November 2011, Pozen sold most of the future royalty and milestone payments covering TREXIMET sales in the U.S. to CPPIB Credit Investments Inc. (“CPPIB”). TREXIMET is covered by three patents in the U.S. which expire August 14, 2017. In addition, we will be seeking pediatric exclusivity and other potential FDA exclusivity options which may provide an additional six months to three years of exclusivity.
In connection with the transaction, GSK assigned to PIL the Product Development and Commercialization Agreement, (the “PDC Agreement”) between GSK and Pozen. In connection with the assignment of the PDC Agreement, PIL paid $3.0 million to CPPIB (which owns the rights to the royalty payments under the PDC Agreement), and the Company has also granted Pozen a warrant (the “Warrant”) to purchase 500,000 shares of our common stock at an exercise price of $4.28 per share (the closing price of the our common stock on May 13, 2014 as reported on NASDAQ). The Warrant is exercisable from the closing date (August 20, 2014) of the Agreement until February 28, 2018. We will continue to pay a royalty to Pozen under the PDC Agreement, equal to 18% of net sales with quarterly minimum royalty amounts of $4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.
Other current portfolio. Our branded products include SILENOR®, a non-controlled substance and approved medication indicated for the treatment of insomnia characterized by difficulty with sleep maintenance, CEDAX®, an antibiotic for middle ear infections, and a family of prescription treatments for cough and cold (ZUTRIPRO®, REZIRA®, and VITUZ®). During the third quarter we engaged a contract sales team to promote CEDAX and entered into an agreement with a third party to promote our presrciption treatments for cough and cold (ZUTRIPRO, REZIRA, and VITUZ). The term of these agreements cover the cough and cold season and currently terminate on March 31, 2015. We currently promote KHEDEZLA™, for major depressive disorder through an Exclusive License Agreement with Osmotica Pharmaceutical Corp.
We promote our branded products through our sales and marketing organization, utilizing both the Pernix sales force as well as contracted-sales organizations for CEDAX and certain cough and cold products.
We sell our generic products in the areas of cough and cold, pain, vitamins, dermatology, antibiotics and gastroenterology through our wholly-owned subsidiaries, Macoven and Cypress.
Exclusive License Agreement. On February 27, 2014, we entered into an exclusive license agreement with Osmotica Pharmaceutical Corporation to promote KHEDEZLA. The sales and marketing of KHEDEZLA is be supported by our team of approximately 100 sales professionals. KHEDEZLA is indicated for the treatment of major depressive disorder. Pursuant to the agreement, we agreed to make an upfront payment for the license and Osmotica’s existing inventory of KHEDEZLA, certain milestone payments payable upon the achievement of certain cumulative sales milestones and royalty payments for sales achieved for promoting the product. Subject to certain earlier termination rights, the initial term of the agreement expires in February 2024, with two year automatic renewals.
February 2014 Note Offering. On February 21, 2014, we issued $65.0 million aggregate principal amount of the Company’s 8.00% Convertible Senior Notes due 2019 in accordance with each of the Securities Purchase Agreements dated February 4, 2014 by and between the Company and the investors party thereto and the related Indenture dated February 21, 2014, by and between the Company and the trustee. See further discussion herein under the heading “Liquidity and Capital Resources”.
August 2014 Note Offering. On August 19, 2014, we issued $220.0 million aggregate principal amount of our 12% Senior Secured Notes due 2020 (the “August Notes”) pursuant to an Indenture (the “August 2014 Indenture”) dated as of August 19, 2014 among us, certain of our subsidiaries (the “Guarantors”) and U.S. Bank National Association (the “August 2014 Trustee”), as trustee and collateral agent.
The August Notes mature on August 1, 2020 and bear interest at a rate of 12% per annum, payable in arrears on February 1 and August 1 of each year (each, a “Payment Date”), beginning on February 1, 2015. On each Payment Date, commencing August 1, 2015, we will pay an installment of principal of the August Notes in an amount equal to 50% of net sales of TREXIMET for the two consecutive fiscal quarters immediately preceding such Payment Date (less the amount of interest paid on the August Notes on such Payment Date).
MidCap Revolver Amendment. On February 21, 2014, we, together with our subsidiaries, entered into Amendment No. 1 to the Amended and Restated Credit Agreement with MidCap Funding IV, LLC, as Agent and as a lender, and the other lenders from time to time parties thereto. This Amendment No. 1 amends the Amended and Restated Credit Agreement that the Company and its subsidiaries entered into, effective May 8, 2013, with MidCap Financial, LLC, as Administrative Agent and as a lender, and the additional lenders from time to time parties thereto. On April 23, 2014 we entered into Amendment No. 2 to the Amended and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. On August 19, 2014, we entered into Amendment No. 3 to the Amended and Restated Credit Agreement with MidCap to permit us to consummate the purchase of the TREXIMET asset from GSK. See Note 14, Debt, to our unaudited condensed consolidated financial statements included in this report for further discussion.
See further discussion herein under the heading “Liquidity and Capital Resources”.
Texas Attorney General Medicaid Investigation. We reached an agreement with the Attorney General of the State of Texas to settle all claims arising from certain actions by Cypress under the Texas Medicaid Fraud Prevention Act prior to its acquisition by the Company in connection with a Civil Investigative Demand made on Cypress. As part of the settlement, we agreed to pay $12.0 million, payable in annual amounts of $2.0 million until the settlement is paid in full. The remaining balance as of September 30, 2014 is $10.0 million.
Disposition of PML (formerly Great Southern Laboratories, or GSL). On April 21, 2014, we completed our disposition of the business assets of Pernix Manufacturing, LLC, (“PML”) a pharmaceutical contract manufacturing company located in Houston, Texas. We received approximately $1.2 million in proceeds net of the assumed mortgage and working capital liabilities at closing and expect to realize approximately $5.0 million in annualized costs savings from the divestiture. As part of the agreement, the purchaser will continue to manufacture the existing Pernix products under a long-term supply agreement with terms similar to those provided to us by other third-party manufacturers.
Business Strategy
Pernix Therapeutics’ core strengths include the acquisition, development, sales and marketing of specialty pharmaceutical products. Our strategy to achieve this objective is supported by the following:
Leveraging our specialty sales and marketing organization - We expanded our sales organization, adding 25 new geographic territories, where we were previously absent. Pernix now covers 100 territories in the U.S. Our sales representatives are focused on promoting our migraine, sleep, and depression medications to specialists, as well as selected regions for our cough and cold portfolio. We have co-marketing agreements and contracted sales organizations responsible for the sale of our gastroenterologic, antibiotic and cough and cold medications. Pernix has an interest in expanding its portfolio into additional specialty segments.
We believe the concentration of high volume prescribers within specialist physician audiences enables us to effectively promote our products with a smaller and more focused sales and marketing organization than would be required for other markets.
Acquiring or in-licensing approved pharmaceuticals - We have historically grown our business by acquiring or in-licensing rights to market and sell prescription pharmaceutical products, and we intend to continue to grow in this manner. We are particularly focused on products that are prescribed by specialist physicians and that are under-promoted by large pharmaceutical companies. We believe that the revenue threshold for products that large pharmaceutical companies can promote effectively is increasing, potentially creating attractive opportunities for us to acquire additional products where the promotional audiences are smaller. We are actively pursuing the acquisition of rights to market and sell additional products which, if successful, may require the use of a substantial portion of our capital resources.
Acquiring or in-licensing late-stage product development candidates - We also selectively seek to acquire or in-license late-stage product development candidates. We are focused on product development targets that are ready for or have already entered Phase III clinical trials and should therefore present relatively less development risk than products at an earlier stage of development. We are focused on specialty product development candidates in our current areas of focus, adjacent areas, or other specialty areas. We believe that our established sales and marketing organization make us an attractive commercialization partner for many biotechnology and pharmaceutical companies with late-stage product development candidates. We are actively pursuing the acquisition of rights to product candidates that, if successful, may require the use of a substantial portion of our capital resources. We intend to acquire or in-license products that will leverage the capacity of our sales and marketing organization, as well as the relationships we have established with our target audience.
Accessing parallel market channels through generic versions of selected branded products through our Macoven and Cypress subsidiaries - We intend to continue to utilize our Macoven Pharmaceuticals, LLC (“Macoven”) and Cypress Pharmaceuticals, Inc. (“Cypress”) subsidiaries to diversify our product mix while leveraging this low-cost base business, without branding or sales force detailing. Our business goals for Macoven and Cypress include launching authorized generic products for branded pharmaceutical companies including generic equivalents of our own branded products and generic products for patented or niche branded products. We believe that our low-cost generics platform provides an attractive partner for branded pharmaceutical companies seeking to maximize the value of their product franchises via generic distribution.
Acquisitions and License Agreements, Co-Promotions and Collaborations
We have and continue to grow our business through the use of acquisitions, license agreements, co-promotions and collaborations. We enter into acquisition, license and co-promotion agreements to acquire, develop, commercialize and market products and product candidates. In certain of these agreements, we market the products of others and remit a specified profit share to them. In certain other agreements, the contracted third-party under the agreement markets products to which we have rights and remits a specified profit share to us. Collaborative agreements often include research and development efforts and/or capital funding requirements of the parties necessary to bring a product candidate to market. License, co-promotion and collaboration agreements may require royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the product, as well as expense reimbursements or payments to third-party licensors.
Collaborations
Development of Late-state Pediatric Product. In March 2012, we entered into a product development agreement with a private company for a prescription product for the pediatrics market. Under the terms of the agreement, we obtained exclusive marketing rights to this late-stage development product in the United States, and in consideration for our agreement to pay the costs related to the development of the product. As of September 30, 2014, we have invested approximately $2.1 million, and we expect to make an additional investment of approximately $200,000 in 2014 for development and regulatory expenses related to this product candidate. We may then consider potential opportunities to license this product to a third party. Under the terms of the product development agreement, our development partner will manage the development program. We and our development partner expect to commence pivotal phase III studies in 2015 after a thorough review of our phase II data and consultation with the FDA.
Planning continues on the SILENOR Rx to over-the-counter (“OTC”) switch and we expect to submit the Investigational New Drug Application (“IND”) in 2015. We will continue to be opportunistic in exploiting our in-house expertise and intellectual property to initiate additional low risk development projects. In addition, we continue to look for external opportunities through in-license, collaborations or partnerships to build the Pernix pipeline.
Third Quarter 2014 Highlights
The following summarizes certain key financial measures as of and for the three months ended September 30, 2014:
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|
Net revenues were approximately $31.5 million and $18.3 million for the three months ended September 30, 2014 and 2013, respectively.
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●
|
Loss before income taxes was approximately $11.0 million and $8.4 million for the three months ended September 30, 2014 and 2013, respectively. Net loss before taxes was approximately $36.4 million and $27.0 million for the nine months ended September 30, 2014 and 2013, respectively. For the nine month ended September 30, 2014, the net loss before taxes included a loss on the sale of PML of $6.7 million.
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●
|
Cash and cash equivalents equaled $16.4 million as of September 30, 2014.
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Opportunities and Trends
There continue to be unmet patient needs in a number of therapeutic areas. We believe that we can systematically focus our efforts on developing and acquiring products or acquiring the assets of other companies whose products or assets can meet these needs. We also believe that future growth will be realized in the execution of specialty product development opportunities in certain therapeutic areas. We believe the combination of product development and acquisition will enhance our growth opportunities. Additionally, we will continue to leverage our industry relationships to identify and take advantage of new product opportunities. Currently, we continue to believe that we have significant opportunities in leveraging the assets and improving the profitability of the assets acquired in the TREXIMET, Cypress and Somaxon acquisitions as well as continuing the progress of certain in-process research and development projects as capital permits. There are a significant number of specialty pharmaceutical assets for sale and we see ourselves as an attractive buyer with a proven track record of being able to execute deals and maximize product revenue.
We are operating in challenging economic and industry environments. The challenges we face are compounded by the continued uncertainty around the continuing impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which we refer to collectively herein as Health Care Reform. Given this business climate, we will continue to focus on managing and deploying our available cash efficiently and strengthening our industry relationships in order to be well-positioned to identify and capitalize upon potential growth opportunities.
As we execute our strategy, we will monitor and evaluate success through the following measures:
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● |
net product sales generated from our existing products;
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● |
acquisition of products and product rights that align with our strategy and that offer potential for sustainable growth; |
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|
● |
revenues generated from revenue sharing arrangements; and,
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● |
our ability to effectively streamline and improve the operating effectiveness and efficiencies of our business.
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Financial Operations Overview
The discussion in this section describes our statement of comprehensive loss categories. For a discussion of our results of operations, see “Results of Operations” below.
Net Revenues
Net revenues consist of net product sales and revenue from co-promotion and other revenue sharing arrangements, as well as revenue from PML until the manufacturing operations were sold on April 21, 2014. We recognized product sales net of estimated allowances for product returns, price adjustments (customer rebates, managed care rebates, service fees, chargebacks, coupons and other discounts), government program rebates (Medicaid, Medicare and other government sponsored programs) and prompt pay discounts. The primary factors that determine our net product sales are the level of demand for our products, unit sales prices, the applicable federal and supplemental government program rebates, contracted rebates, services fees, and chargebacks and other discounts that we may offer such as consumer coupon programs. In addition to our own product portfolio, we have entered into co-promotion agreements and other revenue sharing arrangements with various parties in return for a percentage of revenue on sales we generate or on sales they generate.
The following table sets forth a summary of our net revenues for the three and nine months ended September 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales – TREXIMET
|
|
$ |
16,246 |
|
|
$ |
─
|
|
|
$ |
16,246 |
|
|
$ |
─
|
|
Net product sales – Other
|
|
|
14,168 |
|
|
|
17,150 |
|
|
|
48,215 |
|
|
|
55,991 |
|
Net product sales
|
|
|
30,414 |
|
|
|
17,150 |
|
|
|
64,461 |
|
|
|
55,991 |
|
Manufacturing revenue
|
|
─
|
|
|
|
487 |
|
|
|
1,025 |
|
|
|
2,222 |
|
Co-promotion and other revenue
|
|
|
1,065 |
|
|
|
658 |
|
|
|
2,427 |
|
|
|
2,733 |
|
Total Net Revenues
|
|
$ |
31,479 |
|
|
$ |
18,295 |
|
|
$ |
67,913 |
|
|
$ |
60,946 |
|
Allowances for Prompt Pay Discounts, Product Returns, Price Adjustments, and Medicaid Rebates
The following table sets forth a summary of our allowances for product returns, government rebate programs and price adjustments as of September 30, 2014. Prompt pay discounts are recorded as a reduction of accounts receivable and revenue and, therefore, are not included in the table below. The allowance for prompt pay discounts as of September 30, 2014 and December 31, 2013 was $1,042,000 and $532,000, respectively.
|
|
Product
Returns
|
|
|
Government
Program
Rebates
|
|
|
Price
Adjustments
|
|
|
|
(in thousands) |
|
Balance at December 31, 2012
|
|
$ |
12,057 |
|
|
$ |
7,037 |
|
|
$ |
10,960 |
|
Allowances assumed in acquisition of Somaxon
|
|
|
776 |
|
|
|
479 |
|
|
|
1,113 |
|
Post-closing opening balance sheet adjustments
|
|
|
1,374 |
|
|
|
391 |
|
|
|
416 |
|
Allowances for certain agreements (1)
|
|
|
58 |
|
|
|
110 |
|
|
|
483 |
|
Reclass from contingent consideration
|
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3,934 |
|
|
─
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|
─
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Current provision:
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|
|
|
|
|
|
|
|
|
|
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Adjustments to provision for prior year sales
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|
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1,611 |
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|
(921 |
) |
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|
(300 |
) |
Provision – current year sales
|
|
|
9,394 |
|
|
|
6,335 |
|
|
|
48,567 |
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Payments and credits
|
|
|
(17,155 |
) |
|
|
(9,495 |
) |
|
|
(42,938 |
) |
Balance at December 31, 2013
|
|
|
12,049 |
|
|
|
3,936 |
|
|
|
18,301 |
|
Increase in allowances for certain agreements (1)
|
|
|
2,053 |
|
|
|
543 |
|
|
|
472 |
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to provision for prior year sales
|
|
─
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|
|
|
475 |
|
|
─
|
|
Provision – current year sales
|
|
|
9,474 |
|
|
|
8,562 |
|
|
|
50,550 |
|
Payments and credits
|
|
|
(15,141 |
) |
|
|
(7,503 |
) |
|
|
(38,689 |
) |
Balance at September 30, 2014
|
|
$ |
8,435 |
|
|
$ |
6,013 |
|
|
$ |
30,634 |
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(1)
|
Allowances to be recognized by other parties or under certain co-promotion agreements and other third party arrangements pursuant to which the expense is the responsibility of the other party. However, since we are responsible for the remittance of the payment of these deduction items to the billing third-party, these items are included in accrued allowances on our balance sheet.
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Product Returns. Consistent with industry practice, we offer contractual return rights that allow our customers to return short-dated or expiring products within an 18-month period, commencing from six months prior to and up to twelve months subsequent to the product expiration date. Our products have a 15 to 42 month expiration period from the date of manufacture. We adjust our estimate of product returns if we become aware of other factors that we believe could significantly impact our expected returns. These factors include our estimate of inventory levels of our products in the distribution channel, the shelf life of the product shipped, review of consumer consumption data as reported by external information management companies, actual and historical return rates for expired lots, the forecast of future sales of the product, competitive issues such as new product entrants and other known changes in sales trends. We estimate returns at percentages up to 10% of sales of branded and generic products and from time to time, higher on launch return percentages for sales of new products. Returns estimates are based upon historical data and other facts and circumstances that may impact future expected returns to derive an average return percentage for our products. The returns reserve may be adjusted as sales history and returns experience is accumulated on this portfolio of products. We review and adjust these reserves quarterly. If estimates regarding product demand are inaccurate, if changes in the competitive environment affect demand for certain products, or if other unforeseen circumstances affect a product’s salability, actual returns could differ and such differences could be material. For example, a 1% difference in our provision assumptions for the nine months ended September 30, 2014 would have affected pre-tax loss by $1.4 million.
Government Program Rebates. The liability for Medicaid, Medicare and other government program rebates is estimated based on historical and current rebate redemption and utilization rates contractually submitted by each state’s program administrator and assumptions regarding future government program utilization for each product sold. As we become aware of changing circumstances regarding the Medicaid and Medicare coverage of our products, we will incorporate such changing circumstances into the estimates and assumptions that we use to calculate government program rebates. If our estimates and assumptions prove inaccurate, we may be subject to higher or lower government program rebates. For example, with respect to the provision for the nine months ended September 30, 2014, a 1% difference in the provision assumptions based on utilization would have effected pre-tax loss by $1.3 million and a 1% difference in the provisions based on reimbursement rates would have affected pre-tax loss by approximately $689,000.
Price Adjustments. Our estimates of price adjustments which include coupons, customer rebates, service fees, chargebacks, shelf stock adjustments, fees and other discounts are based on our estimated mix of sales to various third-party payors who are entitled either contractually or statutorily to discounts from the listed prices of our products and contracted service fees with our wholesalers. In the event that the sales mix to third-party payors or the contract fees paid to the wholesalers are different from our estimates, we may be required to pay higher or lower total price adjustments that differ from our original estimates. For example, for the nine months ended September 30, 2014, a 1% difference in the assumptions based on the applicable sales would have affected pre-tax loss by $3.5 million.
We, from time to time, offer certain promotional product-related incentives to our customers. These programs include sample cards to retail consumers, certain product incentives to pharmacy customers and other sales stocking allowances. For example, we have initiated coupon programs for certain of our promoted products whereby we offer a point-of-sale subsidy to retail consumers. We estimate our liabilities for these coupon programs based on redemption information provided by a third-party claims processing organization. We account for the costs of these special promotional programs as a reduction of gross revenue when applicable products are sold to the wholesalers or other retailers. Any price adjustments that are not contractual but that are offered at the time of sale are recorded as a reduction of revenue when the sales order is recorded. These adjustments are not accrued as they are offered on a non-recurring basis at the time of sale and are recorded as an expense at the time of the sale. These allowances may be offered at varying times throughout the year or may be associated with specific events such as a new product launch or to reintroduce a product. Approximately 5% of the provision relates to promotional point-of-sale discounts to the wholesaler.
Prompt Payment Discounts. We typically require our customers to remit payments within the first 30 days for branded products (60 to 120 days for generics, depending on the customer and the products purchased). We offer wholesale distributors a prompt payment discount if they make payments within these deadlines. This discount is generally 2%, but may be higher in some instances due to product launches and/or industry expectations. Because our wholesale distributors typically take advantage of the prompt pay discount, we accrue 100% of the prompt pay discounts, based on the gross amount of each invoice, at the time of our original sale, and apply earned discounts at the time of payment. This allowance is recorded as a reduction of accounts receivable and revenue. We adjust the accrual periodically to reflect actual experience. Historically, these adjustments have not been material. We do not anticipate that future changes to our estimates of prompt payment discounts will have a material impact on our net revenue.
Critical Accounting Estimates
For information regarding our critical accounting policies and estimates please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” contained in our annual report on Form 10-K for the year ended December 31, 2013 and Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements contained therein. There have been no material changes to the critical accounting policies previously disclosed in that report.
Results of Operations
The following table summarizes our results of operations for the three and nine months ended September 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Increase / |
|
|
Nine Months Ended September 30,
|
|
|
Increase / |
|
|
|
2014
|
|
|
2013
|
|
|
(Decrease)
|
|
|
2014
|
|
|
2013
|
|
|
(Decrease)
|
|
Net revenues
|
|
$ |
31,479 |
|
|
$ |
18,295 |
|
|
|
72 |
% |
|
$ |
67,913 |
|
|
$ |
60,946 |
|
|
|
11 |
% |
Cost of product sales
|
|
|
11,689 |
|
|
|
9,572 |
|
|
|
22 |
% |
|
|
30,350 |
|
|
|
33,812 |
|
|
|
(10 |
)% |
Selling, general and administrative
|
|
|
15,049 |
|
|
|
11,740 |
|
|
|
28 |
% |
|
|
42,415 |
|
|
|
38,960 |
|
|
|
9 |
% |
Research and development
|
|
|
290 |
|
|
|
633 |
|
|
|
(54 |
)% |
|
|
1,604 |
|
|
|
3,633 |
|
|
|
(56 |
)% |
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
10,159 |
|
|
|
2,317 |
|
|
|
338 |
% |
|
|
14,319 |
|
|
|
6,419 |
|
|
|
123 |
% |
(Gain) / loss on disposal of assets
|
|
|
7 |
|
|
|
(4 |
) |
|
|
N/A |
(1) |
|
|
160 |
|
|
|
1 |
|
|
|
N/A |
(1) |
(Gain) / loss on sale of PML
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(including impairment charge)
|
|
|
(13 |
) |
|
─
|
|
|
|
N/A |
(1) |
|
|
6,659 |
|
|
─
|
|
|
|
N/A |
(1) |
Change in fair value of put right
|
|
─
|
|
|
|
2,146 |
|
|
|
N/A |
(1) |
|
─
|
|
|
|
6,116 |
|
|
|
N/A |
(1) |
Change in fair value of contingent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consideration (gain) / loss
|
|
─
|
|
|
|
(522 |
) |
|
|
N/A |
(1) |
|
─
|
|
|
|
(805 |
) |
|
|
N/A |
(1) |
Interest expense, net
|
|
|
5,335 |
|
|
|
783 |
|
|
|
581 |
% |
|
|
8,833 |
|
|
|
3,492 |
|
|
|
153 |
% |
(Gain) on sale of investment
|
|
─
|
|
|
─
|
|
|
|
N/A |
(1) |
|
─
|
|
|
|
(3,605 |
) |
|
|
N/A |
(1) |
Income tax expense (benefit)
|
|
|
655 |
|
|
|
(2,547 |
) |
|
|
126 |
% |
|
|
(8,960 |
) |
|
|
(7,666 |
) |
|
|
17 |
% |
(1) Comparison to prior period not meaningful.
Net Revenues
Net product sales – TREXIMET increased by $16.2 million in both the three and nine months ended September 30, 2014 compared to the same periods in 2013, as TREXIMET was acquired in August 2014, with the first sale occurring on September 2, 2014. Net product sales – other decreased by $3.0 million and $7.8 million in the three and nine months ended September 30, 2014 compared to the same periods in 2013, respectively. Declining net revenues were due to (i) the sale of certain Cypress generic products to Breckenridge Pharmaceutical, Inc. (“Breckenridge”) in September 2013 and (ii) the increase in government rebates on certain brand products due to Consumer Price Index for All Urban Consumers (“CPI-U”) penalties resulting from price increases. The decreases in net product sales – other were offset by (iii) an increase in SILENOR net revenues as a result of increased product sales of 80% and 65% in the three and nine months ended September 30, 2014, respectively, compared to the same period in 2013 and (iv) positive impact of price increases on certain products. Manufacturing revenue decreased by $487,000 and $1.2 million in the three and nine months ended September 30, 2014 compared to the same periods in 2013, respectively, as we sold our manufacturing subsidiary, PML, in April 2014. Co-promotion and other revenue increased by $407,000 during the three months ended September 30, 2014, compared to the same period in 2013. The increase during the three months ended September 30, 2014 was due to our co-promotional agreement with Cumberland which began in October 2013. Co-promotion and other revenue decreased by $305,000 during the nine months ended September 30, 2014, compared to the same period in 2013. The decrease during the nine months ended September 30, 2014, was primarily attributable to the termination of the co-promotion agreement on Natroba and was partially offset by the increase in co-promotional revenue from our agreement with Cumberland that began in October 2013.
Cost of Product Sales
Cost of product sales increased by $2.1 million and $3.5 million during the three and nine months ended September 30, 2014 compared to the same period in 2013, respectively. The increase was primarily due to an increase in royalty expense as a result of the royalty to the patent holder of TREXIMET in addition to the cost of the TREXIMET product. The increase was partially offset by a decrease in the acquisition cost basis of the inventory sold as the majority of the Cypress and Somaxon acquired inventory has been sold. In addition, during the nine months ended September 30, 2014, compared to the same period in 2013, the increase in cost of product sales was offset by profit sharing arrangements on the Khedezla product and its authorized generic and the increase in SILENOR profit sharing due primarily to the price increase on this product. Gross profit margin as a percentage of net revenues (excluding cost of sales attributed to sales of the acquired inventory which has a significantly higher basis than the inventory purchased post-closing) was 63.5% and 59.1% in the three and nine months ended September 30, 2014, respectively, compared to 49.9% and 52.9% for the same periods in 2013. The increases in our gross profit margin percentages in both periods were primarily due to a change in product mix, in particular, the addition of the TREXIMET product line.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased in the three and nine months ended September 30, 2014, compared to the same periods in 2013, by $3.3 million and $3.5 million, respectively. The increase for the three months ended September 30, 2014 was due to an increase in non-compensation related SG&A costs of $4.7 million, driven by an increase of marketing campaigns related to our SILENOR and TREXIMET products. We realized increases in sample costs, marketing collateral, consulting, coupon programs fees, professional fees, training and bad debt expense among lesser increases in other categories, partially offset by decreases in deal expense, freight fees and data fees, among lesser decreases in other categories. The increase in non-compensation related SG&A was partially offset by a decrease in salaries and benefits of $1.4 million driven by the costs related to the employees transferred to the buyer in the sale of our manufacturing facility partially offset by an increase in compensation costs of our expanded management team and an increase in share-based compensation expense.
The increase for the nine months ended September 30, 2014 was due to an increase in non-compensation related SG&A of $3.4 million and an increase in compensation of $0.1 million. The increase in non-compensation related SG&A was driven by an increase of marketing campaigns of $3.4 million related to our SILENOR and TREXIMET products, which was offset by the effect of the cancellation of the ParaPRO, LLC options of previously recognized stock compensation expense of approximately $1.2 million. We realized increases in sample costs, marketing collateral, advertising, recruiting, data fees, consulting, coupon programs and professional fees, among lesser increases in other categories, partially offset by decreases in deal costs, legal fees, travel, freight fees and bad debt expense, among lesser decreases in other categories. Salaries and benefits expense remained flat due to an increase in compensation costs of our expanded management team and share-based compensation expense that was offset by the reduction of costs related to the employees transferred to the buyer in the sale of our manufacturing facility.
Research and Development Expense
Research and Development expenses decreased in the three and nine months ended September 30, 2014, compared to the same periods in 2013 by $343,000 and $2.0 million primarily due to the reduction of expenses incurred related to the in-process research and development at Cypress as certain of these projects were transferred to Breckenridge in the sale of certain generic assets to them in September 2013 and others were discontinued.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $7.8 million and $7.9 million in the three and nine months ended September 30, 2014, respectively, compared to the same period in 2013, due to an increase in amortization expense of $8.0 million and $8.2 million, respectively, This increase is primarily due to $8.2 million of amortization related to the developed technologies acquired as a part of the TREXIMET acquisition recognized during both the three and nine months ended September 30, 2014. The increases were partially offset by a decrease in depreciation expense of $129,000 and $227,000, respectively, due to the sale of Pernix Manufacturing fixed assets in April 2014.
Interest Expense, net
Interest expense, net increased by $4.6 million and $5.3 million in the three and nine months ended September 30, 2104, respectively, compared to the same periods in 2013. During the three months ended September 30, 2014, the increase in interest expense, net was primarily due to the recognition of interest expense related to our $220.0 million senior secured notes, issued in August 2014, and $65.0 million senior convertible notes, issued in February 2014, of $3.0 million and $1.3 million, respectively. The increase was partially offset by an $89,000 increase in interest income primarily attributable to the implied interest of our promissory notes with Breckenridge. During the nine month ended September 30, 2014, the increase in interest expense, net was primarily due to the recognition of interest expense related to our $220.0 million senior secured notes, issued in August 2014, and $65.0 million senior convertible notes, issued in February 2014, of $3.0 million and $3.1 million, respectively. Interest expense, net also increased as a result of interest expense related to our credit facility increasing by $1.1 million for the nine months ended September 30, 2014 compared to the same period in 2013. The increases were partially offset by a $263,000 increase in interest income primarily due to the implied interest on our promissory notes with Breckenridge.
Liquidity and Capital Resources
Sources of Liquidity
The following table summarizes our liquidity and working capital as of September 30, 2014 and December 31, 2013 (in thousands, except current ratio):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cash and cash equivalents
|
|
$
|
16,429
|
|
|
$
|
15,647
|
|
|
|
|
|
|
|
|
|
|
Working capital (current assets less current liabilities)
|
|
$
|
20,766
|
|
|
$
|
6,917
|
|
Current ratio (multiple of current assets to current liabilities)
|
|
|
1.23
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit availability
|
|
$
|
21,218
|
|
|
|
3,140
|
|
We require cash to meet our operating expenses and for research and development, capital expenditures, acquisitions, and in-licenses of rights to products. To date, we have funded our operations primarily from product sales, co-promotion agreement revenues, proceeds from equity offerings and debt facilities. As described in Note 14 Debt, to our unaudited condensed consolidated financial statements included within this report, we issued senior secured noted notes in the amount of $220.0 million and senior convertible notes in the amount of $65.0 million during the third and first quarters of 2014, respectively.
August 2014 Note Offering. On August 19, 2014, we issued $220.0 million aggregate principal amount of our 12% Senior Secured Notes due 2020 pursuant to August 2014 Indenture dated as of August 19, 2014 among the Guarantors and the August 2014 Trustee, as trustee and collateral agent.
The August Notes mature on August 1, 2020 and bear interest at a rate of 12% per annum, payable in arrears on February 1 and August 1 of each year, beginning on February 1, 2015. On each Payment Date, commencing August 1, 2015, we will pay an installment of principal of the August Notes in an amount equal to 50% of net sales of TREXIMET for the two consecutive fiscal quarters immediately preceding such Payment Date (less the amount of interest paid on the August Notes on such Payment Date).
The August Notes are unconditionally guaranteed, jointly and severally, by the Guarantors. The August Notes and the guarantees of the Guarantors are secured by a continuing first-priority security interest in substantially all of the assets of the Company and the Guarantors related to TREXIMET, other than inventory and certain inventory related assets, including accounts arising from the sale of the inventory.
We may redeem the August Notes at our option, in whole at any time or in part from time to time, on any business day, on not less than 30 days nor more than 60 days prior notice provided to each holder’s registered address. If such redemption is prior to August 1, 2015, the redemption price is equal to the greater of (i) the principal amount of the August Notes being redeemed and (ii) the present value, discounted at the applicable treasury rate of the principal amount of the August Notes being redeemed plus 1.00%, of such principal payment amounts and interest at the rate per annum shown above on the outstanding principal balance of the August Notes being redeemed assuming the principal balances are amortized at the times and in the assumed amounts set forth on Schedule A to the August 2014 Indenture, as filed as Exhibit 4.1 to Form 8-K dated August 22, 2014. If such redemption occurs (i) on or after August 1, 2015 and prior to August 1, 2016, the redemption price will equal 106% of the outstanding principal amount of August Notes being redeemed plus accrued and unpaid interest thereon, (ii) on or after August 1, 2016 and prior to August 1, 2017, the redemption price will equal 103% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid interest thereon and (iii) on or after August 1, 2017, the redemption price will equal 100% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid interest thereon.
The Indenture contains covenants that limit the ability of the Company and the Guarantors to, among other things: incur certain additional indebtedness; pay dividends on, redeem or repurchase stock or make other distributions in respect of its capital stock; repurchase, prepay or redeem certain indebtedness; make certain investments; create restrictions on the ability of the Guarantors to pay dividends to the Company or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge or sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. Upon the occurrence of certain events constituting a change of control, we are required to make an offer to repurchase all of the August Notes (unless otherwise redeemed) at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any to the repurchase date.
The August 2014 Indenture provides that an Event of Default (as defined in the August 2014 Indenture) will occur if, among other things, (a) we default in any payment of interest on any note when due and payable, and such default continues for a period of 30 days (b) we default in the payment of principal of or premium, if any, on any note when due and payable on the maturity date, upon declaration of acceleration or otherwise, or to pay the change of control repurchase price, when due and payable, and such default continues for a period of five days; (c) failure to make a repurchase offer in the event of a change in control when required under the August 2014 Indenture, which continues for three business days; (d) we or any Guarantor fails to comply with certain covenants after receiving written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding August Notes; (e) we or any Guarantor defaults with respect to other indebtedness for borrowed money in excess of $8.0 million and such default is not cured within 30 days after written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding August Notes; (f) we or any Guarantor has rendered against it a final judgment for the payment of $8.0 million (or its foreign currency equivalent) or more (excluding any amounts covered by insurance) under certain circumstances; (g) certain bankruptcy, insolvency, liquidation, reorganization or similar events occur with respect to us or any Guarantor; (h) a guarantee of the August Notes (with certain exceptions) is held to be unenforceable or invalid in a judicial proceeding or ceases to be in full force and effect or a Guarantor disaffirms its obligations under its guarantee of the August Notes, and (i) certain changes in control of a Guarantor.
On August 19, 2014, we entered into the First Supplemental Indenture to the August 2014 Indenture for our February 2014 Notes due 2019 (the “First Supplemental Indenture”) to permit us to consummate the purchase of the TREXIMET assets from GSK described in Note 10, Business Combination, to our unaudited condensed consolidated financial statements and to issue the August 2014 Notes. On August 19, 2014, the Company also entered into the Second Supplemental Indenture to the August 2014 Indenture for the Company’s February 2014 Notes due 2019 (the “Second Supplemental Indenture”) to add PIL, a wholly owned subsidiary of the Company, as a guarantor.
For the three and nine months ended September 30, 2014, total interest expense related to the outstanding principal balance of the August 2014 Notes was $3.0 million at the stated interest rate of 8.0% per annum, respectively. As of September 30, 2014, the Company had outstanding borrowings of $220.0 million related to the August 2014 Notes. The Company has $7.7 million in deferred financing related to the August 2014 notes as of September 30, 2014. This is recorded on the balance sheet in Prepaid Expenses and Other Current Assets and Other Long-Term Assets.
February 2014 Note Offering. On February 21, 2014, we issued $65.0 million aggregate principal amount of our 8.00% Convertible Senior Notes due 2019 (the “February 2014 Notes”) in accordance with each of the Securities Purchase Agreements (the “Securities Purchase Agreements”), dated February 4, 2014 by and between us and the investors party thereto (the “Investors”). We anticipate using the net proceeds from the issuance of the February 2014 Notes for the acquisition of accretive specialty products, as well as for working capital and general corporate purposes.
The February 2014 Notes are governed by the terms of an indenture (the “February 2014 Indenture”), dated as of February 21, 2014, between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”).
The February 2014 Notes are the senior unsecured obligations and are: senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the February 2014 Notes; equal in right of
payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries.
The February 2014 notes bear interest at a rate of 8.00% per annum, payable quarterly in arrears on March 15, June 15, September 15 and December 15, beginning on June 15, 2014.
We may not redeem the February 2014 Notes prior to the maturity date (February 15, 2019). However, the holders may convert their February 2014 Notes at any time prior to the close of business on the business day immediately preceding February 15, 2019. Upon conversion, we will deliver a number of shares of our common stock equal to the conversion rate in effect on the conversion date. The initial conversion rate will be 277.7778 shares of our common stock for each $1,000 principal amount of the February 2014 Notes, which represents an initial conversion price of approximately $3.60 per share and represents a conversion premium of approximately 72% based on the last reported sale price of our common stock of $2.09 on February 4, 2014, the date upon which the Securities Purchase Agreements were entered. Following certain corporate transactions that can occur on or prior to the stated maturity date, we will increase the conversion rate for a holder that elects to convert its February 2014 Notes in connection with such a corporate transaction.
If a Change of Control (as defined in the February 2014 Indenture) occurs prior to the stated maturity date, holders may require us to purchase for cash all or any portion of their February 2014 Notes at a Change of Control repurchase price equal to the Specified Percentage (as defined in the February 2014 Indenture) of the principal amount of the February 2014 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the Change of Control repurchase date. To the extent such increase in the conversion rate would result in the conversion price of the February 2014 Notes to be less than $2.3278 per share (subject to adjustment) and equal to or greater than $2.09 per share (subject to adjustment), we will be obligated to deliver cash in lieu of any share that was not delivered on account of such limitation.
In connection with the issuance of February 2014 Notes, on February 21, 2014, we and funds managed by each of Athyrium Capital Management and Cetus Capital entered into Representation Agreements (the “Representation Agreements”), pursuant to which we agreed to amend the February 2014 Indenture to increase the interest rate on the February 2014 Notes to 11.00%, if certain board designation rights were not satisfied by the Company as more fully described in the Representation Agreement. We shall be permitted to reduce the interest rate for the February 2014 Notes from 11% back to 8.00% upon delivery of an officer’s certificate to the trustee for the February 2014 Notes stating that the condition for such reduction has been satisfied.
Also in connection with the issuance of the February 2014 Notes, on February 21, 2014, we and the Investors entered into Registration Rights Agreements (the “Registration Rights Agreements”), pursuant to which we agreed to file a resale registration statement for the resale of the Common Stock underlying the February 2014 Notes no later than December 31, 2018. The Investors were also given certain demand registration rights and “piggyback” registration rights as more fully described in the Registration Rights Agreements.
MidCap Revolver Amendments. On February 21, 2014, in connection with the February 2014 Notes offering, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement (the “Amendment” and together with the Amended and Restated Credit Agreement, as amended by the Amendment, the “Amended Credit Agreement”) with MidCap Funding IV, LLC, as Agent and as a lender (“MidCap”), and the other lenders from time to time parties thereto. In addition to allowing for the note issuance, the Amendment provides for the addition of a $20 million uncommitted accordion feature to the lenders’ existing $20 million revolving loan commitment. Pursuant to the Amendment, MidCap and the other lenders released their liens on certain of our assets. The obligations under the Amended Credit Agreement are secured by a first priority security interest in our accounts, inventory, deposit accounts, securities accounts, securities entitlements, permits and cash.
The covenants contained in the Amended Credit Agreement require us to maintain a minimum amount of EBITDA and net invoiced revenues unless we demonstrate minimum liquidity of at least $30 million. The Amended Credit Agreement continues to include customary covenants for a secured credit facility, which include, among other things, (a) restrictions on (i) the incurrence of indebtedness, (ii) the creation of or existence of liens, (iii) the incurrence or existence of contingent obligations, (iv) making certain dividends or other distributions, (v)
certain consolidations, mergers or sales of assets and (vi) purchases of assets, investments and acquisitions; and (b) requirements to deliver financial statements, reports and notices to the Agent and the other lenders, provided that, the restrictions described in (a)(i)-(vi) above are subject to certain exceptions and permissions limited in scope and dollar value. The Amended Credit Agreement also contains customary representations and warranties and event of default provisions for a secured credit facility.
In connection with the Amendment, we entered into an Amended and Restated Security and Pledge Agreement (the “Amended and Restated Security Agreement”) with MidCap as Agent. The Amended and Restated Security Agreement amends and restates the Security and Pledge Agreement, dated as of December 31, 2012, that we entered into with MidCap Funding V, LLC (the “Original Security Agreement”). The Amended and Restated Security Agreement creates a security interest in favor of MidCap, for the benefit of the lenders from time to time parties to the Amended and Restated Security Agreement, in our accounts, inventory, deposit accounts, securities accounts, securities entitlements, permits and cash as security for our repayment of our obligations under the Amended Credit Agreement.
Under the Amended and Restated Credit Agreement effective May 7, 2013, our borrowing base on the revolving loan commitment is equal to (A) 85% of eligible accounts, plus (B) 50% of eligible inventory, minus (C) certain reserves and/or adjustments, subject to certain conditions and limitations. Notwithstanding the foregoing, the Amended and Restated Credit Agreement provided for an advance of up to $3 million in excess of our borrowing base until June 8, 2013, at which time all excess amounts were repaid. Pursuant to the terms of the Amended and Restated Credit Agreement, the closing of the sale of the Cypress assets triggered a requirement by us to repay the term loan included in the Amended and Restated Credit Agreement. At the closing of the sale of these assets as further described below, we paid approximately $7.7 million from the sale proceeds to MidCap in fulfillment of this requirement, and as a result, the term loan has been repaid in full. As of March 12, 2014, the outstanding balance under the revolver was $8.0 million.
The loans under this facility bear interest at a rate equal to the sum of the LIBOR rate (with a floor of 1.5%) plus an applicable margin of 7.50% per annum. Pursuant to the Amended and Restated Credit Agreement, the Company paid certain customary fees to the administrative agent and lenders.
Under the Amended and Restated Credit Agreement, the revolving loan will be paid based on our cash receipts. In addition, we are able to voluntarily prepay outstanding amounts under the revolving loan commitment at any time, subject to certain prepayment penalties.
On April 23, 2014 we entered into Amendment No. 2 to the Amended and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. On August 19, 2014 MidCap, we and certain of our subsidiaries entered into Amendment No. 3 to the Amended and Restated Credit Agreement dated as of May 8, 2013 to permit us to consummate the purchase of the TREXIMET assets from GSK.
Cash Flows
The following table provides information regarding our cash flows for the nine months ended September 30, 2014 and 2013 (in thousands):
|
Nine Months Ended
|
|
|
September 30,
|
|
|
(rounded)
|
|
|
2014
|
|
2013
|
|
Cash (used in) provided by
|
|
|
|
|
Operating activities
|
|
$
|
(23,253
|
)
|
|
$
|
(9,427
|
)
|
Investing activities
|
|
|
(247,396
|
)
|
|
23,400
|
|
Financing activities
|
|
|
271,431
|
|
|
|
(27,305
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
782
|
|
|
$
|
(13,332
|
)
|
The net increase in cash and cash equivalents for the nine months ended September 30, 2014 was primarily attributable to the net proceeds from the issuance of $220.0 million in senior secured notes issued in August 2014
related to our acquisition of TREXIMET and $65.0 million in senior convertible notes in February 2014, payments received on notes receivable of $4.9 million, proceeds from the sale of PML of $1.1 million, proceeds from the issuance of our common stock, net of tax of $2.0 million from stock option exercises, net proceeds on Midcap revolving credit facility of $1.9 million, partially offset by $253.0 million of the acquisition of TREXIMET, our net loss for the period of $27.5 million, payments on financing costs of $14.0 million and payments on contracts payable of $2.5 million.
The net decrease in cash and cash equivalents for the nine months ended September 30, 2013 was primarily attributable to payments on our credit facility of $28.3 million payments on contracts payable of $1.7 million and our net loss of $19.4 million, partially offset by the proceeds from the sale of certain Cypress intangible assets of $19.6 million, cash acquired in connection with the acquisition of Somaxon of $2.9 million and proceeds from the sale of TherapeuticsMD of $4.6 million.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payment, including contingencies related to potential future development, financing, royalty payments and/or scientific, regulatory, or commercial milestone payments under development agreements. Further, obligations under employment agreements contingent upon continued employment are not included in the table below. The following table summarizes our contractual obligations as of September 30, 2014 (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
More than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
$
|
1,665
|
|
|
$
|
302
|
|
|
$
|
597
|
|
|
$
|
613
|
|
|
$
|
153
|
|
Professional services agreements (2)
|
|
|
3,564
|
|
|
|
2,562
|
|
|
|
1,002
|
|
|
|
—
|
|
|
|
—
|
|
Supply agreements and purchase
obligations (3)
|
|
|
8,738
|
|
|
|
1,995
|
|
|
|
1,998
|
|
|
|
1,998
|
|
|
|
2,747
|
|
License and development agreements (4)
|
|
|
5,262
|
|
|
|
3,012
|
|
|
|
2,250
|
|
|
|
—
|
|
|
|
—
|
|
Short-term borrowings (5)
|
|
|
20,472
|
|
|
|
20,472
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt obligations (6)
|
|
|
369,439
|
|
|
|
31,600
|
|
|
|
44,319
|
|
|
|
293,520
|
|
|
|
—
|
|
Settlement obligations (7)
|
|
|
13,500
|
|
|
|
2,750
|
|
|
|
5,500
|
|
|
|
5,000
|
|
|
|
250
|
|
Total contractual obligations
|
|
$
|
422,640
|
|
|
$
|
62,693
|
|
|
$
|
55,666
|
|
|
$
|
301,131
|
|
|
$
|
3,150
|
|
(1)
|
Operating leases include minimum payments under leases for our facilities and certain equipment.
|
(2)
|
Professional service agreements include agreements with a specific term for consulting, information technology, telecom and software support, data and sales reporting tools and services.
|
(3)
|
Supply agreements and Purchase obligations include fixed or minimum payments under manufacturing and supply agreements with third-party manufacturers and other providers of goods and services. The contractual obligations table set forth above does not reflect certain minimum sales requirements related to our co-promotion agreements nor does it include certain supply agreements for which the failure to meet the purchase or sale requirements under such agreements generally allows the counterparty to terminate the agreement and/or results in a loss of our exclusivity rights.
|
(4)
|
Future scheduled or specific payments pursuant to license or development agreements. Future payments for which the date of payments or amount cannot be determined are excluded.
|
(5)
|
Short-term borrowings represent amounts outstanding under our senior secured notes and MidCap Credit Facility as of September 30, 2014 and the minimum interest payments that must be paid on 75% of the total amount available, $20.0 million before consideration of the accordion feature, under the revolver regardless of the balance outstanding. As of September 30, 2014 we had outstanding borrowings of approximately $18.8 million under our revolving credit facility.
|
|
Short-term borrowings represent amounts outstanding under our senior secured notes and MidCap Credit Facility as of September 30, 2014 and the minimum interest payments that must be paid on 75% of the total amount available, $20.0 million before consideration of the accordion feature, under the revolver regardless of the balance outstanding. As of September 30, 2014 we had outstanding borrowings of approximately $18.8 million under our revolving credit facility.
|
(6)
|
The long-term debt obligations represent the payment due on the senior secured notes and senior convertible notes, that were issued in the third and first quarters of 2014, respectively, and the associated contractual interest payments. See Note 14, Debt, for further information on the classification of this long-term debt.
|
(7)
|
Settlement obligations represent remaining payments due under settlement agreements.
|
In addition to minimum sales requirements under our co-promotion agreements, the table above does not include commitments under open purchase orders for inventory that can be cancelled without penalty, which are approximately $13.0 million.
See Notes 14, Debt, and 18, Commitments and Contingencies, to our unaudited condensed consolidated financial statements included in this report for additional information.
In addition to the material contractual cash obligations included the chart above, we have committed to make potential future milestone payments to third parties as part of licensing, distribution, acquisition and development agreements. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory and/or commercial milestones. Because the achievement of milestones is neither probable nor reasonably estimable, such contingent payments have not been recorded on our consolidated balance sheets and have not been included in the table above. See Note 11, Intangible Assets and Goodwill, to our unaudited condensed consolidated financial statements included within this report for additional information.
Recent Accounting Pronouncements
There have been no other recent accounting pronouncements that have not yet been adopted by us that are expected to have a material impact on our condensed consolidated financial statements from the accounting pronouncements previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 and on Form 10-Q for the three and nine months ended September 30, 2014.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to market risk related to changes in interest rates on our revolving credit facility. We do not utilize derivative financial instruments or other market risk-sensitive instruments to manage exposure to interest rate changes. The main objective of our cash investment activities is to preserve principal while maximizing interest income through our trust account.
The interest rate related to borrowings under our revolving credit facility is a variable rate of LIBOR (with a floor of 1.5%) plus an Applicable Margin (7.5%), as defined in the debt agreement (9.0% at September 30, 2014). As of September 30, 2014, we had outstanding borrowings of approximately $18.8 million under our revolving credit facility. We are required to pay minimum interest on 75% of the available revolver balance of $20.0 million. If interest rates increased by 1.0%, our annual interest expense on our borrowings would increase by approximately $188,000.
See Note 14, Debt, to our unaudited condensed consolidated financial statements included within this report for further discussion.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2014, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Management concluded that as of September 30, 2014, our disclosure controls and procedures were effective.
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
See Legal Proceedings under Note 18, Commitments and Contingencies, to our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could be materially adversely affected and the value of our securities could be negatively impacted. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known that may materially adversely affect our business.
Risks Related to our Acquisition Strategy and Managing Growth
We may not be able to continue to grow through acquisitions of businesses and assets.
We have sought growth largely through acquisitions, including the acquisitions of Cypress in 2012, Pernix Sleep (f/k/a Somaxon) in 2013 and the rights to TREXIMET intellectual property in 2014. As part of our ongoing expansion strategy, we plan to make additional strategic acquisitions of assets and businesses. However, our credit agreement with MidCap and the indentures governing our outstanding notes include restrictive covenants, which include, among other things, restrictions on the incurrence of indebtedness, as well as certain consolidations, acquisitions, mergers, purchases or sales of assets and capital expenditures, subject to certain exceptions and permissions limited in scope and dollar value. In addition to these restrictive covenants our credit agreement with MidCap contains certain financial covenants. For additional information see the notes to our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q. In the future, we may pursue growth opportunities through acquisitions that are not directly similar to those currently operated by us. We cannot assure you that acquisitions will be available on terms attractive to us. Moreover, we cannot assure you that such acquisitions will be permissible under our existing credit agreement with MidCap or the indentures governing our outstanding notes or that we will be able to arrange financing on terms acceptable to us or to obtain timely federal and state governmental approvals on terms acceptable to us, or at all.
We may be unable to successfully integrate newly acquired businesses or assets and realize the anticipated benefits of these acquisitions.
Management has in the past has devoted, and will in the future devote, significant attention and resources to integrating newly acquired businesses and assets. Potential difficulties we have or may in the future encounter in the integration process include the following:
|
●
|
the inability to successfully combine our businesses with any newly acquired business, to integrate any newly acquired assets into our existing product portfolio, and to meet our capital requirements following such acquisition, in a manner that permits us to achieve the cost savings or revenue enhancements anticipated to result from these acquisitions, which would result in the anticipated benefits of the acquisitions not being realized in the time frame currently anticipated or at all;
|
|
●
|
lost sales and customers as a result of certain customers of Pernix or the newly acquired business or asset deciding not to do business with us following such acquisition;
|
|
●
|
the additional complexities of integrating newly acquired businesses and assets with different core products and markets;
|
|
●
|
potential unknown liabilities and unforeseen increased expenses associated with an acquisition of a business or asset; and
|
|
●
|
performance shortfalls as a result of the diversion of management’s attention caused by integrating the operations of a newly acquired business with those of Pernix or a newly acquired asset into the existing product portfolio.
|
For all these reasons, you should be aware that it is possible that integrating a newly acquired business or asset could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our products, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the acquisitions, or could otherwise adversely affect our business and financial results.
Our future results will suffer if we do not effectively manage our expanded operations.
Our acquisitions of Cypress, Somaxon and the rights to TREXIMET intellectual property significantly changed the composition of our operations, markets and product mix. Our future success depends, in part, on our ability to address these changes, and, where necessary, to attract and retain new personnel that possess the requisite skills called for by these changes.
We may continue to expand our operations through additional acquisitions, license arrangements, other strategic transactions and new product offerings. Our future success depends, in part, upon our ability to manage our expansion opportunities. Integrating new operations into our existing business in an efficient and timely manner, successfully monitoring our operations, costs, regulatory compliance and customer relationships, and maintaining other necessary internal controls pose substantial challenges for us. As a result, we cannot assure you that our expansion or acquisition opportunities will be successful, or that we will realize our expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
Our business operations and financial position could be adversely affected as a result of our substantial indebtedness.
As of September 30, 2014, after giving effect to our issuance of an aggregate of $65,000,000 of notes in February 2014 and an aggregate of $220,000,000 of notes in connection with our acquisition of the rights to TREXIMET intellectual property in August 2014, we had $303.8 million of debt outstanding and the ability to borrow approximately $21.2 million under our credit agreement with MidCap subject to borrowing base capacity. This significant indebtedness could have important consequences. For example, it may:
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make it difficult for us to satisfy our obligations under our outstanding notes, the credit agreement with MidCap and our other indebtedness and contractual and commercial commitments;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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restrict us from making strategic acquisitions, entering new markets or exploiting business opportunities;
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place us at a competitive disadvantage compared to our competitors that have proportionally less debt;
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limit our ability to borrow additional funds and/or leverage our cost of borrowing; and
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decrease our ability to compete effectively or operate successfully under adverse economic and industry conditions.
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As of September 30, 2014, we believe that our existing cash and cash from operations will be sufficient to continue to fund our existing level of operating expense, certain planned development activities and general capital expenditure requirements through the foreseeable future. Further, we continue to have additional opportunities to recognize synergistic savings from our acquisitions as certain contractual commitments expire, to pace our research and development spend as available capital permits and to potentially sell non-core assets. In the event our capital resources are otherwise insufficient to meet future capital requirements and operating expenses, we may seek to finance our cash needs through public or private equity or debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or royalty rights, or other arrangements. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
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Significantly delay, scale back or discontinue the development or commercialization of our products and product candidates;
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Seek collaborators for one or more of our current or future products or product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or
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Relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.
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Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be permissible under the indentures governing our outstanding notes or the credit agreement with MidCap or otherwise available on acceptable terms, if at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve additional restrictive covenants. Any exploration of strategic alternatives may not result in an agreement or transaction and, if completed, any agreement or transaction may not be successful or on attractive terms. The inability to enter into a strategic transaction, or a strategic transaction that is not successful or on attractive terms, could accelerate our need for cash and make securing funding on reasonable terms more difficult. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
Despite our significant level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.
We may be able to incur substantial additional indebtedness in the future. Although certain of our agreements, including the credit agreement with MidCap and the indentures governing our outstanding notes limit our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. To the extent that we incur additional indebtedness, the risks associated with our substantial leverage described herein, including our possible inability to service our debt, would increase.
Our debt service obligations may adversely affect our cash flow.
A higher level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flow to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail our operations.
Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future financial performance will be affected by a range of economic, competitive and business factors that we cannot control, such as those risks described in this section. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness we will be forced to adopt an alternative strategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. These alternative strategies may not be effected on satisfactory terms, if at all, and they may not yield sufficient funds to make required payments on our indebtedness.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which may allow our creditors at that time to declare outstanding indebtedness to be due and payable, which would in turn trigger cross-acceleration or cross-default rights between the relevant agreements.
In addition, the borrowings under our credit agreement with MidCap bear interest at variable rates and other debt we incur could likewise be variable-rate debt. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed thereunder remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
The indentures governing our outstanding notes and the credit agreement with MidCap impose significant operating and/or financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.
The indentures governing our outstanding notes and the credit agreement with MidCap contain covenants that restrict our and our subsidiaries’ ability to take various actions, such as:
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incur additional debt;
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pay dividends and make distributions on, or redeem or repurchase, their capital stock;
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make certain investments, purchase certain assets or other restricted payments;
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sell assets, including in connection with sale-leaseback transactions;
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create liens;
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enter into transactions with affiliates;
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make lease payments in exceeding a specified amount; and
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merge, consolidate or transfer all or substantially all of their assets.
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In addition, the terms of these agreements require us to maintain a minimum liquidity of $8.0 million at all times.
Upon the occurrence of a change of control, as described in the indenture governing our 8.00% Convertible Senior Notes due 2019, or the Convertible Notes, holders of the Convertible Notes may require us to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% plus a specified percentage (that is initially 40% and declines over the life of the Convertible Notes) of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest. If, upon the occurrence of a change of control, as described in the indenture, a holder elects to convert its Convertible Notes in connection with such change of control, such holder may be entitled to an increase in the conversion rate as described in the indenture. To the extent such increase in the conversion rate would result in the conversion price of the Convertible Notes to be less than $2.3278 per share (subject to adjustment) and equal to or greater than $2.09 per share (subject to adjustment), we will be obligated to deliver cash in lieu of any share that was not delivered on account of such limitation. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or payments of cash on Convertible Notes converted in connection with certain change of control transactions. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Convertible Notes in connection with certain change of control transaction as required by the indenture would constitute a default under the indenture. A default under the indenture or the change of control itself could also lead to a default under agreements governing our indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions in connection with certain change of control transactions. These and other provisions could prevent or deter a third party from acquiring us, even where the acquisition could be beneficial to you.
In addition, the credit agreement with MidCap requires that we maintain a minimum amount of EBITDA and net invoiced revenues unless we demonstrate minimum liquidity of at least $30 million.
Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy those requirements. Our failure to comply with our debt-related obligations could result in an event of default under the particular debt instrument, which could permit acceleration of the indebtedness under that instrument and, in some cases, the acceleration of our other indebtedness, in whole or in part.
These restrictions will also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that would be in our interest.
Our ability to borrow under the credit agreement with MidCap is limited by the amount of our borrowing base. Any negative impact on the elements of our borrowing base, such as accounts receivable and inventory could reduce our borrowing capacity under the credit agreement with MidCap.
If we fail to attract and retain key personnel, we may be unable to successfully develop or commercialize our products.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified managerial personnel. We are highly dependent upon our executive management team, particularly Douglas Drysdale, our Chairman, President and Chief Executive Officer. The loss of the services of Mr. Drysdale or any one or more other members of our executive management team or other key personnel could delay or prevent the successful completion of some of our development and commercialization objectives.
Recruiting and retaining qualified sales and marketing personnel is critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
Our management devotes substantial time to comply with public company regulations.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ Global Market, impose various requirements on public companies, including with respect to corporate governance practices. Moreover, these rules and regulations increase legal and financial compliance costs and make some activities more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that our management maintain adequate disclosure controls and procedures and internal control over financial reporting. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and, as applicable, our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require us to incur substantial accounting and related expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, our financial reporting could be unreliable and misinformation could be disseminated to the public.
Any failure to develop or maintain effective internal control over financial reporting or difficulties encountered in implementing or improving our internal control over financial reporting could harm our operating results and prevent us from meeting our reporting obligations. Ineffective internal controls also could cause our stockholders and potential investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock. In addition, investors relying upon this misinformation could make an uninformed investment decision and we could be subject to sanctions or investigations by the SEC, NASDAQ Global Market or other regulatory authorities, or to stockholder class action securities litigation.
Our August 2014 acquisition of the rights to TREXIMET intellectual property and our strategy of obtaining, through asset acquisitions and in-licenses, rights to other products and product candidates for our development pipeline and to proprietary drug delivery and formulation technologies for our life cycle management of current products may not be successful.
We acquired the rights to TREXIMET intellectual property in August 2014 and from time to time we may seek to engage in additional strategic transactions with third parties to acquire rights to other pharmaceutical products, pharmaceutical product candidates in the late stages of development and proprietary drug delivery and formulation technologies. Because we do not have discovery and research capabilities, the growth of our business will depend in significant part on our ability to acquire or in-license additional products, product candidates or proprietary drug delivery and formulation technologies that we believe have significant commercial potential and are consistent with our commercial objectives. However, we may be unable to license or acquire suitable products, product candidates or technologies from third parties for a number of reasons.
The licensing and acquisition of pharmaceutical products, product candidates and related technologies is a competitive area. A number of more established companies are also pursuing strategies to license or acquire products, product candidates and drug delivery and formulation technologies, which may mean fewer suitable acquisition opportunities for us as well as higher acquisition prices. Many of our competitors have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.
Other factors that may prevent us from licensing or otherwise acquiring suitable products, product candidates or technologies include:
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We may be unable to license or acquire the relevant products, product candidates or technologies on terms that would allow us to make an appropriate return on investment;
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Companies that perceive us as a competitor may be unwilling to license or sell their product rights or technologies to us;
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We may be unable to identify suitable products, product candidates or technologies within our areas of expertise; and
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We may have inadequate cash resources or may be unable to obtain financing to acquire rights to suitable products, product candidates or technologies from third parties.
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If we are unable to successfully identify and acquire rights to products, product candidates and proprietary drug delivery and formulation technologies and successfully integrate them into our operations, we may not be able to increase our revenues in future periods, which could result in significant harm to our financial condition, results of operations and development prospects.
If we fail to successfully manage any acquisitions, our ability to develop our product candidates and expand our product pipeline may be harmed.
Our failure to adequately address the financial, operational or legal risks of any acquisitions or in-license arrangements could harm our business. Financial aspects of these transactions that could alter our financial position, reported operating results or stock price include:
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use of cash resources;
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higher than anticipated acquisition costs and expenses;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities, impairment losses or restructuring charges;
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large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount that must be amortized over the appropriate life of the asset; and
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amortization expenses related to other intangible assets.
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Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:
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challenges associated with managing an increasingly diversified business;
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disruption of our ongoing business;
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difficulty and expense in assimilating the operations, products, technology, information systems or personnel of the acquired company;
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diversion of management’s time and attention from other business concerns;
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entry into a geographic or business market in which we have little or no prior experience;
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challenges associated with training our sales force and equipping them with effective materials relating to our recently acquired rights to the TREXIMET intellectual property, including medical and sales literature to help them inform and educate potential customers about the benefits of TREXIMET and its proper administration and label indication;
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inability to maintain uniform standards, controls, procedures and policies;
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the assumption of known and unknown liabilities of the acquired business or asset, including intellectual property claims; and
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subsequent loss of key personnel.
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If we are unable to successfully manage our acquisitions, our ability to develop and commercialize new products and continue to expand our product pipeline may be limited.
If we are unable to effectively train and equip our sales force to sell TREXIMET, our ability to successfully commercialize our products will be harmed.
In August 2014, we made a significant investment by acquiring the rights to TREXIMET intellectual property from GlaxoSmithKline plc, or GSK. The members of our sales force have no prior experience promoting TREXIMET. As a result, we will have to expend significant time and resources to train our sales force to be credible and persuasive in convincing physicians to prescribe and pharmacists to dispense TREXIMET. In addition, we must train our sales force to ensure that a consistent and appropriate message about our products is being delivered to our potential customers. Our sales representatives may also experience challenges promoting multiple products when they call on physicians and their office staff, and our representatives may also be distracted from selling our products other than TREXIMET now that we are selling TREXIMET, as all of our representatives have to date been focused solely on selling our other products. We have also experienced, and may continue to experience, turnover of the sales representatives that we hired or will hire, requiring us to train new sales representatives. If we are unable to effectively train our sales force and equip them with effective materials relating to TREXIMET, including medical and sales literature to help them inform and educate potential customers about the benefits of TREXIMET and its proper administration and label indication, our efforts to successfully market TREXIMET could be put in jeopardy, which could have a material adverse effect on our financial condition, stock price and operations.
Risks Related to Commercialization
The commercial success of our currently marketed products and any additional products that we successfully commercialize will depend upon the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.
Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If our products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not be profitable. The degree of market acceptance of our products depends on a number of factors, including:
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the prevalence and severity of any side effect;
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the efficacy and potential advantages over the alternative treatments;
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the ability to offer our branded products for sale at competitive prices, including in relation to any generic products;
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substitution of our branded products with generic equivalents at the pharmacy level;
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relative convenience and ease of administration;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support; and
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sufficient third-party coverage or reimbursement.
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We face competition, which may result in others discovering, developing or commercializing products before or more successfully than us.
The development and commercialization of drugs is highly competitive. We face competition with respect to our currently marketed products and any products that we may seek to develop or commercialize in the future. Our competitors include major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Potential competitors also include academic institutions, government agencies and other private and public research organizations that seek patent protection and establish collaborative arrangements for development, manufacturing and commercialization. We face significant competition for our currently marketed products. Some of our currently marketed branded products, including ZUTRIPRO and REZIRA, do not have patent protection and in most cases face generic competition. All of our products face significant price competition from a range of branded and generic products for the same therapeutic indications.
Some or all of our product candidates, if approved, may face competition from other branded and generic drugs approved for the same therapeutic indications, approved drugs used off label for such indications and novel drugs in clinical development. For example, our product candidates may not demonstrate sufficient additional clinical benefits to physicians to justify a higher price compared to other lower cost products within the same therapeutic class. Notwithstanding the fact that we may devote substantial amounts of our resources to bringing product candidates to market, our commercial opportunity could be reduced or eliminated if competitors develop and commercialize products that are more effective, safer, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop and/or commercialize.
Our patent rights may not protect our patent protected products and product candidates if competitors devise ways of making products that compete with us without legally infringing our patent rights. For example, our patent rights in SILENOR are limited in ways that affect our ability to exclude third parties from competing against us. In particular, we do not hold composition of matter patents covering the active pharmaceutical ingredient, or API, of SILENOR. Composition of matter patents on APIs are a particularly effective form of intellectual property protection for pharmaceutical products, as they apply without regard to any method of use or other type of limitation. As a result, competitors who obtain the requisite regulatory approval can offer products with the same API as SILENOR so long as the competitors do not infringe any method of use or formulations patents that we may hold.
The Federal Food, Drug, and Cosmetic Act (“FDCA”) and FDA regulations and policies provide certain exclusivity incentives to manufacturers to create modified, non-infringing versions of a drug in order to facilitate the approval of abbreviated new drug applications (“ANDAs”) for generic substitutes. These same types of exclusivity incentives encourage manufacturers to submit new drug applications (“NDAs”) that rely, in part, on literature and clinical data not prepared for or by such manufacturers. Manufacturers might only be required to conduct a relatively inexpensive study to show that their product has the same API, dosage form, strength, route of administration and conditions of use or labeling as our product and that the generic product is absorbed in the body at the same rate and to the same extent as our product, a comparison known as bioequivalence. Such products would be significantly less costly than certain of our products to bring to market and could lead to the existence of multiple lower-priced competitive products, which would substantially limit our ability to obtain a return on the investments we have made in those products. Our competitors also may obtain FDA or other regulatory approval for their product candidates more rapidly than we may obtain approval for our product candidates.
Products in our portfolio that do not have patent protection are potentially at risk for generic competition. We utilize our generic business to attempt to retain market share from other generic competitors for our branded products. For example, we have attempted to maintain market share in the prescription head lice market by offering an authorized generic of NATROBA. Additionally, products we sell through our collaborative or co-promotion arrangements may also face competition in the marketplace.
Some of our competitors have significantly greater financial, technical and human resources than we have and superior expertise in marketing and sales, research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products and thus may be better equipped than us to discover, develop, manufacture and commercialize products. These competitors also compete with us in recruiting and retaining qualified management personnel and acquiring technologies. Many of our competitors have collaborative arrangements in our target markets with leading companies and research institutions. In many cases, products that compete with our products have already received regulatory approval or are in late-stage development, have well-known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved widespread acceptance among physicians and patients. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
We will face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective, safer or more affordable products, or products with more effective patent protection, than our products. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which would adversely affect our competitive position, our revenue and profit from existing products and anticipated revenue and profit from product candidates. If our products or product candidates are rendered noncompetitive, we may not be able to recover the expenses of developing and commercializing those products or product candidates.
If our competitors introduce their own generic equivalents of our products, our net revenues from such products are expected to decline.
Product sales of generic pharmaceutical products often follow a particular pattern over time based on regulatory and competitive factors. The first company to introduce a generic equivalent of a branded product is often able to capture a substantial share of the market. However, as other companies introduce competing generic products, the first entrant’s market share, and the price of its generic product, will typically decline. The extent of the decline generally depends on several factors, including the number of competitors, the price of the branded product and the pricing strategy of the new competitors.
For example, in the generic drug industry, when a company is the first to introduce a generic drug, the pricing of the generic drug is typically set based on a discount from the published price of the equivalent branded product. Other generic manufacturers may enter the market and, as a result, the price of the drug may decline significantly. In such event, we may in our discretion provide our customers a credit with respect to the customers’ remaining inventory for the difference between our new price and the price at which we originally sold the product to our customers. There are circumstances under which we may, as a matter of business strategy, not provide price adjustments to certain customers and, consequently, we may lose future sales to competitors.
Negative publicity regarding any of our products or product candidates could delay or impair our ability to market any such product, delay or prevent approval of any such product candidate and may require us to spend time and money to address these issues.
If any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers and/or subject to FDA enforcement action, our ability to successfully market and sell our products could be impaired. Because of our dependence on patient and physician perceptions, any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products or any similar products distributed by other companies could limit the commercial potential of our products and expose us to potential liabilities.
If we are unable to attract, hire and retain qualified sales and management personnel and successfully manage our sales and marketing programs and resources, or if our commercial partners do not adequately perform, the commercial opportunity for our products may be diminished.
As of September 30, 2014, our sales force consisted of approximately 100 full-time sales representatives. In October 2013 we entered into a co-promotion agreement with Cumberland Pharmaceuticals, Inc., or Cumberland, under which Cumberland will promote Omeclamox-Pak to gastroenterologists across the United States through its field sales force.
We, Cumberland and any other commercialization partner we engage may not be able to attract, hire, train and retain qualified sales and sales management personnel in the future. If we or they are not successful in maintaining an effective number of qualified sales personnel, our ability to effectively market and promote our products may be impaired. Even if we are able to effectively maintain such sales personnel, their efforts may not be successful in commercializing our products.
In addition, a significant portion of revenues we receive from sales of products that are the subject to commercial partnerships will largely depend upon the efforts our partners, including Cumberland. The efforts of our partners in many instances are likely to be outside our control. If we are unable to maintain our commercial partnerships or to effectively establish alternative arrangements for our products, our business could be adversely affected. In addition, despite our arrangements with Cumberland and our other partners, we still may not be able to cover all of the prescribing physicians for our products at the same level of reach and frequency as our competitors, and we ultimately may need to further expand our selling efforts in order to effectively compete.
The efforts of our sales force and partners are complemented by on-line and other non-personal promotional initiatives that target both physicians and patients. We are also focused on ensuring broad patient access to our products by negotiating agreements with leading commercial managed care organizations and with government payors. Although our goal is to achieve sales through the efficient execution of our sales and marketing plans and programs, we may not be able to effectively generate prescriptions and achieve broad market acceptance for our products on a timely basis, or at all.
A failure to maintain optimal inventory levels to meet commercial demand for our products could harm our reputation and subject us to financial losses.
Some of our products, including ZUTRIPO, REZIRA, VITUZ, their generic equivalents and certain other generic products contain controlled substances, which are regulated by the DEA under the Controlled Substances Act. DEA quota requirements limit the amount of controlled substance drug products a manufacturer can manufacture and the amount of API it can use to manufacture those products. We may experience difficulties obtaining raw materials needed to manufacture our products as a result of DEA regulations and because of the limited number of suppliers of pseudoephedrine, an active ingredient in several of our products. If we are unsuccessful in obtaining quotas, unable to manufacture and release inventory on a timely and consistent basis, fail to maintain an adequate level of product inventory, or if inventory is destroyed or damaged or reaches its expiration date, patients might not have access to our products, our reputation and our brands could be harmed and physicians may be less likely to prescribe our products in the future, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We and our contract manufacturers may not be able to obtain the regulatory approvals or clearances that are necessary to manufacture pharmaceutical products.
Before approving a new drug or biologic product, the FDA requires that the facilities at which the product will be manufactured be in compliance with current Good Manufacturing Practices, which we refer to herein as cGMP, requirements which include requirements relating to quality control and quality assurance, as well as the maintenance of records and documentation and utilization of qualified raw materials. To be successful, our products must be manufactured for development and, following approval, in commercial quantities, in compliance with regulatory requirements and at acceptable costs.
We and our contract manufacturers must comply with these cGMP requirements. While we believe that we and our contract manufacturers currently meet these requirements, we cannot assure that our manufacturing facilities or those of our contract manufacturers will continue to meet cGMP requirements or will be sufficient to manufacture all of our needs and/or the needs of our customers for commercial materials.
We and our contract manufacturers may also encounter problems with the following:
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production yields;
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possible facility contamination;
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quality control and quality assurance programs;
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shortages of qualified personnel;
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compliance with FDA or other regulatory authorities’ regulations, including the demonstration of purity and potency;
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changes in FDA or other regulatory authorities’ requirements;
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production costs; and/or
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development of advanced manufacturing techniques and process controls.
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In addition, we and our contract manufacturers are required to register our manufacturing facilities with the FDA and other regulatory authorities and to subject them to inspections confirming compliance with cGMP or other regulations. If we or our contract manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to permit us or our contract manufacturers to continue manufacturing approved products. As a result, our business, financial condition and results of operations may be materially harmed.
If we or our third party manufacturers fail to comply with regulatory requirements for our controlled substance products, the DEA may take regulatory actions detrimental to our business, resulting in temporary or permanent interruption of distribution, withdrawal of products from the market or other penalties.
We, our third party manufacturers and certain of our products including ZUTRIPO, REZIRA, VITUZ, their generic equivalents, and certain other generic products are subject to the Controlled Substances Act and DEA regulations thereunder. Accordingly, we must adhere to a number of requirements with respect to our controlled substance products including registration, recordkeeping and reporting requirements; labeling and packaging requirements; security controls, procurement and manufacturing quotas; and certain restrictions on refills. Failure to maintain compliance with applicable requirements can result in enforcement action that could have a material adverse effect on our business, financial condition, results of operations and cash flows. The DEA may seek civil penalties, refuse to renew necessary registrations or initiate proceedings to revoke those registrations. In certain circumstances, violations could result in criminal proceedings.
Product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the sale of our currently marketed products and any other products that we successfully develop or commercialize. If we cannot successfully defend ourselves against claims that our products or product candidates caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for our products or any products that we may develop;
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injury to reputation;
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withdrawal of client trial participants;
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withdrawal of a product from the market;
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costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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diversion of management time and attention;
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loss of revenue; and
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the inability to commercialize any products that we may develop.
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The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.
Seasonality may cause fluctuations in our financial results.
We generally experience some effects of seasonality due to increases in demand for cough and cold products during the winter season. Accordingly, sales of cough and cold products and associated revenue have generally increased at a higher rate immediately prior and during the winter season. In the future, this seasonality may cause fluctuations in our financial results. In addition, other seasonality trends may develop and the existing seasonality that we experience may change.
Risks Related to Our Dependence on Third Parties
If the manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.
We do not manufacture our marketed products, and we do not plan to develop any capacity to do so. We rely on third party manufacturers for our products. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed or may terminate their agreements with us. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to sell our marketed products or any other product candidate that we commercialize would be jeopardized. Any delay or interruption in our ability to meet commercial demand for our marketed products will result in the loss of potential revenues.
In connection with our acquisition of the rights to TREXIMET intellectual property in August 2014, we discovered short-term supply constraints for the product. Our failure to obtain sufficient supply of TREXIMET to meet anticipated demand in the future may result in the loss of potential revenues.
All manufacturers of pharmaceutical products must comply with current good manufacturing practice, or cGMP, requirements enforced by the FDA through its facilities inspection program. The FDA is also likely to conduct inspections of our manufacturers’ facilities as part of their review of any marketing applications we submit. These cGMP requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.
Moreover, our manufacturers and suppliers may experience difficulties related to their overall businesses and financial stability, which could result in delays or interruptions of our supply of our marketed products. We do not have alternate manufacturing plans in place at this time. If we need to change to other manufacturers, the FDA and comparable foreign regulators must approve these manufacturers’ facilities and processes prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for production.
Any of these factors could adversely affect the commercial activities for our marketed products, and required approvals for any other product candidate that we develop, or entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our manufacturers failed to deliver the required commercial quantities of raw materials, including bulk drug substance, or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.
The concentration of our product sales to only a few wholesale distributors increases the risk that we will not be able to effectively distribute our products if we need to replace any of these customers, which would cause our sales to decline.
The majority of our sales are to a small number of pharmaceutical wholesale distributors, which in turn sell our products primarily to retail pharmacies, which ultimately dispense our products to the end consumers. In 2013, Cardinal Health accounted for 24% of our total gross sales, McKesson Corporation accounted for 35% of our total gross sales, and AmerisourceBergen Drug Corporation accounted for 20% of our total gross sales. For the nine months ended September 30, 2014, Cardinal Health accounted for 24% of our total gross sales, McKesson Corporation accounted for 37% of our total gross sales and AmerisourceBergen Drug Corporation accounted for 28% of our total gross sales.
If any of these customers cease doing business with us or materially reduce the amount of product they purchase from us and we cannot conclude agreements with replacement wholesale distributors on commercially reasonable terms, we might not be able to effectively distribute our products through retail pharmacies. The possibility of this occurring is exacerbated by the recent significant consolidation in the wholesale drug distribution industry, including through mergers and acquisitions among wholesale distributors and the growth of large retail drugstore chains. As a result, a small number of large wholesale distributors control a significant share of the market.
Any collaboration arrangements that we enter into may not be successful, which could adversely affect our ability to develop and commercialize our product candidates.
We enter into collaboration arrangements from time to time on a selective basis. Our collaborations may not be successful. Of our current product portfolio, we market NATROBA (a prescription treatment for head-lice which we co-promote with ParaPRO, LLC), its generic equivalent, REPREXAIN and OMECLAMOX-PAK pursuant to collaboration arrangements. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.
Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercialization of the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision making authority.
Our business could suffer as a result of a failure to manage and maintain our distribution network with our wholesale customers.
We depend on the distribution abilities of our wholesale customers to ensure that our products are effectively distributed through the supply chain. If there are any interruptions in our customers’ ability to distribute products through their distribution centers, our products may not be effectively distributed, which could cause confusion and frustration among pharmacists and lead to product substitution.
We intend to rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.
We do not intend to independently conduct clinical trials for our product candidates. We will rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
Risks Related to Intellectual Property
If we are unable to obtain and maintain protection for the intellectual property relating to our technology and products, the value of our technology and products will be adversely affected.
Our success will depend in part on our ability to obtain and maintain protection for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of pharmaceuticals is highly uncertain and involves complex legal and scientific questions. We rely upon patents, trade secret laws and confidentiality agreements to protect our technology and products. We may not be able to obtain additional patent rights relating to our technology or products and pending patent applications to which we have rights may not issue as patents or if issued, may not issue in a form that will be advantageous to us. Even if issued, any patents issued to us or licensed to us may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. For example, the principal patent protection that covers SILENOR consists of method of use patents. This type of patent protects the product only when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical or similar to SILENOR for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive or similar product for off-label indications that are covered by the applicable patents. Some physicians are prescribing generic 10mg doxepin capsules and generic oral solution doxepin for insomnia on such an off-label basis in lieu of prescribing SILENOR. In addition, some managed healthcare plans are requiring the substitution of these generic doxepin products for SILENOR, and some pharmacies are suggesting such substitution. Although such off-label prescriptions may induce or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.
Our patent rights also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position. In addition, patents generally expire, regardless of the date of issue, 20 years from the earliest non-provisional effective U.S. filing date.
Our collaborators and licensors may not adequately protect our intellectual property rights. These third parties may have the first right to maintain or defend our intellectual property rights and, although we may have the right to assume the maintenance and defense of our intellectual property rights if these third parties do not, our ability to maintain and defend our intellectual property rights may be compromised by the acts or omissions of these third parties.
In September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law and includes a number of significant changes to U.S. patent law. These include changes in the way patent applications will be prosecuted and may also affect patent litigation. The U.S. Patent and Trademark Office is currently developing regulations and procedures to administer the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act did not become effective until 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the cost of prosecuting our patent applications, our ability to obtain patents based on our patent applications and our ability to enforce or defend our issued patents. An inability to obtain, enforce and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or, if established, maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.
Trademark protection of our products may not provide us with a meaningful competitive advantage.
We use trademarks on most of our currently marketed branded products and believe that having distinctive marks is an important factor in marketing those products. Trademarks are also an important factor in marketing products of other parties under license or co-promotion agreements. Distinctive marks may also be important for any additional products that we successfully develop and commercially market. However, we generally do not expect our marks to provide a meaningful competitive advantage over other branded or generic products. We believe that efficacy, safety, convenience, price, the level of generic competition and the availability of reimbursement from government and other third party payors are and are likely to continue to be more important factors in the commercial success of our products. For example, physicians and patients may not readily associate our trademark with the applicable product or active pharmaceutical ingredient. In addition, prescriptions written for a branded product are typically filled with the generic version at the pharmacy, resulting in a significant loss in sales of the branded product, including for indications for which the generic version has not been approved for marketing by the FDA. Competitors also may use marks or names that are similar to our trademarks. If we initiate legal proceedings to seek to protect our trademarks, the costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We have acquired rights to products and product candidates under license and co-promotion agreements with third parties and expect to enter into additional licenses and co-promotion agreements in the future. Our existing licenses impose, and we expect that future licenses will impose, various development and commercialization, purchase commitment, royalty, sublicensing, patent protection and maintenance, insurance and other obligations on us.
If we fail to comply with our obligations under a license agreement, the licensor may have the right to terminate the license in whole, terminate the exclusive nature of the license or bring a claim against us for damages. Any such termination or claim could prevent or impede our ability to market any product that is covered by the licensed patents. Even if we contest any such termination or claim and are ultimately successful, our results of operations and stock price could suffer. In addition, upon any termination of a license agreement, we may be required to license to the licensor any related intellectual property that we developed.
For example, we in-licensed rights to SILENOR through an exclusive licensing arrangement, and may enter into similar licenses in the future. Under our license agreement for SILENOR, we are required to use commercially reasonable efforts to commercialize SILENOR. In addition, our licensor has the contractual right to terminate the license agreement upon the breach by us or a specified insolvency event. In the event that our licensor for SILENOR terminates the license agreement, even though we would maintain ownership of our clinical data and the other intellectual property we developed relating to SILENOR, we would be unable to continue our commercialization activities relating to SILENOR and our business and financial condition may be materially harmed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect our unpatented proprietary information in part by confidentiality agreements with our employees, consultants and third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, third parties, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate.
In addition, the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. To the extent that our intellectual property protection is inadequate, we are exposed to a greater risk of direct competition. If our intellectual property is not adequately protected against competitors’ products, our competitive position could be adversely affected, as could our business. We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our consultants and third parties, when appropriate, to execute confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific circumstances and that all inventions arising out of the individual’s relationship with us shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.
If we infringe or are alleged to infringe intellectual property rights of third parties, it may adversely affect our business.
Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and/or abroad. Such third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or our collaborators could be forced to stop or delay development, manufacturing or sales of the product or product candidate that is the subject of the suit.
If any relevant claims of third-party patents that we are alleged to infringe are upheld as valid and enforceable in any litigation or administrative proceeding, we or our potential future collaborators could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each such patent, or to redesign our products, and could be liable for monetary damages. There can be no assurance that such licenses would be available or, if available, would be available on acceptable terms or that we would be successful in any attempt to redesign our products. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us or our future collaborators from manufacturing and selling our products, which would have a material adverse effect on our business, financial condition and results of operations.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. The cost to us of any patent litigation or other proceedings, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
Risks Related to Our Financial Position
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs, commercialization efforts or acquisition strategy.
We make significant investments in our currently-marketed products for sales, marketing, and distribution. We have used, and expect to continue to use, revenue from sales of our marketed products to fund acquisitions, for development costs and to establish and expand our sales and marketing infrastructure. We have incurred losses from operations and negative operating cash flows since our inception, and we expect to continue to incur substantial losses for the foreseeable future.
As of September 30, 2014, we had approximately $16.4 million of cash and cash equivalents and $21.2 million of potential availability under our credit agreement with MidCap . We believe that our existing cash and cash from operation and available credit will be sufficient to enable us to fund our existing level of operating expense, certain planned development activities and general capital expenditure requirements through the foreseeable future. Further, we continue to have additional opportunities to recognize synergistic savings from our acquisitions as certain contractual commitments expire, to pace our research and development spend as available capital permits and to potentially sell non-core assets. Our future capital requirements will depend on many factors, including:
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our ability to successfully integrate the operations of newly acquired businesses and assets, including the integration of TREXIMET into our product portfolio;
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the level of product sales from our currently marketed products and any additional products that we may market in the future;
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the extent to which we acquire or invest in products, businesses and technologies;
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the scope, progress, results and costs of clinical development activities for our product candidates;
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the costs, timing and outcome of regulatory review of our product candidates;
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the number of, and development requirements for, additional product candidates that we pursue;
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the costs of commercialization activities, including product marketing, sales and distribution;
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the extent to which we choose to establish additional collaboration, co-promotion, distribution or other similar arrangements for our products and product candidates; and
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the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property related claims.
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We intend to obtain any additional funding we require through public or private equity or debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or royalty rights, or other arrangements and we cannot assure such funding will be available on reasonable terms, or at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Any exploration of strategic alternatives may not result in an agreement or transaction and, if completed, any agreement or transaction may not be successful or on attractive terms. The inability to enter into a strategic transaction, or a strategic transaction that is not successful or on attractive terms, could accelerate our need for cash and make securing funding on reasonable terms more difficult. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If our efforts in raising additional funds when needed are unsuccessful, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to our products or renegotiate less favorable terms with respect to such rights than we would otherwise choose or cease operating as a going concern. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we were successful in defending against these potential claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that could further adversely impact our financial condition.
If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investments.
If the estimates that we make, or the assumptions upon which we rely, in preparing our financial statements prove inaccurate, our future financial results may vary from expectations.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, stockholders’ equity, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. For example, at the same time we recognize revenues for product sales, we also record an adjustment, or decrease, to revenue for estimated charge backs, rebates, discounts, vouchers and returns, which management determines on a product-by-product basis as its best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such reserves. Actual sales allowances may vary from our estimates for a variety of reasons, including unanticipated competition, regulatory actions or changes in one or more of our contractual relationships. We cannot assure you, therefore, that there may not be material fluctuations between our estimates and the actual results.
If we fail to meet all applicable continued listing requirements of the NASDAQ Global Market and it determines to delist our common stock, the market liquidity and market price of our common stock could decline.
If we fail to meet all applicable listing requirements of the NASDAQ Global Market and it determines to delist our common stock, trading, if any, in our shares may continue to be conducted on the Over-the-Counter Bulletin Board or in a non-NASDAQ over-the-counter market, such as the “pink sheets”. Delisting of our shares would result in limited release of the market price of those shares and limited analyst coverage and could restrict investors’ interest and confidence in our securities. Also, a delisting could have a material adverse effect on the trading market and prices for our shares and our ability to issue additional securities or to secure additional financing. In addition, if our shares were not listed and the trading price of our shares was less than $5.00 per share, our shares could be subject to Rule 15g-9 under the Exchange Act which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser’s written consent prior to any transaction. In such case, our securities could also be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our securities and our ability to raise additional capital.
If significant business or product announcements by us or our competitors cause fluctuations in our stock price, an investment in our stock may suffer a decline in value.
The market price of our common stock may be subject to substantial volatility as a result of announcements by us or other companies in our industry, including our collaborators. Announcements that may subject the price of our common stock to substantial volatility include announcements regarding:
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our operating results, including the amount and timing of sales of our products and our ability to successfully integrate the operations of newly acquired businesses or products;
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the availability and timely delivery of a sufficient supply of our products;
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our licensing and collaboration agreements and the products or product candidates that are the subject of those agreements;
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the results of discoveries, preclinical studies and clinical trials by us or our competitors;
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the acquisition of technologies, product candidates or products by us or our competitors;
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the development of new technologies, product candidates or products by us or our competitors;
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regulatory actions with respect to our product candidates or products or those of our competitors; and
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significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
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Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We did not make any distributions for the years ended December 31, 2013, 2012 and 2011. We are currently investing in our promoted product lines and product candidates and do not anticipate paying dividends in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of our credit agreement with MidCap and the indentures governing our outstanding notes prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Holders of our outstanding 8.00% Convertible Senior Notes due 2019 have the ability to exercise significant influence over our management and affairs and matters requiring stockholder approval.
Upon conversion of our outstanding Convertible Notes, the Convertible Note holders will own an aggregate of 18,055,555 shares of our common stock, which represents approximately 32% of our outstanding common stock upon conversion. In addition, two of these holders have each been granted the right to nominate a member of our board of directors. As a result, these Convertible Note holders have the ability to exercise significant influence over our management and affairs and matters requiring stockholder approval. The interests of these holders may differ from or conflict with the interests of our other stockholders.
Sales of a substantial number of shares of our common stock or equity-linked securities could cause our stock price to fall.
Sales of a substantial number of shares of our common stock or equity-linked securities in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity or equity-linked securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results. Potential causes of future fluctuations in our operating results may include:
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period-to-period fluctuations in financial results due to seasonal demands for certain of our products;
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unanticipated potential product liability or patent infringement claims;
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new or increased competition from generics;
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the introduction of technological innovations or new commercial products by competitors;
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changes in the availability of reimbursement to the patient from third-party payers for our products;
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the entry into, or termination of, key agreements, including key strategic alliance agreements;
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the initiation of litigation to enforce or defend any of our intellectual property rights;
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the loss of key employees;
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the results of pre-clinical testing, IND application, and potential clinical trials of some product candidates;
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regulatory changes;
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the results and timing of regulatory reviews relating to the approval of product candidates;
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the results of clinical trials conducted by others on products that would compete with our products and product candidates;
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failure of any of our products or product candidates to achieve commercial success;
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general and industry-specific economic conditions that may affect research and development expenditures;
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future sales of our common stock; and
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changes in the structure of health care payment systems resulting from proposed healthcare legislation or otherwise.
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Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer a decline in value.
The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general has recently experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely volatile and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our common stock.
If we become subject to unsolicited public proposals from activist stockholders due to our shifting strategic focus or otherwise, we may experience significant uncertainty that would likely be disruptive to our business and increase volatility in our stock price.
Public companies, particularly those in volatile industries such as the pharmaceutical industry, have been the target of unsolicited public proposals from activist stockholders. The unsolicited and often hostile nature of these public proposals can result in significant uncertainty for current and potential licensors, suppliers, patients, physicians and other constituents, and can cause these parties to change or terminate their business relationships with the targeted company. Companies targeted by these unsolicited proposals from activist stockholders may not be able to attract and retain key personnel as a result of the related uncertainty. In addition, unsolicited proposals can result in stockholder class action lawsuits. The review and consideration of an unsolicited proposal as well as any resulting lawsuits can be a significant distraction for management and employees, and may require the expenditure of significant time, costs and other resources.
If we were to receive unsolicited public proposals from activist stockholders, we may encounter all of these risks and, as a result, may be delayed in executing our core strategy. We could be required to spend substantial resources on the evaluation of the proposal as well as the review of other opportunities that never come to fruition. If we were to receive any of these unsolicited public proposals, the future trading price of our common stock is likely to be even more volatile than in the past, and could be subject to wide price fluctuations based on many factors, including uncertainty associated with the proposals.
We may become involved in securities or other class action litigation that could divert management’s attention and harm our business.
The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Any securities or other class action litigation asserted against us could have a material adverse effect on our business.
Risks Related to Product Development
We may invest a significant portion of our efforts and financial resources in the development of our product candidates and there is no guarantee we will obtain requisite regulatory approvals or otherwise timely bring these product candidates to market.
Our ability to bring any of our product candidates to market depends on a number of factors including:
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successful completion of pre-clinical laboratory and animal testing;
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an FDA approved investigational new drug application or IND application, becoming effective, which must occur before human clinical trials may commence;
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successful completion of clinical trials;
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submission of an NDA;
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receipt of marketing approvals from the FDA;
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establishing commercial manufacturing arrangements with third-party manufacturers;
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launching commercial sales of the product;
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acceptance of the product by patients, the medical community and third party payors;
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competition from other therapies;
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achieving and maintaining compliance with all regulatory requirements applicable to the product; and
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a continued acceptable safety profile of the product following approval.
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There are no guarantees that we will be successful in completing these tasks. If we are not successful in commercializing any of our product candidates, or are significantly delayed in doing so, our business will be harmed, possibly materially.
If our clinical trials do not demonstrate safety and efficacy in humans, we may experience delays, incur additional costs and ultimately be unable to commercialize our product candidates.
Before obtaining regulatory approval for the sale of some of our product candidates, we must conduct, at our own expense, extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. In the United States, we must demonstrate with substantial evidence gathered in well-controlled studies, and to the satisfaction of the FDA, that each product candidate is safe and effective for use in the target indication. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. The outcome of early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Even if early phase clinical trials are successful, it is necessary to conduct additional clinical trials in larger numbers of patients taking the drug for longer periods before seeking approval from the FDA to market and sell a drug in the United States. Clinical data is often susceptible to varying interpretations, and companies that have believed their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products. Similarly, even if clinical trials of a product candidate are successful in one indication, clinical trials of that product candidate for other indications may be unsuccessful. A failure of one or more of our clinical trials can occur at any stage of testing.
Failures or delays in the commencement or completion of our clinical trials could result in increased costs to us and delay or limit our ability to generate revenues.
We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. Commencement or completion of clinical trials can be delayed or prevented for a number of reasons, including:
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FDA or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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difficulty complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial;
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delays in reaching or failure to reach agreement on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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our clinical trials may produce negative or inconclusive results, and we may decide, or the FDA or analogous foreign governmental entities may require us, to conduct additional clinical trials or we may abandon projects that we expect to be promising;
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the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower or more difficult than we anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate;
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our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;
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we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;
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regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
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the cost of our clinical trials may be greater than we anticipate;
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the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate; and
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the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.
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If we are required to conduct additional clinical trials or other testing of our product candidates in addition to those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for one or more of our product candidates;
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not be able to obtain marketing approval; or
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obtain approval for indications that are not as broad as intended.
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Our product development costs also will increase if we experience delays in testing or approvals. Significant clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates. In addition, failure to conduct the clinical trial in accordance with regulatory requirements or the trial protocols may also result in the ineligibility to use the data to support market approval.
Risks Related to Regulatory Matters
Some of our specialty pharmaceutical products are now being marketed without FDA approvals.
Even though the FDCA requires pre-marketing approval of all new drugs, as a matter of history and regulatory policy, the FDA has historically refrained from taking enforcement action against some marketed, unapproved new drugs. Specifically, some marketed prescription and nonprescription drugs are not the subject of an approved marketing application because they are thought to be identical, related, or similar to historically-marketed products, which were thought not to require pre-market review and approval, or which were approved only on the basis of safety, at the time they entered the marketplace. When enacted in 1938, the FDCA required proof of safety but not efficacy for new drugs. Between 1938 and 1962, if a drug obtained approval, FDA considered drugs that were identical, related, or similar to the approved drug to be covered by that approval, and allowed those drugs to be marketed without independent approval. In 1962, Congress amended the FDCA to require that a new drug be proven effective, as well as safe, to obtain FDA approval. The FDA established the Drug Efficacy Study Implementation, or DESI, program, which was established to determine the effectiveness of drug products approved before 1962. Drugs that were not subject to applications approved between 1938 and 1962 were not subject to DESI review. For a period of time, the FDA permitted these drugs to remain on the market without approval. In 1984, the FDA created a program, known as the Prescription Drug Wrap-Up, also known as DESI II, to address the remaining unapproved drugs. Most of these drugs contain active pharmaceutical ingredients that were first marketed prior to 1938. The FDA asserts that all drugs subject to the Prescription Drug Wrap-Up are on the market illegally and are subject to FDA enforcement discretion because all prescription drugs must be the subject of an approved drug application.
There are a few narrow exceptions. Under the 1938 grandfather clause, a drug product that was on the market prior to the passage of the FDCA in 1938 and which contains in its labeling the same representations concerning the conditions of use as it did prior to passage of the FDCA was not considered a “new drug” and therefore was exempt from the requirement of having an approved NDA. The 1962 grandfather clause exempts a drug from the effectiveness requirements if its composition and labeling has not changed since 1962 and if, on the day before the 1962 Amendments became effective, it was (a) used or sold commercially in the United States, (b) not a new drug as defined by the FDCA at that time, and (c) not covered by an effective application. The FDA and the courts have interpreted these two grandfather clauses very narrowly. The FDA believes that there are very few drugs on the market that are actually entitled to grandfather status because the drugs currently on the market likely differ from the previous versions in some respect, such as formulation, dosage or strength, dosage form, route of administration, indications, or intended patient population. It is a company’s burden to prove that its product is grandfathered.
The FDA has adopted a risk-based enforcement policy concerning these unapproved drugs. While all such drugs are considered to require FDA approval, FDA enforcement against such products as unapproved new drugs prioritizes products that pose potential safety risks, lack evidence of effectiveness, prevent patients from seeking effective therapies or are marketed fraudulently. In addition, the FDA has indicated that approval of an NDA for one drug within a class of drugs marketed without FDA approval may also trigger agency enforcement of the new drug requirements against all other drugs within that class that have not been so approved.
Some of our specialty pharmaceutical products are marketed in the United States without an FDA-approved marketing application because they have been considered by us to be identical, related or similar to products that have existed in the market without an NDA or ANDA. These products are marketed subject to the FDA’s regulatory discretion and enforcement policies, and it is possible that the FDA could disagree with our determination that one or more of these products is identical, related or similar to products that have existed in the marketplace without an NDA or ANDA. On March 3, 2011, the FDA announced its intent to remove certain unapproved prescription cough, cold, and allergy products from the U.S. market and named products from two cough and cold product families that Pernix sold, as well as certain Cypress products. The FDA provided three dates for the cessation of manufacturing, shipping or other introduction or delivery into commerce – March 3, 2011 for drugs not listed with the FDA under Section 510 of the FDCA, June 1, 2011 for cessation of manufacturing of listed drugs and August 31, 2011 for cessation of shipping of listed drugs covered by the notice. Manufacturing or shipping of the drug products covered by the notice beyond the date specified can result in enforcement action, including seizure, injunction, or other judicial or administrative proceedings. The time periods will not be extended for those who have submitted but not yet received approval of an NDA or ANDA application for a drug product covered by the notice. The Company completed the conversion of the ALDEX and BROVEX product families, two of our legacy cough and cold product families, to OTC monograph from DESI drugs in 2011. The Company believes it has appropriately marketed these lines as OTC monograph products. If the FDA were to disagree with our determination, it could require the removal of our unapproved products from the market, which would significantly reduce our gross sales. We voluntarily discontinued these products in 2013.
The Company’s authorized generic products that are OTC monograph products have not been affected by the FDA announcement. Certain Macoven generic products that were not marketed as OTC monograph were converted, and we did not experience any suspension, delay or interruption in our sales of these products. Our remaining generic DESI cough and cold products that were not being converted to OTC monograph were phased out by 2011 and did not have a material impact on the results of operations or financial condition of the Company. If the FDA were to disagree with our determination, it could ask or require the removal of our unapproved products from the market, which would significantly reduce our gross sales.
In addition, if the FDA issues an approved NDA for one of the drug products within the class of drugs that includes one or more of our unapproved products or completes the efficacy review for that drug product, it may require us to also file an NDA or ANDA application for its unapproved products in that class of drugs in order to continue marketing them in the United States. While the FDA generally provides sponsors with a one-year grace period during which time they are permitted to continue selling the unapproved drug, it is not statutorily required to do so and could ask or require that the unapproved products be removed from the market immediately. In addition, the time it takes us to complete the necessary clinical trials and submit an NDA or ANDA to the FDA may exceed any applicable grace period, which would result in an interruption of sales of such unapproved products. If the FDA asks or requires that the unapproved products be removed from the market, our financial condition and results of operations would be materially and adversely affected.
If the FDA disagrees with our determination that several of our products meet the over-the-counter requirements, those products may be removed from the market.
Drugs must meet all of the general conditions for OTC drugs and all of the conditions contained in an applicable final monograph to be considered generally recognized as safe and effective (GRAS/GRAE) and to be marketed without FDA approval of a marketing application. The general conditions include, among other things, compliance with cGMP, establishment registration and labeling requirements. Any product which fails to comply with the general conditions and a monograph is liable to regulatory action. We believe our promoted branded products comply with FDA OTC monograph requirements. However, if the FDA determines that our products do not comply with the monograph or if we fail to meet the general conditions, the products may be removed from the market and we may face actions including, but not limited to, restrictions on the marketing or distribution of such products, warning letters, fines, product seizure, or injunctions or the imposition of civil or criminal penalties. Any of these actions would reduce our gross sales.
If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates and our ability to generate increased revenue will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA, the DEA and other regulatory agencies in the United States. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our future products may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved and the nature of the disease or condition to be treated. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, recordkeeping, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers, or manufacturing processes or failure to comply with regulatory requirements may result in actions such as:
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withdrawal of the products from the market;
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restrictions on the marketing or distribution of such products;
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restrictions on the manufacturers or manufacturing processes;
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warning letters;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recalls;
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fines;
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suspension or withdrawal of regulatory approvals;
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refusal to permit the import or export of our products;
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product seizure; or
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injunctions or the imposition of civil or criminal penalties.
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In addition, the FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label, or for the indications specified in an applicable OTC monograph and in accordance with the monograph’s labeling requirements. An organization that is found to have improperly promoted off-label uses may be subject to significant liability by the FDA and other agencies that actively enforce laws and regulations prohibiting the promotion of off-label uses. The Federal Trade Commission regulates advertising for OTC drug products and advertising for these products must be truthful, not misleading and adequately substantiated. If we are found to have promoted off-label uses, our OTC products may be deemed out of compliance with the applicable OTC monograph, we may be enjoined from such off-label promotion and become subject to significant liability, which would have an adverse effect on our reputation, business and revenues, if any.
Our sales depend on payment and reimbursement from third-party payors, and a reduction in the payment rate or reimbursement could result in decreased use or sales of our products.
Our sales of currently marketed products are, and any future sales of our product candidates will be, dependent, in part, on the availability of coverage and reimbursement from third-party payors, including government health care programs such as Medicare and Medicaid, and private insurance plans. All of our products are generally covered by managed care and private insurance plans. Generally, the status or tier within managed care formularies, which are lists of approved products developed by MCOs, varies but coverage is similar to other products within the same class of drugs. For example, CEDAX is covered by private insurance plans similar to other marketed, branded cephalosporins. However, the position of any of our branded products that requires a higher patient copayment may make it more difficult to expand the current market share for such product. In some cases, MCOs may require additional evidence that a patient had previously failed another therapy, additional paperwork or prior authorization from the MCO before approving reimbursement for a branded product. Some Medicare Part D plans also cover some or all of our products, but the amount and level of coverage varies from plan to plan. We also participate in the Medicaid Drug Rebate program with the Centers for Medicare & Medicaid Services and submit all of our products for inclusion in this program. Coverage of our products under individual state Medicaid plans varies from state to state. Additionally, some of our products are purchased under the 340B Drug Pricing Program, which is codified as Section 340B of the Public Health Service Act. Section 340B limits the cost of covered outpatient drugs to certain federal grantees, federally qualified health center lookalikes and qualified disproportionate share hospitals.
There have been, there are and we expect there will continue to be federal and state legislative and administrative proposals that could limit the amount that government health care programs will pay to reimburse the cost of pharmaceutical and biologic products. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003, or the MMA, created a new Medicare benefit for prescription drugs. More recently, the Deficit Reduction Act of 2005 significantly reduced reimbursement for drugs under the Medicaid program. Legislative or administrative acts that reduce reimbursement for our products could adversely impact our business.
In March 2010, the President signed the PPACA, which makes extensive changes to the delivery of healthcare in the U.S. This act includes numerous provisions that affect pharmaceutical companies, some of which were effective immediately and others of which will be taking effect over the next several years. For example, the act seeks to expand healthcare coverage to the uninsured through private health insurance reforms and an expansion of Medicaid. The act also imposes substantial costs on pharmaceutical manufacturers, such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be offered to certain enrollees in the Medicare prescription drug benefit, an annual fee imposed on all manufacturers of brand prescription drugs in the U.S., increased disclosure obligations and an expansion of an existing program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized clinics. The act also contains cost-containment measures that could reduce reimbursement levels for healthcare items and services generally, including pharmaceuticals. It also will require reporting and public disclosure of payments and other transfers of value provided by pharmaceutical companies to physicians and teaching hospitals. These measures could result in decreased net revenues from our pharmaceutical products and decreased potential returns from our development efforts. Although the PPACA was recently upheld by the U.S. Supreme Court, it is possible that the PPACA may be modified or repealed in the future.
In addition, private insurers, such as MCOs, may adopt their own reimbursement reductions in response to federal or state legislation. Any reduction in reimbursement for our products could materially harm our results of operations. In addition, we believe that the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our products, which may adversely impact our product sales. Furthermore, when a new product is approved, governmental and private coverage for that product and the amount for which that product will be reimbursed are uncertain. We cannot predict the availability or amount of reimbursement for our product candidates, and current reimbursement policies for marketed products may change at any time.
The MMA established a voluntary prescription drug benefit, called Part D, which became effective in 2006 for all Medicare beneficiaries. We cannot be certain that our currently marketed products will continue to be, or any of our product candidates still in development will be, included in the Medicare prescription drug benefit. Even if our products are included, the private health plans that administer the Medicare drug benefit can limit the number of prescription drugs that are covered on their formularies in each therapeutic category and class. In addition, private managed care plans and other government agencies continue to seek price discounts. Because many of these same private health plans administer the Medicare drug benefit, they have the ability to influence prescription decisions for a larger segment of the population. In addition, certain states have proposed or adopted various programs under their Medicaid programs to control drug prices, including price constraints, restrictions on access to certain products and bulk purchasing of drugs.
If we succeed in bringing additional products to the market, these products may not be considered cost-effective and reimbursement to the patient may not be available or sufficient to allow us to sell our product candidates on a competitive basis to a sufficient patient population. We may need to conduct expensive pharmacoeconomic trials in order to demonstrate the cost-effectiveness of our products and product candidates.
Our relationships with customers and payors are subject to applicable fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputation harm, and diminished profits and future earnings.
Healthcare providers, physicians and others play a primary role in the recommendation and prescription of our products. Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulation that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products. Applicable federal and state healthcare laws and regulations, include but are not limited to, the following:
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the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;
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the Ethics in Patient Referrals Act, commonly referred to as the Stark Law, and its corresponding regulations, prohibit physicians from referring patients for designated health services reimbursed under the Medicare and Medicaid programs to entities with which the physicians or their immediate family members have a financial relationship or an ownership interest, subject to narrow regulatory exceptions;
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the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
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the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and
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analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.
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In March 2010, the President signed the Patient Protection and Affordable Care Act, or PPACA, which makes extensive changes to the delivery of healthcare in the U.S. This act includes numerous provisions that affect pharmaceutical companies, some of which were effective immediately and others of which will be taking effect over the next several years. For example, the act seeks to expand healthcare coverage to the uninsured through private health insurance reforms and an expansion of Medicaid. The act also imposes substantial costs on pharmaceutical manufacturers, such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be offered to certain enrollees in the Medicare prescription drug benefit, an annual fee imposed on all manufacturers of brand prescription drugs in the U.S., increased disclosure obligations and an expansion of an existing program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized clinics. The act also contains cost-containment measures that could reduce reimbursement levels for healthcare items and services generally, including pharmaceuticals. It also will require reporting and public disclosure of payments and other transfers of value provided by pharmaceutical companies to physicians and teaching hospitals. These measures could result in decreased net revenues from our pharmaceutical products and decreased potential returns from our development efforts. Although the PPACA was recently upheld by the U.S. Supreme Court, it is possible that the PPACA may be modified or repealed in the future.
In addition, there have been a number of other legislative and regulatory proposals aimed at changing the pharmaceutical industry. These include proposals to permit reimportation of pharmaceutical products from other countries and proposals concerning safety matters. For example, in an attempt to protect against counterfeiting and diversion of drugs, a bill was introduced in a previous Congress that would establish an electronic drug pedigree and track-and-trace system capable of electronically recording and authenticating every sale of a drug unit throughout the distribution chain. This bill or a similar bill may be introduced in Congress in the future. California has already enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. California’s electronic pedigree requirement is scheduled to take effect beginning in January 2015. Compliance with California and any future federal or state electronic pedigree requirements will likely require an increase in our operational expenses and will likely be administratively burdensome. As a result of these and other new proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations.
We, as well as many other pharmaceutical companies, sponsor prescription drug coupons and other cost-savings programs to help reduce the burden of co-payments and co-insurance. During 2012, lawsuits have been filed against several pharmaceutical companies alleging, among other things, that the drug-makers violated anti-trust laws and the Racketeer Influenced and Corrupt Organizations Act, or RICO, when they provided coupon programs to privately-insured consumers that subsidize all or part of the cost-sharing obligation (co-pay or co-insurance) for a branded prescription drug or drugs. We cannot be certain as to whether we will be named in any future similar lawsuit or concerning the potential outcome of the ongoing litigation.
Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our past or present operations, including activities conducted by our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from third-party payor programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Many aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations, which increases the risk of potential violations. In addition, these laws and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.
The Food and Drug Administration Amendments Act of 2007 may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market and distribute our existing products.
The Food and Drug Administration Amendments Act of 2007, or the FDAAA, grants a variety of new powers to the FDA, many of which are aimed at improving drug safety and assuring the safety of drug products after approval. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. The new requirements and other changes that the FDAAA imposes may make it more difficult, and likely more costly, to obtain approval of new pharmaceutical products and to produce, market and distribute existing products.
We may be subject to investigations or other inquiries concerning our compliance with reporting obligations under federal healthcare program pharmaceutical pricing requirements.
Under federal healthcare programs, some state governments and private payors investigate and have filed civil actions against numerous pharmaceutical companies alleging that the reporting of prices for pharmaceutical products has resulted in false and overstated average wholesale price, which in turn may be alleged to have improperly inflated the reimbursements paid by Medicare, private insurers, state Medicaid programs, medical plans and others to healthcare providers who prescribed and administered those products or pharmacies that dispensed those products. These same payors may allege that companies do not properly report their “best prices” to the state under the Medicaid program. Suppliers of outpatient pharmaceuticals to the Medicaid program are also subject to price rebate agreements. Failure to comply with these price rebate agreements may lead to federal or state investigations, criminal or civil liability, exclusion from federal healthcare programs, contractual damages, and otherwise harm our reputation, business and prospects.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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None.
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DEFAULTS UPON SENIOR SECURITIES
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None.
Not applicable.
None.
EXHIBIT INDEX
Exhibit No.
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Description
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2.1
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Asset Purchase and Sale Agreement dated as of May 13, 2014 by and among Glaxo Group Limited, GlaxoSmithKline Intellectual Property Management Limited, GlaxoSmithKline Intellectual Property Holdings Limited and GlaxoSmithKline LLC, on the one hand, and Pernix Therapeutics Holdings, Inc., on the other hand (previously filed as exhibit 2.1 to our current Report on Form 8-K filed on May 16, 2014 and incorporated herein by reference.
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4.1
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Indenture, dated August 19, 2014, among Pernix Therapeutics Holdings, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee and as Collateral Agent (previously filed as exhibit 4.1 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference)
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4.2
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Forms of 12% Senior Secured Notes due 2020 (included in Exhibit 4.1) (previously filed as exhibit 4.2 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference) |
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4.3
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First Supplemental Indenture, dated as of August 19, 2014, among Pernix Therapeutics Holdings, Inc. and Wilmington Trust, National Association, as Trustee. (previously filed as exhibit 4.3 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference)
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4.4
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Second Supplemental Indenture, dated as of August 19, 2014, among Pernix Therapeutics Holdings, Inc. and Wilmington Trust, National Association, as Trustee. (previously filed as exhibit 4.4 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference)
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10.1
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Amendment No. 3, dated as of August 19, 2014, among MidCap Funding IV, LLC, as Agent, Pernix Therepeutics Holdings, Inc. and the subsidiary guarantors identified therein. (previously filed as Exhibit 10.1 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference).
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10.2
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Letter Agreement dated August 14, 2014 among Pernix Therapeutics Holdings, Inc., Worrigan Limited, Glaxo Group, Limited, GlaxoSmithKline Intellectual Property Management Limited, GlaxoSmithKline Intellectual Property Holdings Limited, and GlaxoSmithKline, LLC (previously filed as exhibit 10.2 to our current Report on Form 8-K filed on August 22, 2014 and incorporated herein by reference)
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31.1*
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Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2 *
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Certification of the Registrant’s Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1 *
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Certification of the Registrant’s Chief Executive Officer and Principal Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101*
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Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
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(i) Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013;
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(ii) Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ending September 30, 2014 and 2013;
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(iii) Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months ended September 30, 2014;
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(iv) Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2014 and 2013; and
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(v) Notes to Condensed Consolidated Financial Statements.
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_______________________
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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PERNIX THERAPEUTICS HOLDINGS, INC.
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Date: November 10, 2014
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By:
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/s/ DOUGLAS L. DRYSDALE
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Douglas L. Drysdale
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Chairman and Chief Executive Officer and President and Director
(Principal Executive Officer)
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Date: November 10, 2014
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By:
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/s/ SANJAY S. PATEL
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Sanjay S. Patel
Chief Financial Officer
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(Principal Financial Officer)
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