King Pharmaceuticals, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File No. 0-24425
King Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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Tennessee
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54-1684963 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
501 Fifth Street, Bristol, TN
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37620 |
(Address of principal executive offices) |
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(Zip Code) |
(423) 989-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Number of shares outstanding of Registrants common stock
as of August 8, 2005: 241,738,182
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial
Statements
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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June 30, | |
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2005 | |
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December 31, | |
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(unaudited) | |
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2004 | |
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| |
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ASSETS |
Current Assets:
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Cash and cash equivalents
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$ |
565,566 |
|
|
$ |
342,086 |
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Restricted cash
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|
130,400 |
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|
97,730 |
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Marketable securities
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|
7,471 |
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|
16,498 |
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|
Accounts receivable, net of allowance for doubtful accounts of
$14,078 and $15,348
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|
195,031 |
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180,963 |
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Inventories
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|
222,995 |
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|
274,412 |
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|
Deferred income tax assets
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|
122,857 |
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|
153,979 |
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Prepaid expenses and other current assets
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|
57,140 |
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|
61,395 |
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Total current assets
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1,301,460 |
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|
1,127,063 |
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Property, plant and equipment, net
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284,615 |
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|
280,731 |
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Intangible assets, net
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1,092,206 |
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1,285,961 |
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Goodwill
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121,152 |
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121,152 |
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Deferred income tax assets
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|
138,173 |
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92,931 |
|
Other assets (includes restricted cash of $13,949 and $2,775)
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27,105 |
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|
16,318 |
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|
|
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Total assets
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$ |
2,964,711 |
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$ |
2,924,156 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities:
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Accounts payable
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$ |
62,190 |
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$ |
92,920 |
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Accrued expenses
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|
535,547 |
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|
596,010 |
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Income taxes payable
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|
57,048 |
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|
|
|
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|
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Total current liabilities
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654,785 |
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688,930 |
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Long-term debt
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345,000 |
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345,000 |
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Other liabilities
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26,829 |
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41,436 |
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|
|
|
|
|
|
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Total liabilities
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1,026,614 |
|
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1,075,366 |
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Commitments and contingencies (Note 9)
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Shareholders equity
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1,938,097 |
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|
1,848,790 |
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|
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|
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|
|
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Total liabilities and shareholders equity
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$ |
2,964,711 |
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$ |
2,924,156 |
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See accompanying notes.
2
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
|
June 30, | |
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| |
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| |
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2004* | |
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2004* | |
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2005 | |
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(restated) | |
|
2005 | |
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(restated) | |
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| |
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Revenues:
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|
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Net sales
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$ |
443,361 |
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$ |
254,492 |
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$ |
793,931 |
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$ |
529,186 |
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|
Royalty revenue
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|
19,578 |
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21,119 |
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37,633 |
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37,875 |
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|
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|
|
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Total revenues
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462,939 |
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275,611 |
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831,564 |
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567,061 |
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Operating costs and expenses:
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Cost of revenues, exclusive of depreciation, amortization and
impairments shown below
|
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91,204 |
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85,124 |
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|
163,420 |
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168,665 |
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|
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Selling, general and administrative, exclusive of co-promotion
fees
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|
101,423 |
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|
104,125 |
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194,273 |
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|
191,727 |
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|
Medicaid related charge (Note 9)
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|
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65,000 |
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|
65,000 |
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Mylan transaction costs
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|
155 |
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|
3,126 |
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|
3,432 |
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|
3,126 |
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Co-promotion fees
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|
57,587 |
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|
19,402 |
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|
92,242 |
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|
42,946 |
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|
|
|
|
|
|
|
|
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Total selling, general and administrative expense
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|
159,165 |
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|
191,653 |
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|
289,947 |
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|
302,799 |
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|
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|
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Research and development
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|
17,500 |
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17,478 |
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|
28,972 |
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|
33,501 |
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Depreciation and amortization
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|
39,920 |
|
|
|
38,466 |
|
|
|
81,346 |
|
|
|
77,784 |
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|
Intangible asset impairment
|
|
|
126,923 |
|
|
|
|
|
|
|
126,923 |
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|
|
34,936 |
|
|
Restructuring charges (Note 13)
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|
(17 |
) |
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|
6,153 |
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|
|
2,006 |
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|
6,153 |
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|
Gain on sale of products
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|
(591 |
) |
|
|
(3,421 |
) |
|
|
(1,438 |
) |
|
|
(4,279 |
) |
|
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|
|
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|
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Total operating costs and expenses
|
|
|
434,104 |
|
|
|
335,453 |
|
|
|
691,176 |
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|
619,559 |
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|
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Operating income (loss)
|
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|
28,835 |
|
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|
(59,842 |
) |
|
|
140,388 |
|
|
|
(52,498 |
) |
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Other income (expense):
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Interest income
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|
|
3,933 |
|
|
|
1,081 |
|
|
|
6,210 |
|
|
|
2,135 |
|
|
Interest expense
|
|
|
(3,039 |
) |
|
|
(3,266 |
) |
|
|
(5,740 |
) |
|
|
(6,371 |
) |
|
Valuation charge convertible notes receivable
|
|
|
|
|
|
|
(2,438 |
) |
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|
|
|
|
|
(2,887 |
) |
|
Write-down of investment
|
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|
(369 |
) |
|
|
|
|
|
|
(7,222 |
) |
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Other, net
|
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|
(1,047 |
) |
|
|
1,168 |
|
|
|
(1,296 |
) |
|
|
465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total other (expense) income
|
|
|
(522 |
) |
|
|
(3,455 |
) |
|
|
(8,048 |
) |
|
|
(6,658 |
) |
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|
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|
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|
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|
|
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|
Income (loss) from continuing operations before income taxes
|
|
|
28,313 |
|
|
|
(63,297 |
) |
|
|
132,340 |
|
|
|
(59,156 |
) |
Income tax expense
|
|
|
7,271 |
|
|
|
986 |
|
|
|
44,193 |
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
21,042 |
|
|
|
(64,283 |
) |
|
|
88,147 |
|
|
|
(61,981 |
) |
|
|
|
|
|
|
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|
|
|
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|
Discontinued operations (Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, including loss
on impairment
|
|
|
(849 |
) |
|
|
2,148 |
|
|
|
3,833 |
|
|
|
(165,314 |
) |
|
Income tax (benefit) expense
|
|
|
(304 |
) |
|
|
789 |
|
|
|
1,428 |
|
|
|
(60,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net
|
|
|
(545 |
) |
|
|
1,359 |
|
|
|
2,405 |
|
|
|
(105,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss)
|
|
$ |
20,497 |
|
|
$ |
(62,924 |
) |
|
$ |
90,552 |
|
|
$ |
(167,000 |
) |
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|
|
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Income (loss) per common share:
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|
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Basic:
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing operations
|
|
$ |
0.08 |
|
|
$ |
(0.27 |
) |
|
$ |
0.36 |
|
|
$ |
(0.26 |
) |
|
|
Total income (loss) from discontinued operations
|
|
|
|
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.08 |
|
|
$ |
(0.26 |
) |
|
$ |
0.37 |
|
|
$ |
(0.69 |
) |
|
|
|
|
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Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.08 |
|
|
$ |
(0.27 |
) |
|
$ |
0.36 |
|
|
$ |
(0.26 |
) |
|
|
Total income (loss) from discontinued operations
|
|
|
|
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.08 |
|
|
$ |
(0.26 |
) |
|
$ |
0.37 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
* See Note 2.
See accompanying notes.
3
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share data)
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|
|
|
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Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
Other | |
|
|
|
|
| |
|
Retained | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Earnings | |
|
Income | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
|
241,190,852 |
|
|
$ |
1,205,970 |
|
|
$ |
797,408 |
|
|
$ |
1,113 |
|
|
$ |
2,004,491 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as restated*
|
|
|
|
|
|
|
|
|
|
|
(167,000 |
) |
|
|
|
|
|
|
(167,000 |
) |
|
Net unrealized loss on marketable securities, net of tax of $28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
(53 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss, as restated*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,005 |
) |
Stock option activity
|
|
|
221,659 |
|
|
|
2,324 |
|
|
|
|
|
|
|
|
|
|
|
2,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004, as restated*
|
|
|
241,412,511 |
|
|
$ |
1,208,294 |
|
|
$ |
630,408 |
|
|
$ |
1,108 |
|
|
$ |
1,839,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
241,706,583 |
|
|
$ |
1,210,647 |
|
|
$ |
637,120 |
|
|
$ |
1,023 |
|
|
$ |
1,848,790 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
90,552 |
|
|
|
|
|
|
|
90,552 |
|
|
Net unrealized loss on marketable securities, net of tax of $702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,249 |
) |
|
|
(1,249 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,220 |
|
Stock option activity
|
|
|
28,850 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
241,735,433 |
|
|
$ |
1,210,734 |
|
|
$ |
727,672 |
|
|
$ |
(309 |
) |
|
$ |
1,938,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
|
|
2004* | |
|
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
Cash flows from operating activities of continuing operations
|
|
$ |
316,768 |
|
|
$ |
15,948 |
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
Transfers (to) from restricted cash
|
|
|
(73,449 |
) |
|
|
806 |
|
|
Purchases of property, plant and equipment
|
|
|
(19,927 |
) |
|
|
(28,462 |
) |
|
Proceeds from sale of assets
|
|
|
1 |
|
|
|
113 |
|
|
Acquisition of primary care business of Elan
|
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(93,375 |
) |
|
|
(63,543 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
87 |
|
|
|
2,324 |
|
|
Payments on other long-term debt and capital lease obligations
|
|
|
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
87 |
|
|
|
2,227 |
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
6,122 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
223,480 |
|
|
|
(39,246 |
) |
Cash and cash equivalents, beginning of period
|
|
|
342,086 |
|
|
|
146,053 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
565,566 |
|
|
$ |
106,807 |
|
|
|
|
|
|
|
|
* See Note 2.
See accompanying notes.
5
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
(In thousands)
The accompanying unaudited interim condensed consolidated
financial statements of King Pharmaceuticals, Inc.
(King or the Company) have been prepared
by the Company in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and,
accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three and six months ended
June 30, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005.
These consolidated statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2004. The year-end
condensed balance sheet was derived from the audited
consolidated financial statements but does not include all
disclosures required by generally accepted accounting principles.
These consolidated financial statements include the accounts of
King and all of its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
|
|
2. |
Restatement of Previously Issued Financial Statements |
As previously disclosed and discussed in detail in Note 2
to the Companys Annual Report on Form 10-K for the
year ended December 31, 2004, the Company has in prior
filings restated its financial statements for the years 2002 and
2003, including interim quarterly financial data for 2003, and
the first two quarters of 2004, primarily to reflect the
correction of methodological errors related to its reserve for
product returns. All amounts referenced in this Quarterly Report
for those periods reflect the relevant amounts on a restated
basis.
6
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Previous Restatement of Income Statement Amounts |
The table below sets forth the effect of the previously
disclosed restatement for the three months ended June 30,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns | |
|
Other | |
|
|
|
|
As Originally | |
|
Reserve | |
|
Immaterial | |
|
|
|
|
Reported | |
|
Errors | |
|
Items | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
254,021 |
|
|
$ |
7,775 |
|
|
$ |
(7,304 |
) |
|
$ |
254,492 |
|
|
Royalty revenue
|
|
|
21,119 |
|
|
|
|
|
|
|
|
|
|
|
21,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
275,140 |
|
|
|
7,775 |
|
|
|
(7,304 |
) |
|
|
275,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments shown below
|
|
|
85,411 |
|
|
|
(189 |
) |
|
|
(98 |
) |
|
|
85,124 |
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
104,125 |
|
|
|
|
|
|
|
|
|
|
|
104,125 |
|
|
Medicaid related charge
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
Mylan transaction costs
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
3,126 |
|
|
Co-promotion fees
|
|
|
20,823 |
|
|
|
361 |
|
|
|
(1,782 |
) |
|
|
19,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expense
|
|
|
193,074 |
|
|
|
361 |
|
|
|
(1,782 |
) |
|
|
191,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17,478 |
|
|
|
|
|
|
|
|
|
|
|
17,478 |
|
|
Depreciation and amortization
|
|
|
38,466 |
|
|
|
|
|
|
|
|
|
|
|
38,466 |
|
|
Restructuring charges
|
|
|
6,153 |
|
|
|
|
|
|
|
|
|
|
|
6,153 |
|
|
Gain on sale of assets
|
|
|
(3,421 |
) |
|
|
|
|
|
|
|
|
|
|
(3,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
337,161 |
|
|
|
172 |
|
|
|
(1,880 |
) |
|
|
335,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(62,021 |
) |
|
|
7,603 |
|
|
|
(5,424 |
) |
|
|
(59,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(3,455 |
) |
|
|
|
|
|
|
|
|
|
|
(3,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(65,476 |
) |
|
|
7,603 |
|
|
|
(5,424 |
) |
|
|
(63,297 |
) |
Income tax (benefit) expense
|
|
|
152 |
|
|
|
2,911 |
|
|
|
(2,077 |
) |
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(65,628 |
) |
|
|
4,692 |
|
|
|
(3,347 |
) |
|
|
(64,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, including loss on
impairment
|
|
|
3,332 |
|
|
|
(946 |
) |
|
|
(238 |
) |
|
|
2,148 |
|
|
Income tax (benefit) expense
|
|
|
1,243 |
|
|
|
(363 |
) |
|
|
(91 |
) |
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
|
2,089 |
|
|
|
(583 |
) |
|
|
(147 |
) |
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(63,539 |
) |
|
$ |
4,109 |
|
|
$ |
(3,494 |
) |
|
$ |
(62,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$ |
(0.26 |
) |
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$ |
(0.26 |
) |
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below sets forth the effect of the previously
disclosed restatement for the six months ended June 30,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns | |
|
Other | |
|
|
|
|
As Originally | |
|
Reserve | |
|
Immaterial | |
|
|
|
|
Reported | |
|
Errors | |
|
Items | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
527,909 |
|
|
$ |
8,195 |
|
|
$ |
(6,918 |
) |
|
$ |
529,186 |
|
|
Royalty revenue
|
|
|
37,875 |
|
|
|
|
|
|
|
|
|
|
|
37,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
565,784 |
|
|
|
8,195 |
|
|
|
(6,918 |
) |
|
|
567,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairment shown below
|
|
|
173,125 |
|
|
|
(327 |
) |
|
|
(4,133 |
) |
|
|
168,665 |
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
190,727 |
|
|
|
|
|
|
|
1,000 |
|
|
|
191,727 |
|
|
Medicaid related charge
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
Mylan transaction costs
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
3,126 |
|
|
Co-promotion fees
|
|
|
48,327 |
|
|
|
(2,845 |
) |
|
|
(2,536 |
) |
|
|
42,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expense
|
|
|
307,180 |
|
|
|
(2,845 |
) |
|
|
(1,536 |
) |
|
|
302,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
33,501 |
|
|
|
|
|
|
|
|
|
|
|
33,501 |
|
|
Depreciation and amortization
|
|
|
77,784 |
|
|
|
|
|
|
|
|
|
|
|
77,784 |
|
|
Restructuring charges
|
|
|
6,153 |
|
|
|
|
|
|
|
|
|
|
|
6,153 |
|
|
Intangible asset impairment
|
|
|
34,936 |
|
|
|
|
|
|
|
|
|
|
|
34,936 |
|
|
Gain on sale of assets
|
|
|
(4,279 |
) |
|
|
|
|
|
|
|
|
|
|
(4,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
628,400 |
|
|
|
(3,172 |
) |
|
|
(5,669 |
) |
|
|
619,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(62,616 |
) |
|
|
11,367 |
|
|
|
(1,249 |
) |
|
|
(52,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(6,258 |
) |
|
|
|
|
|
|
(400 |
) |
|
|
(6,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(68,874 |
) |
|
|
11,367 |
|
|
|
(1,649 |
) |
|
|
(59,156 |
) |
Income tax (benefit) expense
|
|
|
(896 |
) |
|
|
4,353 |
|
|
|
(632 |
) |
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(67,978 |
) |
|
|
7,014 |
|
|
|
(1,017 |
) |
|
|
(61,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, including loss on
impairment
|
|
|
(167,910 |
) |
|
|
3,081 |
|
|
|
(485 |
) |
|
|
(165,314 |
) |
|
Income tax (benefit) expense
|
|
|
(61,289 |
) |
|
|
1,179 |
|
|
|
(185 |
) |
|
|
(60,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net
|
|
|
(106,621 |
) |
|
|
1,902 |
|
|
|
(300 |
) |
|
|
(105,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(174,599 |
) |
|
$ |
8,916 |
|
|
$ |
(1,317 |
) |
|
$ |
(167,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$ |
(0.72 |
) |
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per common share
|
|
$ |
(0.72 |
) |
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has adopted the disclosure only provision of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148. Accordingly, since
options were granted at a strike price equal to market price at
the date of grant, no compensation cost has been recognized for
stock options granted to date. Had compensation costs for the
Companys stock compensation plans been determined for
options granted, consistent with SFAS No. 123, the
Companys net income (loss), basic income (loss) per
common share and diluted income (loss) per common share
would include adjustments for the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
|
|
2004* | |
|
|
|
2004* | |
|
|
2005 | |
|
(restated) | |
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
|
| |
|
| |
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
20,497 |
|
|
$ |
(62,924 |
) |
|
$ |
90,552 |
|
|
$ |
(167,000 |
) |
|
Less pro forma compensation costs for options granted
|
|
|
(1,516 |
) |
|
|
(2,377 |
) |
|
|
(2,867 |
) |
|
|
(3,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
18,981 |
|
|
$ |
(65,301 |
) |
|
$ |
87,685 |
|
|
$ |
(170,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.08 |
|
|
$ |
(0.26 |
) |
|
$ |
0.37 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.08 |
|
|
$ |
(0.27 |
) |
|
$ |
0.36 |
|
|
$ |
(0.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.08 |
|
|
$ |
(0.26 |
) |
|
$ |
0.37 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.08 |
|
|
$ |
(0.27 |
) |
|
$ |
0.36 |
|
|
$ |
(0.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model.
The basic and diluted income (loss) per common share was
determined using the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,732 |
|
|
|
241,383 |
|
|
|
241,728 |
|
|
|
241,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,732 |
|
|
|
241,383 |
|
|
|
241,728 |
|
|
|
241,341 |
|
|
Effect of stock options
|
|
|
51 |
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,783 |
|
|
|
241,383 |
|
|
|
241,793 |
|
|
|
241,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the three months ended June 30, 2004, options to
purchase 817 shares of common stock were not included in the
computation of diluted income (loss) per share because
their inclusion would have been anti-dilutive and would have
reduced the loss per share. For the six months ended
June 30, 2004, options to purchase 866 shares of common
stock were not included in the computation of diluted income
(loss) per share because their inclusion would have been
anti-dilutive and would have reduced the loss per share. The
Companys convertible debentures could also be converted
into 6,878 shares of common stock in the future, subject to
certain contingencies outlined in the indenture relating to
those debentures. Because such contingencies were not fulfilled,
the convertible debentures were not considered in the
calculation of diluted income (loss) per common share.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
131,848 |
|
|
$ |
168,541 |
|
Work-in-process
|
|
|
19,929 |
|
|
|
20,287 |
|
Finished goods (including $11,891 and $11,350 of sample
inventory, respectively)
|
|
|
109,214 |
|
|
|
133,527 |
|
|
|
|
|
|
|
|
|
|
|
260,991 |
|
|
|
322,355 |
|
Inventory valuation allowance
|
|
|
(37,996 |
) |
|
|
(47,943 |
) |
|
|
|
|
|
|
|
|
|
$ |
222,995 |
|
|
$ |
274,412 |
|
|
|
|
|
|
|
|
|
|
6. |
Property, Plant and Equipment |
The Companys Rochester, Michigan facility manufactures
products for the Company and various third-party manufacturers.
As of June 30, 2005, the net carrying value of the
property, plant and equipment at the Rochester facility was
$92,874. Overall production volume at this facility has been
declining. The Company currently is transferring to this
facility the manufacture of certain products that are currently
manufactured by the Company at other Company facilities or for
the Company by third parties. These transfers should increase
production and cash flow at the Rochester facility. Management
currently believes that the long-term assets associated with the
Rochester facility are not impaired based on estimated
undiscounted future cash flows. However, if production volumes
continue to decline or if the Company is not successful in
transferring additional production to the Rochester facility,
the Company may have to write off a portion of the property,
plant and equipment associated with this facility.
|
|
7. |
Intangible Assets and Goodwill |
The following table reflects the components of intangible assets
as of June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
Trademarks and product rights
|
|
$ |
1,243,788 |
|
|
$ |
260,319 |
|
Patents
|
|
|
267,049 |
|
|
|
159,146 |
|
Other intangibles
|
|
|
9,459 |
|
|
|
8,625 |
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
1,520,296 |
|
|
$ |
428,090 |
|
|
|
|
|
|
|
|
10
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for the three months ended June 30,
2005 and 2004 was $32,569 and $31,904, respectively.
Amortization expense for the six months ended June 30, 2005
and 2004 was $66,832 and $64,751, respectively.
As previously disclosed, a new competitor to Sonata®
entered the market in April 2005. In the second quarter of 2005,
the prescriptions for Sonata® did not meet expectations. As
a result, the Company lowered its future sales forecast which
decreased the estimated undiscounted future cash flows
associated with these assets to a level below the carrying
value. Accordingly, the Company recorded an intangible asset
impairment charge of $126,923 during the second quarter of 2005
to adjust the carrying value of the Sonata® intangible
assets on the Companys balance sheet to reflect the
estimated fair value of these assets. The Company determined the
fair value of the intangible assets associated with Sonata®
based on its estimated discounted future cash flows.
Sonata® is included in the Companys branded
pharmaceuticals reporting segment.
During the first quarter of 2004, the Company recorded
intangible asset impairment charges totaling $34,936 primarily
due to a greater than anticipated decline in prescriptions for
Florinef® and Tapazole® as a result of the
availability of generics for these products. The Company
determined the fair value of the intangible assets associated
with Florinef® and Tapazole® based on
managements discounted cash flow projections for these
products.
Demand for some of the Companys products, including but
not limited to Intal®, Tilade®, Synercid®, and
Corzide®, has been declining. The net intangible assets
associated with these four specific products total approximately
$244,357. These intangible assets are not currently impaired
based on estimated undiscounted future cash flows associated
with these assets. However, if demand for the products
associated with these intangible assets declines below current
expectations, the Company may have to write off a portion or all
of these intangible assets.
The Companys forecast of future cash flows reflects
estimated improvements in sales from planned marketing
activities for certain products. If the Companys estimates
regarding future cash flows prove to be incorrect or adversely
change, the Company may be required to take an impairment charge
which could have a material adverse effect on its financial
position and results of operations.
Goodwill at December 31, 2004 and June 30, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded | |
|
Meridian | |
|
|
|
|
Segment | |
|
Segment | |
|
Total | |
|
|
| |
|
| |
|
| |
Goodwill
|
|
$ |
12,742 |
|
|
$ |
108,410 |
|
|
$ |
121,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
Discontinued Operations |
On March 30, 2004, the Companys Board of Directors
approved managements decision to market for divestiture
many of the Companys womens health products. On
November 22, 2004, the Company sold all of its rights in
Prefest® for approximately $15,000. On December 23,
2004, the Company sold all of its rights in Nordette® for
approximately $12,000.
The Prefest® and Nordette® product rights had
identifiable cash flows that were largely independent of the
cash flows of other groups of assets and liabilities and are
classified as discontinued operations in the accompanying
financial statements. Prefest® and Nordette® formerly
were included in the Companys branded pharmaceuticals
segment. During the first quarter of 2004, the Company wrote
down intangible assets by the amount of $169,591 to reduce the
carrying value of the intangible assets associated with these
products to their estimated fair value less expected costs to
sell. The Company determined the fair value of these assets
based on managements discounted cash flow projections for
the products. During each of the first and second quarters of
2005, adjustments to reserves for product returns and rebates
11
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
associated with Prefest® and Nordette® due to changes
in estimates were the sole source of activity from discontinued
operations.
Summarized financial information for the discontinued operations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
|
|
2004* | |
|
|
|
2004* | |
|
|
2005 | |
|
(restated) | |
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
(849 |
) |
|
$ |
3,042 |
|
|
$ |
3,834 |
|
|
$ |
13,939 |
|
Operating (loss) income, including expected loss on disposal
|
|
|
(849 |
) |
|
|
2,148 |
|
|
|
3,833 |
|
|
|
(165,314 |
) |
Net (loss) income
|
|
|
(545 |
) |
|
|
1,359 |
|
|
|
2,405 |
|
|
|
(105,019 |
) |
* See Note 2.
9. Contingencies
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court-supervised
medical monitoring of persons who have ingested the product. The
Company is one of many defendants in no more than six lawsuits
that claim damages for personal injury arising from the
Companys production of the anorexigenic drug phentermine
under contract for GlaxoSmithKline.
While the Company cannot predict the outcome of these suits, the
Company believes that the claims against it are without merit
and intends to vigorously pursue all defenses available to it.
The Company is being indemnified in all of these suits by
GlaxoSmithKline, for which the Company manufactured the
anorexigenic product, provided that neither the lawsuits nor the
associated liabilities are based upon the independent negligence
or intentional acts of the Company, and the Company intends to
submit a claim for all unreimbursed costs to the Companys
product liability insurance carrier. However, in the event that
GlaxoSmithKline is unable to satisfy or fulfill its obligations
under the indemnity, the Company would have to defend the
lawsuits and be responsible for damages, if any, that are
awarded against it or for amounts in excess of the
Companys product liability coverage. A reasonable estimate
of possible losses related to these suits cannot be made.
In addition, King Research and Development, Inc. (King
R&D), successor to Jones Pharma Incorporated
(Jones) and a wholly owned subsidiary of the
Company, is a defendant in approximately 188 multi-defendant
lawsuits involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. These suits have been filed in
various jurisdictions throughout the United States, and in each
of these suits King R&D, as the successor to Jones, is one
of many defendants, including manufacturers and other
distributors of these drugs. Although Jones did not at any time
manufacture dexfenfluramine, fenfluramine, or phentermine, Jones
was a distributor of a generic phentermine product and, after
its acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®, its branded phentermine product. The plaintiffs in
these cases claim injury as a result of ingesting a combination
of these weight-loss drugs and are seeking compensatory and
punitive damages as well as medical care and court-supervised
medical monitoring. The plaintiffs claim liability based on a
variety of theories, including but not limited to, product
liability, strict liability, negligence, breach of warranty and
misrepresentation.
12
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
King R&D denies any liability incident to the distribution
of Obenix® or Jones generic phentermine product and
intends to pursue all defenses available to it. King R&D has
tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending King R&D in these
suits. The manufacturers of fenfluramine and dexfenfluramine
have settled many of these cases. In the event that King
R&Ds insurance coverage is inadequate to satisfy any
resulting liability, King R&D will have to resume defense of
these lawsuits and be responsible for the damages, if any, that
are awarded against it.
While the Company cannot predict the outcome of these suits,
management believes that the claims against King R&D are
without merit and intends to vigorously pursue all defenses
available. The Company is unable to disclose an aggregate dollar
amount of damages claimed because many of these complaints are
multi-party suits and do not state specific damage amounts.
Rather, these claims typically state damages as may be
determined by the court or similar language and state no
specific amount of damages against King R&D. The Company
cannot reasonably estimate possible losses related to the
lawsuits.
|
|
|
Thimerosal/ Vaccine Related Litigation |
King and Parkedale Pharmaceuticals, Inc.
(Parkedale), a wholly owned subsidiary of King, have
been named as defendants in lawsuits filed in California and
Illinois, along with other pharmaceutical companies that have
manufactured or sold products containing the mercury-based
preservative, thimerosal.
In these cases, the plaintiffs attempt to link the receipt of
the mercury-based products to neurological defects. The
plaintiffs claim unfair business practices, fraudulent
misrepresentations, negligent misrepresentations, and breach of
implied warranty, which are all arguments premised on the idea
that the defendants promoted products without any reference to
the toxic hazards and potential public health ramifications
resulting from the mercury-containing preservative. The
plaintiffs also allege that the defendants knew of the dangerous
propensities of thimerosal in their products.
The Companys product liability insurance carrier has been
given proper notice of all of these matters and defense counsel
is vigorously defending the Companys interests. The
Company has filed motions to dismiss due, among other things, to
lack of product identity in the plaintiffs complaints. In
2001, the Company was dismissed on this basis in a similar case.
The Company intends to defend these lawsuits vigorously but is
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.
|
|
|
Hormone Replacement Therapy |
The Company has been named as a defendant in seven lawsuits
involving the manufacture and sale of hormone replacement
therapy drugs. Numerous pharmaceutical companies have also been
sued. These cases have been filed in Alabama, Arkansas,
Missouri, Pennsylvania, Ohio and Mississippi. The plaintiffs
allege that King and other defendants failed to conduct adequate
pre-approval research and post-approval surveillance to
establish the safety of the long-term hormone therapy regimen,
thus misleading consumers when marketing their products.
Plaintiffs claims include allegations of negligence,
strict liability, breach of implied warranty, breach of express
warranty, fraud and misrepresentation. The Company intends to
defend these lawsuits vigorously but is unable currently to
predict the outcome or reasonably estimate the range of
potential loss, if any.
|
|
|
Average Wholesale Pricing Litigation |
In August 2004, King and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly owned subsidiary of King, were
named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their Average
Wholesale Prices and fraudulently failed to accurately report
13
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
their Best Prices and their Average
Manufacturers Prices and failed to pay proper rebates
pursuant to federal law. Additional claims allege violations of
federal and New York statutes, fraud and unjust enrichment. For
the period from 1992 to the present, NYC is requesting money
damages, civil penalties, declaratory and injunctive relief,
restitution, disgorgement of profits, and treble and punitive
damages.
In August 2004, a defendant in the NYC action sought to have the
action transferred to the United States District Court for the
District of Massachusetts and combined with existing
multi-district litigation, entitled In re Average
Wholesale Pricing Litigation, being heard by that court. A
conditional transfer order was issued during September 2004
indicating that the action is subject to transfer for pretrial
proceedings to the United States District Court for the District
of Massachusetts. The Company intends to defend this lawsuit
vigorously but is unable currently to predict the outcome or
reasonably estimate the range of loss, if any.
The Company also has been named as a defendant along with other
pharmaceutical manufacturers in twenty-eight other lawsuits
containing allegations of fraudulently inflating average
wholesale prices. These lawsuits have been filed in federal
courts in New York and Massachusetts, and in state courts in New
York and Alabama, all of which the Company will seek to have
transferred to the United States District Court for the District
of Massachusetts and combined with the existing multi-district
litigation.
|
|
|
Governmental Investigations and Securities and ERISA
Litigation |
As previously reported, in March 2003 the U.S. Securities and
Exchange Commission (SEC) initiated a formal investigation of
King relating to, among other topics, sales of its products to
VitaRx and Prison Health Services, its best price
lists, the pricing of its pharmaceutical products provided to
governmental Medicaid agencies, the accrual and payment of
rebates on the product Altace®, the products Fluogen®
and Lorabid®, the King Benevolent Fund, Inc., its
calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, the Company received a subpoena duces tecum from the
Office of Inspector General at the Department of Health and
Human Services requesting the production of documents relating
to some of the matters being investigated by the SEC and to its
sales, marketing and other business practices for Altace®,
Aplisol®, and Levoxyl®. The Company has also reviewed
with the staff of the SEC the circumstances giving rise to the
restatement of its issued financial statements for 2002, 2003
and the first two quarters of 2004.
In connection with the Companys determination that it
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, the Company has continued to
engage in discussions with representatives of the SEC, the
United States Attorney for the Eastern District of Pennsylvania,
the Department of Justice, the National Association of Medicaid
Fraud Control Units, the Office of Inspector General of the
Department of Health and Human Services, the Department of
Veterans Affairs, the Centers for Medicare & Medicaid
Services, and the Public Health Service. The Companys
objective in these discussions has been to achieve a
comprehensive settlement relating to all the matters being
investigated by or discussed with all the governmental
authorities.
The Company has not yet reached any agreements or understandings
with respect to the terms of such a settlement, and may not ever
be able to reach such an agreement. However, based on the status
of the discussions to date, the Company now believes that it is
reasonably likely that it will be able to achieve a
comprehensive settlement with all relevant governmental parties
on the following terms:
|
|
|
|
|
The Company has previously accrued $130,400 in respect of its
estimated underpayments to Medicaid and other government pricing
programs and estimated settlement costs with all relevant
governmental parties. This amount includes $65,400 accrued for
estimated underpayments to Medicaid and other governmental
pricing programs, and an additional $65,000 for estimated |
14
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
settlement costs to cover interest, costs, fines, penalties and
all other additional amounts. The Companys current
expectation is that the aggregate cost to settle with the
governmental authorities should not materially exceed the
amounts already accrued. |
|
|
|
With respect to the matters being investigated by or discussed
with the staff of the SEC, the Company currently anticipates
that it would settle, without admitting or denying, one or more
charges that the Company had failed to maintain adequate books
and records and internal controls. The Company anticipates that
the action to be settled could also include one or more charges
that its public filings contained material misstatements or
omissions relating to its financial results for some or all of
the periods for which results have been restated. The Company
does not anticipate being required to restate any results for
periods prior to 2002. |
|
|
|
The Company expects that it will be required to enter into a
Corporate Integrity Agreement with the Department of Health and
Human Services, which would require the Company to submit to
audits relating to its Medicaid rebate calculations over a
five-year period. The Company does not expect that the
resolution of the pending investigations will result in any
prohibitions on the Companys sales to Medicaid or any
related state or Federal program, nor does the Company expect
any other material restriction on its ability to conduct its
business, although the Company will be required to incur
consultant fees and other expenses in order to comply with the
Corporate Integrity Agreement. |
|
|
|
The Company does not expect that any criminal charges will be
asserted against it or against any present or former director,
officer or employee in connection with the matters being
investigated. |
The Companys ability to achieve a settlement on these or
other terms is subject to substantial uncertainties. The
Companys discussions to date have been conducted with the
staffs of various agencies and other governmental authorities.
The Company does not yet have any agreements or understandings
with any of them. Even if the Company were to reach such an
agreement or understanding with staff personnel, it would be
subject to the approval of numerous more senior representatives
of the governmental parties, including the members of the U.S.
Securities and Exchange Commission, the United States Attorney
for the Eastern District of Pennsylvania, senior officials in
the Departments of Justice, Health and Human Services and
Veterans Affairs, and senior officials in most or all of the
States. The Company expects that its agreements with the various
governmental parties would also require that those governmental
parties reach numerous agreements among themselves, and that the
consummation of the Companys agreement with each
governmental party would be dependent on consummation of the
Companys agreements with other governmental parties. The
Company also expects that some aspects of a comprehensive
settlement would require court approval.
In light of these uncertainties, the Company stresses that it
may not be able to reach a settlement with the governmental
parties, whether on the terms described above or at all. As a
result, the ultimate amount that the Company will actually have
to pay to resolve these matters could be materially more than
the amount accrued to date, and the terms could otherwise be
materially less favorable than those described above. Because of
these uncertainties and the complexity of completing a
comprehensive resolution, the Company is not yet able to
estimate with reasonable confidence the amount of time that will
be required to enter into and consummate comprehensive
settlement agreements.
The possible settlement described above would not apply to the
related pending class actions and derivative suits, or any other
claims by private plaintiffs. While the Company denies any
liability, it is unable to predict the outcome of the class
actions and derivative suits or reasonably estimate the range of
loss, if any.
As described above, the Company has accrued a total of $130.4
million in respect of its estimated underpayments to Medicaid
and other governmental programs and estimated settlement costs
with all
15
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
relevant governmental parties. The full amount of this accrual
has been placed into an interest-bearing escrow account ($46.5
million in 2003, $19.0 million in 2004 and $64.9 million in
2005) and is included in restricted cash in the Companys
financial statements.
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported class
action complaints were filed by holders of the Companys
securities against the Company, its directors, former directors,
executive officers, former executive officers, a Company
subsidiary, and a former director of the subsidiary in the
United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934. These 22 complaints
have been consolidated in the United States District Court for
the Eastern District of Tennessee. In addition, holders of the
Companys securities filed two class action complaints
alleging violations of the Securities Act of 1933 in Tennessee
state court. The Company removed these two cases to the United
States District Court for the Eastern District of Tennessee,
where these two cases were consolidated with the other class
actions. Plaintiffs in these actions unsuccessfully moved to
remand these two cases back to Tennessee state court. These two
actions therefore remain part of the consolidated action. The
district court has appointed lead plaintiffs in the consolidated
action, and those lead plaintiffs filed a consolidated amended
complaint on October 21, 2003 alleging that King, through
some of its executive officers, former executive officers,
directors, and former directors, made false or misleading
statements concerning its business, financial condition, and
results of operations during periods beginning February 16,
1999 and continuing until March 10, 2003. Plaintiffs in the
consolidated action have also named the underwriters of
Kings November 2001 public offering as defendants. The
Company and other defendants filed motions to dismiss the
consolidated amended complaint.
On August 12, 2004, the United States District Court for
the Eastern District of Tennessee ruled on defendants
motions to dismiss. The Court dismissed all claims as to Jones
and as to defendants Dennis Jones and Henry Richards. The Court
also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, the Company and the other remaining
defendants filed answers to plaintiffs consolidated
amended complaint. Discovery and other proceedings in the case
are continuing, and no trial date has been set.
Seven purported shareholder derivative complaints have also been
filed in federal and state courts in Tennessee alleging a breach
of fiduciary duty, among other things, by some of the
Companys officers and directors. On October 26, 2004,
all of the defendants named in this action filed an answer to
the amended consolidated derivative and class action complaint.
Discovery in this action has commenced. No trial date has been
set.
Another purported class action complaint was filed on
August 16, 2004 in Tennessee state court against the
Company and the members of the Companys board of
directors. This new case largely asserts substantially the same
claims and seeks the same relief as the class action claim that
was recently added to the state derivative action described
above. Defendants in that action filed a motion to dismiss on
November 30, 2004; that motion is pending and no hearing
date has been set.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that the
Company and certain of its executive officers, former executive
officers, directors, former directors and an employee of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying this action are similar in many respects to those in
the class action litigation described above. The defendants
filed a motion to dismiss the ERISA action on March 5,
2004. The District Court Judge referred the motion to a
Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he
16
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recommended that the District Court Judge dismiss the action.
The District Court Judge accepted the recommendation and
dismissed the case on February 4, 2005. The plaintiffs have
not appealed this decision, and the deadline for filing any
appeal has now passed.
The Company intends to defend all of these lawsuits vigorously
but is unable currently to predict the outcome or reasonably
estimate the range of potential loss, if any.
If any governmental sanctions are imposed in excess of those
described above, or if the Company were not to prevail in the
pending litigation, neither of which the Company can predict or
reasonably estimate at this time, the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected. Responding to the government
investigations, resolving the amounts owed to governmental
agencies in connection with the underpayments and defending King
in the pending litigation has resulted, and is expected to
continue to result, in a significant diversion of
managements attention and resources and the payment of
additional professional fees.
The Rochester facility was one of six facilities owned by Pfizer
subject to a Consent Decree of Permanent Injunction issued
August 1993 in United States of America v. Warner-Lambert
Company and Melvin R. Goodes and Lodewijk J.R. DeVink (U.S.
Dist. Ct., Dist. of N.J.) (the Consent Decree). The
Company acquired the Rochester facility in February 1998.
In July 2005, the Court lifted the Consent Decree as it
pertained to the Rochester facility. Accordingly, the Rochester
facility is no longer subject to a consent decree.
Cobalt Pharmaceuticals, Inc. (Cobalt), a generic
drug manufacturer located in Mississauga, Ontario, Canada, filed
an ANDA with the U.S. Food and Drug Administration (the
FDA) seeking permission to market a generic version
of Altace®. The following U.S. patents are listed for
Altace® in the FDAs Approved Drug Products With
Therapeutic Equivalence Evaluations (the Orange
Book): U.S. Patent Nos. 4,587,258 (the 258
patent) and 5,061,722 (the 722 patent), two composition of
matter patents related to Altace®, and U.S. Patent
No. 5,403,856 (the 856 patent), a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
federal Hatch-Waxman Act of 1984, any generic manufacturer may
file an ANDA with a certification (a Paragraph IV
certification) challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and the Company filed suit on
March 14, 2003 in the District Court for the District of
Massachusetts to enforce its rights under that patent. Pursuant
to the Hatch-Waxman Act, the filing of that suit provides the
Company an automatic stay of FDA approval of Cobalts ANDA
for 30 months from no earlier than February 5, 2003.
In March 2004, Cobalt stipulated to infringement of the
722 patent. Subsequent to filing its original
complaint, the Company amended its complaint to add an
allegation of infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-infringement of the
856 patent. The courts decision does not affect
Cobalts infringement of the 722 patent. Trial
is scheduled to begin on September 12, 2005.
Lupin Ltd. (Lupin) has also filed an ANDA with the
FDA seeking permission to market a generic version of
Altace® (Lupins ANDA). In addition to its
ANDA, Lupin filed a Paragraph IV certification challenging
the validity and infringement of the 722 patent, seeking
to market its generic version of Altace® before expiration
of the 722 patent. In July 2005, the Company filed a civil
action for infringement of the 722 patent against Lupin in
the U.S. District Court for the District of Maryland.
17
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pursuant to the Hatch-Waxman Act, the filing of the suit against
Lupin provides the Company with an automatic stay of FDA
approval of Lupins ANDA for up to 30 months from no
earlier than June 8, 2005.
The Company intends to vigorously enforce its rights under the
722 and 856 patents. If a generic version of
Altace® enters the market, the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected. As of June 30, 2005, the
Company had net intangible assets related to Altace® of
$251,439. If a generic version of Altace® enters the
market, the Company may have to write off a portion of the
patent intangible assets and the other intangible assets
associated with this product.
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(CorePharma) and Mutual Pharmaceutical Co., Inc.
(Mutual) have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of Skelaxin® 800 mg
tablets. United States Patent Nos. 6,407,128 (the
128 patent) and 6,683,102 (the 102 patent), two
method-of-use patents relating to Skelaxin®, are listed in
the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications against the 128 and
102 patents alleging noninfringement and invalidity of
those patents. Mutual has filed a Paragraph IV
certification against the 102 patent alleging
noninfringement and invalidity of that patent. The Company filed
a patent infringement suit against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
against CorePharma on March 7, 2003 in the District Court
for the District of New Jersey (subsequently transferred to the
District Court for the Eastern District of New York); and
against Mutual on March 12, 2004 in the District Court for
the Eastern District of Pennsylvania concerning their proposed
400 mg products. Additionally, the Company filed a separate suit
against Eon Labs on December 17, 2004 in the District Court
for the Eastern District of New York, concerning its proposed
800 mg product. Pursuant to the Hatch-Waxman Act, the filing of
the suit against CorePharma provides the Company with an
automatic stay of FDA approval of CorePharmas ANDA for
30 months from no earlier than January 24, 2003. Also
pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provides the Company with an automatic stay of
FDA approval of Eon Labs ANDA for its proposed 400 mg and
800 mg products for 30 months from no earlier than
November 18, 2002 and November 3, 2004, respectively.
The Company intends to vigorously enforce its rights under the
128 and 102 patents to the full extent of the law.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for Skelaxin® stating
that the use listed in the FDAs Orange Book for the
128 patent may be deleted from the ANDA applicants
product labeling. The Company believes that this decision is
arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. The Company filed a Citizen
Petition on March 18, 2004 (supplemented on April 15,
2004 and on July 21, 2004), requesting the FDA to rescind
that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent,
and prohibit the removal of information corresponding to the use
listed in the Orange Book. King concurrently filed a Petition
for Stay of Action requesting the FDA to stay approval of any
generic metaxalone products until the FDA has fully evaluated
the Companys Citizen Petition.
On March 12, 2004, the FDA sent a letter to the Company
explaining that Kings proposed labeling revision for
Skelaxin®, which includes references to additional clinical
studies relating to food, age, and gender effects, was
approvable and only required certain formatting changes. On
April 5, 2004, the Company submitted amended labeling text
that incorporated those changes. On April 5, 2004, Mutual
filed a Petition for Stay of Action requesting the FDA to stay
approval of the Companys proposed labeling revision until
the FDA has fully evaluated and ruled upon the Companys
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. The Company, CorePharma and
Mutual have filed responses and supplements to the pending
Citizen Petition.
18
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If the Companys Citizen Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected. As of June 30, 2005, the
Company had net intangible assets related to Skelaxin® of
$178,158. If demand for Skelaxin® declines below current
expectations, the Company may have to write off a portion or all
of these intangible assets.
Sicor Pharmaceuticals, Inc. (Sicor Pharma), a
generic drug manufacturer located in Irvine California, filed an
ANDA with the FDA seeking permission to market a generic version
of Adenoscan®. U.S. Patent No. 5,070,877 (the
877 patent) is assigned to King and listed in the
FDAs Orange Book entry for Adenoscan®. Astellas
Pharma US, Inc. (Astellas) is the exclusive
licensee of certain rights under the 877 and has marketed
Adenoscan® in the U.S. since 1995. A substantial
portion of the Companys revenues from its royalties
segment is derived from Astellas based on its net sales of
Adenoscan®. Sicor Pharma has filed a Paragraph IV
certification alleging invalidity of the 877 patent and
non-infringement of certain claims of the 877 patent. King
and Astellas filed suit against Sicor Pharma and its
parents/affiliates Sicor, Inc., Teva Pharmaceuticals USA,
Inc. and Teva Pharmaceutical Industries, Ltd., on May 26,
2005, in the United States District Court for the District of
Delaware to enforce their rights under the 877 patent.
Pursuant to the Hatch-Waxman Act, the filing of that suit
provides the Company an automatic stay of FDA approval of Sicor
Pharmas ANDA for 30 months from no earlier than
April 16, 2005. The Company intends to vigorously enforce
its rights under the 877 patent. If a generic version of
Adenoscan® enters the market, the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected.
Teva Pharmaceuticals USA, Inc. filed an ANDA with the FDA
seeking permission to market a generic version of Sonata®.
In addition to its ANDA, Teva filed a Paragraph IV
certification challenging the enforceability of U.S. Patent
4,626,538 (the 538 patent) listed in the Orange Book
which expires in June 2008. King filed suit against Teva in the
United States District Court for the District of New Jersey to
enforce its rights under the 538 patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides the Company
an automatic stay of FDA approval of Tevas ANDA for
30 months from no earlier than June 21, 2005. The
Company intends to vigorously enforce its rights under the
538 patent. If a generic form of Sonata® enters
the market, the Companys business, financial condition,
results of operations and cash flows could be materially
adversely affected.
In addition to the matters discussed above, the Company is
involved in various other legal proceedings incident to the
ordinary course of its business. The Company does not believe
that unfavorable outcomes as a result of these other legal
proceedings would have a material adverse effect on its
financial position, results of operations and cash flows.
|
|
10. |
Accounting Developments |
In December 2004, the FASB issued SFAS No. 123(R)
Share-based Payment, that requires the Company to
expense costs related to share-based payment transactions with
employees. The Securities and Exchange Commission has issued an
Amendment to Rule 4-01(a) of Regulation S-X, changing
the compliance date for SFAS 123(R) to the first annual
reporting period beginning on or after June 15, 2005. The
Company is in the process of evaluating the effect that
SFAS No. 123(R) will have on the Companys
financial reporting.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin No. 43. SFAS No. 151 requires certain
abnormal expenditures to be recognized as expenses in the
current period. It also requires that the amount of fixed
production overhead allocated to inventory be based on the
normal capacity of the production facilities. The standard is
effective for the fiscal year beginning January 1, 2006.
The Company is currently evaluating the effect that
SFAS No. 151 will have on the Companys financial
reporting.
19
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective tax rate varies from the statutory rate for the
six months and three months ended June 30, 2005 due
primarily to tax benefits related to charitable contributions of
inventory and tax-exempt interest income. The effective tax rate
varies from the statutory rate for the six months and three
months ended June 30, 2004 due primarily to the
nondeductibility of certain estimated Medicaid settlement
charges (Note 9).
The Companys business is classified into five reportable
segments: branded pharmaceuticals, Meridian Medical
Technologies, royalties, contract manufacturing and all other.
Branded pharmaceuticals include a variety of branded
prescription products over seven therapeutic areas, including
cardiovascular, endocrinology, neuroscience, critical care,
anti-infective, respiratory, and other. Such branded
prescription products have been aggregated because of the
similarity in regulatory environment, manufacturing processes,
methods of distribution, and the types of customer. Meridian
develops, manufactures, and sells auto-injector pharmaceutical
products to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen® product line, marketed and sold by Dey, L.P., which
is primarily prescribed for the treatment of severe allergic
reactions. Government revenues are principally derived from the
sale of nerve agent antidotes and other emergency medicine
auto-injector products marketed to the U.S. Department of
Defense and other federal, state and local agencies,
particularly those involved in homeland security, as well as to
approved foreign governments. Contract manufacturing includes
pharmaceutical manufacturing services the Company provides to
third-party pharmaceutical and biotechnology companies.
Royalties include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments.
The Company primarily evaluates its segments based on segment
profit (excluding depreciation). Reportable segments were
separately identified based on revenues, segment profit and
total assets. Revenues among the segments are presented in the
individual segments and removed through eliminations in the
information below. Substantially all of the eliminations relate
to sales from the contract manufacturing segment to the branded
pharmaceuticals segment.
20
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
|
|
2004* | |
|
|
|
2004* | |
|
|
2005 | |
|
(restated) | |
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
400,310 |
|
|
$ |
220,059 |
|
|
$ |
722,079 |
|
|
$ |
454,073 |
|
|
Meridian Medical Technologies
|
|
|
35,418 |
|
|
|
27,681 |
|
|
|
58,632 |
|
|
|
62,182 |
|
|
Royalties
|
|
|
19,578 |
|
|
|
21,118 |
|
|
|
37,633 |
|
|
|
37,875 |
|
|
Contract manufacturing and other
|
|
|
129,847 |
|
|
|
152,539 |
|
|
|
249,212 |
|
|
|
285,431 |
|
|
Eliminations
|
|
|
(122,214 |
) |
|
|
(145,786 |
) |
|
|
(235,992 |
) |
|
|
(272,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total net revenues
|
|
$ |
462,939 |
|
|
$ |
275,611 |
|
|
$ |
831,564 |
|
|
$ |
567,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
335,682 |
|
|
$ |
161,607 |
|
|
$ |
607,794 |
|
|
$ |
337,617 |
|
|
Meridian Medical Technologies
|
|
|
18,164 |
|
|
|
14,000 |
|
|
|
30,477 |
|
|
|
33,454 |
|
|
Royalties
|
|
|
17,140 |
|
|
|
17,978 |
|
|
|
32,946 |
|
|
|
32,155 |
|
|
Contract manufacturing and other
|
|
|
749 |
|
|
|
(3,098 |
) |
|
|
(3,073 |
) |
|
|
(4,830 |
) |
|
Other operating costs and expense
|
|
|
(342,900 |
) |
|
|
(250,329 |
) |
|
|
(527,756 |
) |
|
|
(450,894 |
) |
|
Other expense
|
|
|
(522 |
) |
|
|
(3,455 |
) |
|
|
(8,048 |
) |
|
|
(6,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before tax
|
|
$ |
28,313 |
|
|
$ |
(63,297 |
) |
|
$ |
132,340 |
|
|
$ |
(59,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total assets:
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
2,578,841 |
|
|
$ |
2,530,725 |
|
|
Meridian Medical Technologies
|
|
|
258,198 |
|
|
|
275,850 |
|
|
Royalties
|
|
|
21,210 |
|
|
|
22,430 |
|
|
Contract manufacturing and other
|
|
|
106,462 |
|
|
|
95,151 |
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$ |
2,964,711 |
|
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
21
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents branded pharmaceutical revenues by
therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
|
|
2004* | |
|
|
|
2004* | |
|
|
2005 | |
|
(restated) | |
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
$ |
149,388 |
|
|
$ |
70,148 |
|
|
$ |
238,261 |
|
|
$ |
140,655 |
|
|
Anti-infective
|
|
|
21,072 |
|
|
|
7,914 |
|
|
|
42,294 |
|
|
|
21,504 |
|
|
Critical care
|
|
|
54,506 |
|
|
|
39,045 |
|
|
|
118,526 |
|
|
|
79,348 |
|
|
Endocrinology
|
|
|
52,915 |
|
|
|
37,735 |
|
|
|
99,135 |
|
|
|
69,388 |
|
|
Respiratory
|
|
|
4,212 |
|
|
|
1,654 |
|
|
|
8,577 |
|
|
|
10,095 |
|
|
Neuroscience
|
|
|
106,111 |
|
|
|
58,623 |
|
|
|
197,506 |
|
|
|
120,748 |
|
|
Other branded
|
|
|
12,106 |
|
|
|
4,940 |
|
|
|
17,780 |
|
|
|
12,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$ |
400,310 |
|
|
$ |
220,059 |
|
|
$ |
722,079 |
|
|
$ |
454,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2.
|
|
13. |
Restructuring Activities |
During 2005 the Company incurred restructuring charges as a
result of the relocation of the Companys sales and
marketing operations from Bristol, Tennessee to Princeton, New
Jersey, and the decision to end principal operations of a small
subsidiary of Meridian Medical Technologies located in Northern
Ireland. A summary of the types of costs accrued and incurred
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
Accrued | |
|
|
|
|
|
Accrued | |
|
|
Balance at | |
|
Income | |
|
|
|
Balance at | |
|
Income | |
|
|
|
Balance at | |
|
|
December 31, | |
|
Statement | |
|
|
|
March 31, | |
|
Statement | |
|
|
|
June 30, | |
|
|
2004 | |
|
Impact | |
|
Payments | |
|
2005 | |
|
Impact | |
|
Payments | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Employee relocation
|
|
$ |
|
|
|
$ |
159 |
|
|
$ |
159 |
|
|
$ |
|
|
|
$ |
163 |
|
|
$ |
163 |
|
|
$ |
|
|
Facility demolition costs
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
924 |
|
Termination of lease
|
|
|
|
|
|
|
1,733 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
131 |
|
|
|
131 |
|
|
|
|
|
|
|
(180 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
924 |
|
|
$ |
2,023 |
|
|
$ |
2,023 |
|
|
$ |
924 |
|
|
$ |
(17 |
) |
|
$ |
(17 |
) |
|
$ |
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
It is anticipated that the relocation of key sales and marketing
employees to New Jersey will be completed within the next three
months and will require additional costs, which in accordance
with SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, have not yet been accrued.
All of the accrued restructuring charges in 2005 relate to the
Meridian Medical Technologies segment, except for $322 related
to the branded pharmaceutical segment. As of June 30, 2005,
accrued restructuring charges relate to the Companys
contract manufacturing segment.
|
|
14. |
Marketable Securities |
During the first and second quarters of 2005 the Company
incurred charges of $6,853 and $369, respectively, due to the
determination that the decline in fair value of our equity
interest in Novavax at March 31, 2005 and June 30,
2005 was other than temporary.
22
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys calculation for returns reserves is based on
historical sales and return rates over the period which
customers have a right of return. This calculation also gives
consideration to current wholesale inventory levels of the
Companys products. Based on data received from the
Companys inventory management agreements with its three
key wholesale customers, there was a significant reduction of
wholesale inventory levels of the Companys products during
the first quarter of 2005. This reduction was primarily due to
sales to retail outlets by the Companys wholesale
customers, not returns of these products to the Company. This
reduction resulted in a change in estimate during the first
quarter of 2005 that decreased the Companys reserve for
returns by approximately $25,000 and increased net sales from
branded pharmaceuticals by the same amount. During the second
quarter of 2005, the Company decreased its reserve for returns
by approximately $5,000 and increased its net sales from branded
pharmaceuticals by the same amount as a result of an additional
reduction in wholesale inventory levels of the Companys
branded products.
|
|
16. |
Guarantor Financial Statements |
Each of the Companys subsidiaries, except Monarch
Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), has guaranteed, on a full, unconditional
and joint and several basis, the Companys performance
under the $345,000,
23/4%
Convertible Debentures due 2021 and under the $400,000 Senior
Secured Revolving Credit Facility on a joint and several basis.
There are no restrictions under the Companys financing
arrangements on the ability of the Guarantor Subsidiaries to
distribute funds to the Company in the form of cash dividends,
loans or advances. The following combined financial data
provides information regarding the financial position, results
of operations and cash flows of the Guarantor Subsidiaries
(condensed consolidating financial data). Separate financial
statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined
that such information would not be material to the holders of
the debt.
23
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
|
|
|
(unaudited) | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
Eliminating | |
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
Eliminating | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
558,571 |
|
|
$ |
4,839 |
|
|
$ |
2,156 |
|
|
$ |
|
|
|
$ |
565,566 |
|
|
$ |
313,881 |
|
|
$ |
27,035 |
|
|
$ |
1,170 |
|
|
$ |
|
|
|
$ |
342,086 |
|
|
Marketable securities
|
|
|
7,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,471 |
|
|
|
16,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,498 |
|
|
Restricted cash
|
|
|
130,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400 |
|
|
|
66,543 |
|
|
|
31,187 |
|
|
|
|
|
|
|
|
|
|
|
97,730 |
|
|
Accounts receivable, net
|
|
|
467 |
|
|
|
192,981 |
|
|
|
1,583 |
|
|
|
|
|
|
|
195,031 |
|
|
|
3,344 |
|
|
|
174,797 |
|
|
|
2,822 |
|
|
|
|
|
|
|
180,963 |
|
|
Inventories
|
|
|
183,530 |
|
|
|
39,370 |
|
|
|
95 |
|
|
|
|
|
|
|
222,995 |
|
|
|
237,448 |
|
|
|
36,743 |
|
|
|
221 |
|
|
|
|
|
|
|
274,412 |
|
|
Deferred income tax assets
|
|
|
26,998 |
|
|
|
95,859 |
|
|
|
|
|
|
|
|
|
|
|
122,857 |
|
|
|
32,809 |
|
|
|
121,170 |
|
|
|
|
|
|
|
|
|
|
|
153,979 |
|
|
Prepaid expenses and other current assets
|
|
|
14,737 |
|
|
|
42,403 |
|
|
|
|
|
|
|
|
|
|
|
57,140 |
|
|
|
22,846 |
|
|
|
38,481 |
|
|
|
68 |
|
|
|
|
|
|
|
61,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
922,174 |
|
|
|
375,452 |
|
|
|
3,834 |
|
|
|
|
|
|
|
1,301,460 |
|
|
|
693,369 |
|
|
|
429,413 |
|
|
|
4,281 |
|
|
|
|
|
|
|
1,127,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
106,726 |
|
|
|
177,889 |
|
|
|
|
|
|
|
|
|
|
|
284,615 |
|
|
|
112,416 |
|
|
|
168,313 |
|
|
|
2 |
|
|
|
|
|
|
|
280,731 |
|
Goodwill
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
Intangible assets, net
|
|
|
113 |
|
|
|
1,082,132 |
|
|
|
9,961 |
|
|
|
|
|
|
|
1,092,206 |
|
|
|
194 |
|
|
|
1,275,474 |
|
|
|
10,293 |
|
|
|
|
|
|
|
1,285,961 |
|
Other assets
|
|
|
26,865 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
27,105 |
|
|
|
16,078 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
16,318 |
|
Deferred income tax assets
|
|
|
14,285 |
|
|
|
123,888 |
|
|
|
|
|
|
|
|
|
|
|
138,173 |
|
|
|
14,197 |
|
|
|
78,734 |
|
|
|
|
|
|
|
|
|
|
|
92,931 |
|
Investments in subsidiaries
|
|
|
2,289,238 |
|
|
|
|
|
|
|
|
|
|
|
(2,289,238 |
) |
|
|
|
|
|
|
2,186,234 |
|
|
|
|
|
|
|
|
|
|
|
(2,186,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,359,401 |
|
|
$ |
1,880,753 |
|
|
$ |
13,795 |
|
|
$ |
(2,289,238 |
) |
|
$ |
2,964,711 |
|
|
$ |
3,022,488 |
|
|
$ |
2,073,326 |
|
|
$ |
14,576 |
|
|
$ |
(2,186,234 |
) |
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
24,462 |
|
|
$ |
37,692 |
|
|
$ |
36 |
|
|
$ |
|
|
|
$ |
62,190 |
|
|
$ |
61,427 |
|
|
$ |
31,339 |
|
|
$ |
154 |
|
|
$ |
|
|
|
$ |
92,920 |
|
|
Accrued expenses
|
|
|
116,024 |
|
|
|
419,532 |
|
|
|
(9 |
) |
|
|
|
|
|
|
535,547 |
|
|
|
125,095 |
|
|
|
470,899 |
|
|
|
16 |
|
|
|
|
|
|
|
596,010 |
|
|
Income taxes payable
|
|
|
3,142 |
|
|
|
54,383 |
|
|
|
(477 |
) |
|
|
|
|
|
|
57,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
143,628 |
|
|
|
511,607 |
|
|
|
(450 |
) |
|
|
|
|
|
|
654,785 |
|
|
|
186,522 |
|
|
|
502,238 |
|
|
|
170 |
|
|
|
|
|
|
|
688,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
Other long-term liabilities
|
|
|
24,596 |
|
|
|
2,233 |
|
|
|
|
|
|
|
|
|
|
|
26,829 |
|
|
|
29,417 |
|
|
|
12,019 |
|
|
|
|
|
|
|
|
|
|
|
41,436 |
|
Intercompany payable (receivable)
|
|
|
908,080 |
|
|
|
(916,225 |
) |
|
|
8,145 |
|
|
|
|
|
|
|
|
|
|
|
612,759 |
|
|
|
(620,511 |
) |
|
|
7,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,421,304 |
|
|
|
(402,385 |
) |
|
|
7,695 |
|
|
|
|
|
|
|
1,026,614 |
|
|
|
1,173,698 |
|
|
|
(106,254 |
) |
|
|
7,922 |
|
|
|
|
|
|
|
1,075,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,938,097 |
|
|
|
2,283,138 |
|
|
|
6,100 |
|
|
|
(2,289,238 |
) |
|
|
1,938,097 |
|
|
|
1,848,790 |
|
|
|
2,179,580 |
|
|
|
6,654 |
|
|
|
(2,186,234 |
) |
|
|
1,848,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
3,359,401 |
|
|
$ |
1,880,753 |
|
|
$ |
13,795 |
|
|
$ |
(2,289,238 |
) |
|
$ |
2,964,711 |
|
|
$ |
3,022,488 |
|
|
$ |
2,073,326 |
|
|
$ |
14,576 |
|
|
$ |
(2,186,234 |
) |
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 | |
|
Three Months Ended June 30, 2004 (restated)* | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
102,090 |
|
|
$ |
442,992 |
|
|
$ |
144 |
|
|
$ |
(101,865 |
) |
|
$ |
443,361 |
|
|
$ |
121,767 |
|
|
$ |
254,034 |
|
|
$ |
465 |
|
|
$ |
(121,774 |
) |
|
$ |
254,492 |
|
|
Royalty revenue
|
|
|
|
|
|
|
19,578 |
|
|
|
|
|
|
|
|
|
|
|
19,578 |
|
|
|
|
|
|
|
21,119 |
|
|
|
|
|
|
|
|
|
|
|
21,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
102,090 |
|
|
|
462,570 |
|
|
|
144 |
|
|
|
(101,865 |
) |
|
|
462,939 |
|
|
|
121,767 |
|
|
|
275,153 |
|
|
|
465 |
|
|
|
(121,774 |
) |
|
|
275,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
32,855 |
|
|
|
160,128 |
|
|
|
86 |
|
|
|
(101,865 |
) |
|
|
91,204 |
|
|
|
35,167 |
|
|
|
171,594 |
|
|
|
137 |
|
|
|
(121,774 |
) |
|
|
85,124 |
|
|
Selling, general and administrative
|
|
|
52,859 |
|
|
|
106,120 |
|
|
|
31 |
|
|
|
|
|
|
|
159,010 |
|
|
|
48,693 |
|
|
|
74,743 |
|
|
|
91 |
|
|
|
|
|
|
|
123,527 |
|
|
Medicaid related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
Transaction costs
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,126 |
|
|
Depreciation and amortization
|
|
|
3,922 |
|
|
|
35,832 |
|
|
|
166 |
|
|
|
|
|
|
|
39,920 |
|
|
|
4,312 |
|
|
|
34,048 |
|
|
|
106 |
|
|
|
|
|
|
|
38,466 |
|
|
Research and development
|
|
|
131 |
|
|
|
17,369 |
|
|
|
|
|
|
|
|
|
|
|
17,500 |
|
|
|
146 |
|
|
|
17,332 |
|
|
|
|
|
|
|
|
|
|
|
17,478 |
|
|
Intangible asset impairment
|
|
|
|
|
|
|
126,923 |
|
|
|
|
|
|
|
|
|
|
|
126,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(591 |
) |
|
|
|
|
|
|
|
|
|
|
(591 |
) |
|
|
|
|
|
|
(3,421 |
) |
|
|
|
|
|
|
|
|
|
|
(3,421 |
) |
|
Restructuring charges
|
|
|
163 |
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
6,247 |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
6,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
90,085 |
|
|
|
445,601 |
|
|
|
283 |
|
|
|
(101,865 |
) |
|
|
434,104 |
|
|
|
162,691 |
|
|
|
294,202 |
|
|
|
334 |
|
|
|
(121,774 |
) |
|
|
335,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
12,005 |
|
|
|
16,969 |
|
|
|
(139 |
) |
|
|
|
|
|
|
28,835 |
|
|
|
(40,924 |
) |
|
|
(19,049 |
) |
|
|
131 |
|
|
|
|
|
|
|
(59,842 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,680 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
3,933 |
|
|
|
917 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
1,081 |
|
|
Interest expense
|
|
|
(3,036 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3,039 |
) |
|
|
(3,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,266 |
) |
|
Valuation charge convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,438 |
) |
|
Write-down of investment
|
|
|
(369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
(105 |
) |
|
|
(721 |
) |
|
|
(221 |
) |
|
|
|
|
|
|
(1,047 |
) |
|
|
(162 |
) |
|
|
1,374 |
|
|
|
(44 |
) |
|
|
|
|
|
|
1,168 |
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
23,432 |
|
|
|
|
|
|
|
|
|
|
|
(23,432 |
) |
|
|
|
|
|
|
2,534 |
|
|
|
|
|
|
|
|
|
|
|
(2,534 |
) |
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(16,797 |
) |
|
|
16,948 |
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
(8,164 |
) |
|
|
8,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
6,805 |
|
|
|
16,477 |
|
|
|
(372 |
) |
|
|
(23,432 |
) |
|
|
(522 |
) |
|
|
(10,579 |
) |
|
|
9,702 |
|
|
|
(44 |
) |
|
|
(2,534 |
) |
|
|
(3,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
18,810 |
|
|
|
33,446 |
|
|
|
(511 |
) |
|
|
(23,432 |
) |
|
|
28,313 |
|
|
|
(51,503 |
) |
|
|
(9,347 |
) |
|
|
87 |
|
|
|
(2,534 |
) |
|
|
(63,297 |
) |
Income tax (benefit) expense
|
|
|
(1,687 |
) |
|
|
9,137 |
|
|
|
(179 |
) |
|
|
|
|
|
|
7,271 |
|
|
|
11,421 |
|
|
|
(10,465 |
) |
|
|
30 |
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
20,497 |
|
|
|
24,309 |
|
|
|
(332 |
) |
|
|
(23,432 |
) |
|
|
21,042 |
|
|
|
(62,924 |
) |
|
|
1,118 |
|
|
|
57 |
|
|
|
(2,534 |
) |
|
|
(64,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, including loss on
impairment
|
|
|
|
|
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
(849 |
) |
|
|
|
|
|
|
2,148 |
|
|
|
|
|
|
|
|
|
|
|
2,148 |
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net
|
|
|
|
|
|
|
(545 |
) |
|
|
|
|
|
|
|
|
|
|
(545 |
) |
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
20,497 |
|
|
$ |
23,764 |
|
|
$ |
(332 |
) |
|
$ |
(23,432 |
) |
|
$ |
20,497 |
|
|
$ |
(62,924 |
) |
|
$ |
2,477 |
|
|
$ |
57 |
|
|
$ |
(2,534 |
) |
|
$ |
(62,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 | |
|
Six Months Ended June 30, 2004 (restated) * | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
196,408 |
|
|
$ |
792,251 |
|
|
$ |
584 |
|
|
$ |
(195,312 |
) |
|
$ |
793,931 |
|
|
$ |
228,269 |
|
|
$ |
528,188 |
|
|
$ |
883 |
|
|
$ |
(228,154 |
) |
|
$ |
529,186 |
|
|
Royalty revenue
|
|
|
|
|
|
|
37,633 |
|
|
|
|
|
|
|
|
|
|
|
37,633 |
|
|
|
|
|
|
|
37,875 |
|
|
|
|
|
|
|
|
|
|
|
37,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
196,408 |
|
|
|
829,884 |
|
|
|
584 |
|
|
|
(195,312 |
) |
|
|
831,564 |
|
|
|
228,269 |
|
|
|
566,063 |
|
|
|
883 |
|
|
|
(228,154 |
) |
|
|
567,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
72,025 |
|
|
|
286,391 |
|
|
|
316 |
|
|
|
(195,312 |
) |
|
|
163,420 |
|
|
|
67,164 |
|
|
|
329,401 |
|
|
|
254 |
|
|
|
(228,154 |
) |
|
|
168,665 |
|
|
Selling, general and administrative
|
|
|
91,938 |
|
|
|
194,450 |
|
|
|
127 |
|
|
|
|
|
|
|
286,515 |
|
|
|
85,387 |
|
|
|
148,344 |
|
|
|
942 |
|
|
|
|
|
|
|
234,673 |
|
|
Medicaid related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
Transaction costs
|
|
|
3,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,432 |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,126 |
|
|
Depreciation and amortization
|
|
|
7,809 |
|
|
|
73,205 |
|
|
|
332 |
|
|
|
|
|
|
|
81,346 |
|
|
|
8,652 |
|
|
|
68,920 |
|
|
|
212 |
|
|
|
|
|
|
|
77,784 |
|
|
Research and development
|
|
|
292 |
|
|
|
28,680 |
|
|
|
|
|
|
|
|
|
|
|
28,972 |
|
|
|
256 |
|
|
|
33,245 |
|
|
|
|
|
|
|
|
|
|
|
33,501 |
|
|
Intangible asset impairment
|
|
|
|
|
|
|
126,923 |
|
|
|
|
|
|
|
|
|
|
|
126,923 |
|
|
|
|
|
|
|
34,936 |
|
|
|
|
|
|
|
|
|
|
|
34,936 |
|
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
(1,438 |
) |
|
|
|
|
|
|
(4,279 |
) |
|
|
|
|
|
|
|
|
|
|
(4,279 |
) |
|
Restructuring charges
|
|
|
322 |
|
|
|
1,684 |
|
|
|
|
|
|
|
|
|
|
|
2,006 |
|
|
|
6,247 |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
6,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
175,818 |
|
|
|
709,895 |
|
|
|
775 |
|
|
|
(195,312 |
) |
|
|
691,176 |
|
|
|
235,832 |
|
|
|
610,473 |
|
|
|
1,408 |
|
|
|
(228,154 |
) |
|
|
619,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
20,590 |
|
|
|
119,989 |
|
|
|
(191 |
) |
|
|
|
|
|
|
140,388 |
|
|
|
(7,563 |
) |
|
|
(44,410 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
(52,498 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,722 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
6,210 |
|
|
|
1,810 |
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
2,135 |
|
|
Interest expense
|
|
|
(5,722 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
(5,740 |
) |
|
|
(6,366 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(6,371 |
) |
|
Valuation charge convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,887 |
) |
|
Write-down of investment
|
|
|
(7,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
(182 |
) |
|
|
(753 |
) |
|
|
(361 |
) |
|
|
|
|
|
|
(1,296 |
) |
|
|
(487 |
) |
|
|
1,043 |
|
|
|
(91 |
) |
|
|
|
|
|
|
465 |
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
103,089 |
|
|
|
|
|
|
|
|
|
|
|
(103,089 |
) |
|
|
|
|
|
|
(115,222 |
) |
|
|
|
|
|
|
|
|
|
|
115,222 |
|
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(28,990 |
) |
|
|
29,290 |
|
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
(15,330 |
) |
|
|
15,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
66,695 |
|
|
|
29,007 |
|
|
|
(661 |
) |
|
|
(103,089 |
) |
|
|
(8,048 |
) |
|
|
(138,482 |
) |
|
|
16,693 |
|
|
|
(91 |
) |
|
|
115,222 |
|
|
|
(6,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
87,285 |
|
|
|
148,996 |
|
|
|
(852 |
) |
|
|
(103,089 |
) |
|
|
132,340 |
|
|
|
(146,045 |
) |
|
|
(27,717 |
) |
|
|
(616 |
) |
|
|
115,222 |
|
|
|
(59,156 |
) |
Income tax (benefit) expense
|
|
|
(3,267 |
) |
|
|
47,758 |
|
|
|
(298 |
) |
|
|
|
|
|
|
44,193 |
|
|
|
20,955 |
|
|
|
(17,914 |
) |
|
|
(216 |
) |
|
|
|
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
90,552 |
|
|
|
101,238 |
|
|
|
(554 |
) |
|
|
(103,089 |
) |
|
|
88,147 |
|
|
|
(167,000 |
) |
|
|
(9,803 |
) |
|
|
(400 |
) |
|
|
115,222 |
|
|
|
(61,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, including loss on
impairment
|
|
|
|
|
|
|
3,833 |
|
|
|
|
|
|
|
|
|
|
|
3,833 |
|
|
|
|
|
|
|
(165,314 |
) |
|
|
|
|
|
|
|
|
|
|
(165,314 |
) |
|
Income tax expense (benefit)
|
|
|
|
|
|
|
1,428 |
|
|
|
|
|
|
|
|
|
|
|
1,428 |
|
|
|
|
|
|
|
(60,295 |
) |
|
|
|
|
|
|
|
|
|
|
(60,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
|
|
|
|
|
2,405 |
|
|
|
|
|
|
|
|
|
|
|
2,405 |
|
|
|
|
|
|
|
(105,019 |
) |
|
|
|
|
|
|
|
|
|
|
(105,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
90,552 |
|
|
$ |
103,643 |
|
|
$ |
(554 |
) |
|
$ |
(103,089 |
) |
|
$ |
90,552 |
|
|
$ |
(167,000 |
) |
|
$ |
(114,822 |
) |
|
$ |
(400 |
) |
|
$ |
115,222 |
|
|
$ |
(167,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2.
26
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 | |
|
Six Months Ended June 30, 2004 (restated)* | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash flows from operating activities
|
|
|
27,223 |
|
|
|
288,952 |
|
|
|
593 |
|
|
|
316,768 |
|
|
$ |
(44,664 |
) |
|
$ |
60,694 |
|
|
$ |
(82 |
) |
|
$ |
15,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers (to) from restricted cash
|
|
|
(75,031 |
) |
|
|
1,582 |
|
|
|
|
|
|
|
(73,449 |
) |
|
|
1,351 |
|
|
|
(545 |
) |
|
|
|
|
|
|
806 |
|
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(2,911 |
) |
|
|
(17,016 |
) |
|
|
|
|
|
|
(19,927 |
) |
|
|
(6,891 |
) |
|
|
(21,569 |
) |
|
|
(2 |
) |
|
|
(28,462 |
) |
|
Proceeds from sale of assets
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
Acquisition of Primary Care from Elan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(77,941 |
) |
|
|
(15,434 |
) |
|
|
|
|
|
|
(93,375 |
) |
|
|
(5,427 |
) |
|
|
(58,114 |
) |
|
|
(2 |
) |
|
|
(63,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
87 |
|
|
|
2,324 |
|
|
|
|
|
|
|
|
|
|
|
2,324 |
|
|
Payments on other long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
(97 |
) |
|
Intercompany
|
|
|
295,321 |
|
|
|
(295,714 |
) |
|
|
393 |
|
|
|
|
|
|
|
6,106 |
|
|
|
(6,193 |
) |
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
295,408 |
|
|
|
(295,714 |
) |
|
|
393 |
|
|
|
87 |
|
|
|
8,333 |
|
|
|
(6,193 |
) |
|
|
87 |
|
|
|
2,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,122 |
|
|
|
|
|
|
|
6,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
244,690 |
|
|
|
(22,196 |
) |
|
|
986 |
|
|
|
223,480 |
|
|
|
(41,758 |
) |
|
|
2,509 |
|
|
|
3 |
|
|
|
(39,246 |
) |
Cash and cash equivalents, beginning of period
|
|
|
313,881 |
|
|
|
27,035 |
|
|
|
1,170 |
|
|
|
342,086 |
|
|
|
140,617 |
|
|
|
3,641 |
|
|
|
1,795 |
|
|
|
146,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
|
558,571 |
|
|
|
4,839 |
|
|
|
2,156 |
|
|
|
565,566 |
|
|
$ |
98,859 |
|
|
$ |
6,150 |
|
|
$ |
1,798 |
|
|
$ |
106,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See Note 2.
27
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk Factors set
out below and in our Annual Report on Form 10-K for the
year ended December 31, 2004, which are supplemented by the
discussion which follows; (b) our audited consolidated
financial statements which are included in our Annual Report on
Form 10-K for the year ended December 31, 2004; and
(c) our unaudited consolidated financial statements and
related notes which are included in this report on
Form 10-Q. Please see the sections entitled Risk
Factors and A Warning About Forward-Looking
Statements for a discussion of the uncertainties, risks
and assumptions associated with these statements.
I. OVERVIEW
Introduction
We are a vertically integrated pharmaceutical company that
develops, manufactures, markets and sells branded prescription
pharmaceutical products. We seek to capitalize on opportunities
in the pharmaceutical industry through the development,
including through in-licensing arrangements and acquisitions, of
novel branded prescription pharmaceutical products in attractive
markets and the strategic acquisition of branded products that
can benefit from focused promotion and marketing and product
life-cycle management.
General Review of Financial Results
The following summarizes net revenues by reportable segment (in
thousands):
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For the Three Months | |
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For the Six Months | |
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Ended June 30, | |
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Ended June 30, | |
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2004 | |
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2004 | |
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2005 | |
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(restated) | |
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2005 | |
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(restated) | |
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Branded pharmaceuticals
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$ |
400,310 |
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$ |
220,059 |
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$ |
722,079 |
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$ |
454,073 |
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Meridian Medical Technologies
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35,418 |
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27,681 |
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58,632 |
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62,182 |
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Royalties
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19,578 |
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21,118 |
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37,633 |
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37,875 |
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Contract manufacturing and other
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7,633 |
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6,753 |
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13,220 |
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12,931 |
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Total
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$ |
462,939 |
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$ |
275,611 |
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$ |
831,564 |
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$ |
567,061 |
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II. RESULTS OF OPERATIONS
As previously disclosed and discussed in detail in our 2004
Annual Report on Form 10-K, we restated our financial
statements in prior filings for the first and second quarters of
2004, among other periods, primarily to reflect the correction
of methodological errors related to our reserve for product
returns. All amounts referenced in this Quarterly Report for
those periods reflect the relevant amounts on a restated basis.
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Three Months Ended June 30, 2005 and 2004 |
Total net revenues increased $187.3 million, or 68.0%, to
$462.9 million in 2005 from $275.6 million in 2004,
primarily due to increased net sales from our branded
pharmaceuticals segment during 2005.
Net sales from branded pharmaceutical products increased
$180.2 million, or 81.9%, to $400.3 million in 2005
from $220.1 million in 2004. This increase was primarily
due to higher unit sales of these products in 2005 as a result
of the effect of wholesale channel inventory reductions of some
of our branded pharmaceutical products during 2004, particularly
with respect to Altace®, Skelaxin®, and Sonata®,
higher net sales of Thrombin-JMI® in 2005, a decrease in
the amount of actual returns of our branded
28
pharmaceutical products in 2005 compared to 2004 and the effect
of a reduction in reserves in 2005 described in the
Liquidity and Capital Resources section under the
heading Critical Accounting Policies. As a result of
wholesale inventory reductions of our products in 2004, net
sales of our key products in 2004 were significantly lower than
end-user demand would indicate. We believe 2005 net sales more
closely reflect end-user demand. As of June 30, 2005, the
wholesale inventory levels of four of our key branded
pharmaceutical products, Altace®, Skelaxin®,
Sonata® and Levoxyl®, based on data obtained through
our inventory management agreements with our three largest
customers, were on average at a level of less than one month of
end-user demand.
Revenues from Meridian Medical Technologies increased
$7.7 million, or 27.8%, to $35.4 million in 2005 from
$27.7 million in 2004 primarily due to an increase in unit
sales of EpiPen® under our supply agreement with Dey, L.P.,
which markets, distributes and sells the product worldwide. This
increase is due to timing variances of orders.
Revenues from royalties decreased $1.5 million, or 7.1%, to
$19.6 million in 2005 from $21.1 million in 2004
primarily due to a decrease in sales of Adenoscan®.
Revenues from royalties are derived primarily from payments we
receive based on sales of Adenoscan®. We are not
responsible for the marketing of Adenoscan® and, thus, are
not able to predict whether future revenues from royalties will
increase, decrease, or remain the same.
Net revenues from contract manufacturing and other were
$7.6 million in 2005 compared to $6.8 million in 2004.
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Operating Costs and Expenses |
Total operating costs and expenses increased $98.6 million,
or 29.4%, to $434.1 million in 2005 from
$335.5 million in 2004. Variables, including special items,
affecting total operating costs and expenses during 2005 and
2004 are discussed below. Special items are those particular
material income or expense items that our management believes
are not related to our ongoing, underlying business, are not
recurring, or are not generally predictable. These items
include, but are not limited to, merger and restructuring
expenses; non-capitalized expenses associated with acquisitions,
such as in-process research and development charges and one-time
inventory valuation adjustment charges; charges resulting from
the early extinguishments of debt; asset impairment charges;
expenses of drug recalls; and gains and losses resulting from
the divestiture of assets. We believe the identification of
special items enhances the analysis of our ongoing, underlying
business and an analysis of our financial results when comparing
those results to that of a previous or subsequent like period.
However, it should be noted that the determination of whether to
classify an item as a special charge involves judgments.
Cost of revenues increased $6.1 million, or 7.2%, to
$91.2 million in 2005 from $85.1 million in 2004. This
increase is primarily related to higher cost of revenues
associated with branded pharmaceuticals. As a percentage of
total revenues, cost of revenues decreased to 19.7% in 2005 from
30.9% in 2004 primarily due to an increase in revenues from our
branded pharmaceuticals segment in 2005, as discussed above and
the effect of special items on this category of expense in 2004,
as discussed below.
Cost of revenues from branded pharmaceutical products increased
$6.1 million, or 10.4%, to $64.6 million in 2005 from
$58.5 million in 2004 primarily due to higher unit sales of
these products. During 2004 cost of revenues from branded
pharmaceuticals included a charge in the amount of
$10.4 million for the write-off of excess inventory and a
special item that resulted in a charge of $4.6 million
primarily related to the voluntary recall of some lots of
Levoxyl®.
Cost of revenues from Meridian Medical Technologies increased
$3.6 million, or 26.3%, to $17.3 million in 2005 from
$13.7 million in 2004 primarily due to increased unit sales
of EpiPen®.
Cost of revenues from royalties decreased $0.7 million to
$2.4 million in 2005 from $3.1 million in 2004.
29
Cost of revenues associated with contract manufacturing was
$6.9 million in 2005 compared to $9.9 million in 2004.
Total selling, general and administrative expenses decreased
$32.5 million, or 17.0%, to $159.2 million in 2005
from $191.7 million in 2004. This decrease was primarily
attributable to decreases in expenses associated with special
items partially offset by an increase in co-promotion fees paid
under our Co-Promotion Agreement with Wyeth Pharmaceuticals due
to higher net sales of Altace® during 2005, as compared to
2004. Increased net sales of Altace® during 2005 is
primarily due to the effect of wholesale inventory reductions of
this product in 2004.
Selling, general and administrative expense includes special
items of $5.4 million in 2005 and $73.1 million in
2004. These special items include the following:
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A $5.2 million charge in 2005 and a $5.0 million
charge in 2004 primarily due to professional fees related to the
ongoing investigations of our company by the Office of Inspector
General of the Department of Health and Human Services, which we
refer to as the OIG, and the U.S. Securities and
Exchange Commission, which we refer to as the SEC.
For additional information, please see Governmental
Investigations and Securities Litigation in
Liquidity and Capital Resources. |
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Special charges of $0.2 million in 2005 and
$3.1 million in 2004 for professional fees and expenses
related to our terminated merger agreement with Mylan
Laboratories Inc. |
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As part of our ongoing discussions with the OIG, the SEC, and
other state and federal agencies, we accrued $65.0 million
for estimated settlement costs as an operating expense during
the second quarter of 2004 to cover interest, costs, fines,
penalties and all other amounts in addition to the
$65.4 million that we previously accrued for estimated
underpayments to Medicaid and other government pricing programs.
Although we have not entered into any agreements or
understandings with respect to a possible settlement, these
accruals represent our current best estimate of the aggregate
payment we would have to make pursuant to a comprehensive
settlement with the OIG, the SEC and other federal and state
agencies. For additional information, please see
Governmental Investigations and Securities
Litigation in Liquidity and Capital Resources. |
As a percentage of total revenues, total selling, general, and
administrative expense decreased to 34.4% in 2005 compared to
69.6% in 2004. Selling, general and administrative expense, as a
percentage of total revenues, was significantly higher in 2004
than in 2005 primarily due to lower revenues in 2004 as a result
of wholesale channel inventory reductions of some of our branded
pharmaceutical products and the higher level of expense
associated with special items affecting this category of expense
in 2004 as discussed above.
Depreciation and amortization expense increased
$1.4 million, or 3.6%, to $39.9 million in 2005 from
$38.5 million in 2004.
Total research and development expense equaled
$17.5 million in 2005 and 2004. We believe the level of
expense will increase during the remaining quarters in 2005.
In addition to the special items related to cost of revenues,
and selling, general and administrative expense described above,
we incurred other special items affecting operating costs and
expenses during 2005 and 2004 resulting in a net charge of
$126.3 million in 2005 and a net charge of
$2.8 million in 2004. These other special items primarily
include the following:
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An intangible asset impairment charge of $126.9 million in
2005 related to Sonata®. As previously disclosed, a new
competitor to Sonata® entered the market in April 2005. In
the second quarter of 2005, the prescriptions for Sonata®
did not meet our expectations. As a result, we lowered our
future sales forecast which decreased the estimated undiscounted
future cash flows associated with these assets to a level below
the carrying value. This special item was recorded in order to
adjust the carrying value of the Sonata® intangible assets
on our balance sheet so as to reflect the |
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estimated fair value of such assets. We determined the fair
value of the intangible assets associated with Sonata®
based on the estimated discounted future cash flows for this
product. |
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Income in the amount of $0.6 million and $3.4 million
in 2005 and 2004, respectively, due to gains on the sale of some
of our assets. |
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A restructuring charge in the amount of $6.2 million during
2004 primarily due to separation agreements with several
executives and the relocation of our sales and marketing
operations from Bristol, Tennessee to Princeton, New Jersey. |
Due to the factors discussed above, we had operating income
equaling $28.8 million during 2005 compared to an operating
loss of $59.8 million in 2004.
Interest income increased to $3.9 million in 2005 from
$1.1 million in 2004 primarily due to higher cash balances
in 2005.
Interest expense was $3.0 million in 2005 compared to
$3.3 million in 2004.
Special items affecting other income (expense) include a
charge of $0.4 million in 2005 to reflect our determination
that the decline in the fair value of our equity interest in
Novavax, Inc. as of June 30, 2005 was other than temporary,
and a charge of $2.4 million in 2004 to reflect an increase
in the valuation allowance for the convertible notes receivable
from Novavax. Novavax repurchased the convertible notes from us
in July 2004.
Our effective tax rate for continuing operations was 25.7% in
2005. This rate differs from the statutory rate of 35% due
primarily to tax benefits related to charitable contributions of
inventory and tax-exempt interest income and the effect of
special items during the second quarter of 2005. We expect that
the effective tax rate for the remainder of 2005 should more
closely reflect the statutory rate. Our income tax expense in
2004 excludes any tax benefit associated with the Medicaid
related charge of $65.0 million during 2004 discussed above.
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Income (loss) from Continuing Operations |
Due to the factors set forth above, we had income from
continuing operations of $21.0 million in 2005 compared to
a loss from continuing operations of $64.3 million in 2004.
During the first quarter of 2004, our Board of Directors
approved managements decision to market for divestiture
some of our womens health products, including
Prefest® and Nordette®, which we sold in the fourth
quarter of 2004. These product rights had identifiable cash
flows that were largely independent of the cash flows of other
groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Accordingly, all net sales, cost of revenues,
selling, general and administrative costs and amortization
associated with Prefest® and Nordette® are included in
discontinued operations in 2005 and 2004.
Special items include results from discontinued operations.
During 2005, we had a loss from discontinued operations of
$0.8 million, or $0.5 million net of tax, as a result
of changes in estimates resulting in minor increases in our
reserves for returns and rebates previously accrued for
Prefest® and Nordette®. During 2004, we had income
from discontinued operations of $2.1 million, or
$1.4 million net of tax expense.
31
Due to the factors discussed above, we had net income equaling
$20.5 million during 2005 compared to a net loss of
$62.9 million in 2004.
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Six Months Ended June 30, 2005 and 2004 |
Total net revenue increased $264.5 million, or 46.6%, to
$831.6 million in 2005 from $567.1 million in 2004,
primarily due to higher net sales from our branded
pharmaceuticals segment during 2005.
Net sales from branded pharmaceutical products increased
$268.0 million, or 59.0%, to $722.1 million in 2005
from $454.1 million in 2004. This increase was primarily
due to the effect of higher unit sales of these products in 2005
as a result of decreased wholesale channel inventory reductions
of some of our branded pharmaceutical products during 2005 as
compared to 2004, particularly with respect to Altace®
Skelaxin® and Sonata®, significantly higher net sales
of Thrombin-JMI® in 2005, a decrease in the amount of
actual returns of our branded pharmaceutical products in 2005
compared to 2004 and the effect of a reduction in reserves for
returns and rebates in 2005 described in the Liquidity and
Capital Resources section under the heading Critical
Accounting Policies. As a result of continued wholesale
inventory reductions, net sales of some of our branded
pharmaceutical products, particularly Altace®, during 2005
were below the level that prescription demand for such products
would indicate. However, we believe that wholesale inventory
reductions of our key products were complete as of
March 31, 2005.
Revenues from Meridian Medical Technologies decreased
$3.6 million, or 5.8%, to $58.6 million in 2005 from
$62.2 million in 2004 primarily due to a decrease in
government sales as a result of lower unit demand. Higher
government sales in 2004 primarily reflected increased military
preparedness in early 2004.
Revenues from royalties were $37.6 million in 2005 compared
to $37.9 million in 2004. Revenues from royalties are
derived primarily from payments we receive based on sales of
Adenoscan®. We are not responsible for the marketing of
Adenoscan® and, thus, are not able to predict whether
future revenues from royalties will increase, decrease, or
remain the same.
Net revenues from contract manufacturing were $13.2 million
in 2005 compared to $12.9 million in 2004.
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Operating Costs and Expenses |
Total operating costs and expenses increased $71.6 million,
or 11.6%, to $691.2 million in 2005 from
$619.6 million in 2004. Variables, including special items,
affecting total operating costs and expenses during 2005 and
2004 are discussed below.
Cost of revenues decreased $5.3 million, or 3.1%, to
$163.4 million in 2005 from $168.7 million in 2004.
This decrease was primarily associated with reduced cost of
revenues associated with our branded pharmaceuticals segment. As
a percentage of total revenues, cost of revenues decreased to
19.6% in 2005 from 29.7% in 2004 primarily due to the increase
in revenues from our branded pharmaceuticals segment in 2005, as
discussed above, and the effect of special items on this
category of expense, as discussed below.
Cost of revenues from branded pharmaceutical products decreased
$2.2 million, or 1.9%, to $114.3 million in 2005 from
$116.5 million in 2004. This decrease was primarily due to
a charge during 2004 in the amount of $31.4 million for the
write-off of excess inventory associated with our branded
pharmaceuticals segment which is to some extent attributable to
reduced net sales of branded pharmaceutical products during 2004
for the reasons discussed above, offset by an increase in cost of
32
revenues due to higher unit sales of our pharmaceutical products
during 2005. Special items affecting cost of revenues from
branded pharmaceuticals include the following:
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Income of $1.6 million in 2005 and a charge of
$0.2 million in 2004 related to changes in estimates
regarding the effect of some excess purchase commitments. |
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A $4.6 million charge in 2004 primarily related to the
voluntary recall of some lots of Levoxyl®. |
Cost of revenues from Meridian Medical Technologies decreased
$0.5 million, or 1.7%, to $28.2 million in 2005 from
$28.7 million in 2004.
Cost of revenues from royalties decreased $1.0 million to
$4.7 million in 2005 from $5.7 million in 2004.
Cost of revenues associated with contract manufacturing
decreased $1.5 million, or 8.4%, to $16.3 million in
2005 from $17.8 million in 2004 primarily due to a decrease
in fixed overhead costs.
Total selling, general and administrative expenses decreased
$12.9 million, or 4.3%, to $289.9 million in 2005 from
$302.8 million in 2004. This decrease was primarily
attributable a lower net charge for special items in 2005
compared to 2004, that were partially offset by an increase in
co-promotion fees paid under our Co-Promotion Agreement with
Wyeth due to higher net sales of Altace® during 2005, as
compared to 2004. Increased net sales of Altace® during
2005 is primarily due to a lower level of wholesale inventory
reductions of this product in 2005 compared to 2004.
Selling, general and administrative expense includes the
following special items:
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Charges of $8.9 million and $10.7 million during 2005
and 2004, respectively, primarily due to professional fees that
were related to the ongoing investigations of our company by the
OIG and the SEC. |
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Charges in the amount of $3.4 million and $3.1 million in
2005 and 2004, respectively, for professional fees and expenses
related to the terminated merger agreement with Mylan. |
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As discussed above, we accrued $65.0 million for a Medicaid
related charge in the first half of 2004 to cover estimated
interest, costs, fines, penalties and all other settlement costs
in addition to the $65.4 million that we previously accrued
for estimated underpayments to Medicaid and other government
pricing programs. Although we have not entered into any
agreements or understandings with respect to a possible
settlement, these accruals represent our current best estimate
of the aggregate payment we would have to make pursuant to a
comprehensive settlement with the OIG, the SEC and other federal
and state agencies. For additional information, please see
Governmental Investigations and Securities
Litigation in Liquidity and Capital Resources. |
As a percentage of total revenues, total selling, general, and
administrative expenses decreased to 34.9% in 2005 compared to
53.4% in 2004. Selling, general and administrative expense, as a
percentage of total revenues, was higher in 2004 than in 2005
primarily due to lower revenues in 2004 as a result of a higher
level of wholesale channel inventory reductions of some of our
branded pharmaceutical products and a higher level of expense
associated with special items effecting this category of expense
in 2004 as discussed above.
Depreciation and amortization expense increased
$3.5 million, or 4.5%, to $81.3 million in 2005 from
$77.8 million in 2004.
Total research and development expense decreased
$4.5 million, or 13.4%, to $29.0 million in 2005 from
$33.5 million in 2004. We believe that the amount of this
expense in the second half of 2005 will be higher than that
experienced during the first half of 2005.
33
In addition to the special items related to cost of revenues of
branded pharmaceutical products, and selling, general and
administrative described above, we incurred other special items
affecting operating costs and expenses during 2005 and 2004
which include the following:
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An intangible asset impairment charge of $126.9 million in 2005
related to Sonata®. As previously disclosed, a new
competitor to Sonata® entered the market in April 2005. In
the second quarter of 2005, the prescriptions for Sonata®
did not meet our expectations. As a result, we lowered our
future sales forecast which decreased the estimated undiscounted
future cash flows associated with these assets to a level below
the carrying value. This special item was recorded in order to
adjust the carrying value of the Sonata® intangible assets
on our balance sheet so as to reflect the estimated fair value
of such assets. We also had an intangible asset impairment
charge totaling $34.9 million in 2004 that was primarily
related to a greater than expected decline in prescriptions for
Florinef® and Tapazole® due to the availability of
generics for these products. This special item was recorded to
adjust the carrying value of the intangible assets on our
balance sheet associated with these products so as to reflect
the estimated fair value of such assets. We determined the fair
value of the intangible assets associated with Sonata®,
Florinef® and Tapazole® based on our estimated
discounted future cash flows for these products. |
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Income in the amount of $1.4 million and $4.3 million
in 2005 and 2004, respectively, due to gains on the sale of some
of our assets. |
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A restructuring charge in the amount of $2.0 million in
2005 primarily due to our decision to discontinue some
relatively insignificant products associated with our Meridian
Medical Technologies business. |
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We also incurred a restructuring charge in the amount of
$6.2 million during 2004 primarily due to separation
agreements with several executives and the relocation of our
sales and marketing operations from Bristol, Tennessee to
Princeton, New Jersey. |
Due to the factors discussed above, we had operating income
equaling $140.4 million during 2005 compared to an
operating loss of $52.5 million in 2004.
Interest income increased to $6.2 million in 2005 from
$2.1 million in 2004 primarily due to higher cash balances
in 2005.
Interest expense was $5.7 million in 2005 compared to
$6.4 million in 2004.
Special items affecting other income (expense) include a
charge of $7.2 million in 2005 to reflect our determination
that the decline in the fair value of our equity interest in
Novavax as of June 30, 2005 was other than temporary, and a
charge of $2.9 million in 2004 to reflect an increase in
the valuation allowance for the convertible notes receivable
from Novavax. Novavax repurchased the convertible notes from us
in July 2004.
Our effective tax rate for continuing operations was 33.4% in
2005. This rate differs from the statutory rate of 35% due
primarily to tax benefits related to charitable contributions of
inventory and tax-exempt interest income. Our income tax expense
of $2.8 million during 2004 excludes any tax benefit
associated with the Medicaid related charge during 2004
discussed above.
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Income (loss) from Continuing Operations |
Due to the factors set forth above, we had income from
continuing operations of $88.1 million in 2005 compared to
a loss from continuing operations of $62.0 million in 2004.
34
Special items include results from discontinued operations.
During 2005, we had income from discontinued operations of
$3.8 million, or $2.4 million net of tax, as a result
of changes in estimates resulting in the reduction in our
reserves for returns and rebates previously accrued for
Prefest® and Nordette®. During 2004, we had a loss
from discontinued operations in the amount of
$165.3 million, or $105.0 million net of tax benefit,
primarily due to an intangible asset write-down to reduce the
carrying value of the intangible assets associated with these
products to their estimated fair value less then anticipated
costs to sell.
Due to the factors discussed above, we had net income equaling
$90.6 million during 2005 compared to a net loss of
$167.0 million in 2004.
Liquidity and Capital Resources
We believe that existing balances of cash, cash equivalents and
marketable securities, cash generated from operations, our
existing revolving credit facility, and funds that may be
available to us through public offerings or private placements
of our securities should be sufficient to finance our current
operations and working capital requirements on both a short-term
and long-term basis. However, we cannot predict the amount or
timing of our need for additional funds, and numerous
circumstances, including a significant acquisition of a business
or assets, new product development projects, expansion
opportunities or other factors, could require us to raise
additional funds in the future. We cannot assure you that funds
will be available to us when needed on favorable terms, or at
all.
As additional consideration for Synercid®, an injectable
antibiotic acquired on December 30, 2002, we agreed to
potential milestone payments. We will pay Sanofi-Aventis a
milestone payment of $18.6 million on December 31,
2005, if there is continued recognition of Synercid® as an
effective treatment for vancomycin-resistant enterococcus
faecium on that date. An additional $25.0 million milestone
is payable to Sanofi-Aventis if Synercid® should receive
FDA approval to treat methicillin resistant staphylococcus
aureus, or we will pay Sanofi-Aventis a one-time payment of
$5.0 million the first time during any twelve-month period
that net sales of Synercid® exceed $60.0 million, and
a one-time payment of $20.0 million the first time during
any twelve-month period that net sales of Synercid® exceed
$75.0 million.
On June 12, 2003, we acquired the primary care business of
Elan Corporation, plc and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, Sonata® and
Skelaxin®. We will pay royalties on the current formulation
of Skelaxin® from the date of closing of this acquisition.
Elan was working to develop a modified release formulation of
Sonata®, which we refer to as Sonata® MR, pursuant to
an agreement we had with them. In early 2005, we decided to
discontinue the program to develop Sonata MR. Accordingly, we
advised Elan that we consider the agreement terminated. However,
we can provide no assurance that we will not be required to
engage in dispute resolution as provided in the agreement. The
agreement required us to pay up to an additional
$60.0 million if Elan achieved certain milestones in
connection with the development of a reformulated version of
Sonata® and $15.0 million as a milestone payment if
annual net sales of a reformulated version of Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of Sonata®. We
believe these milestones have not and cannot in the future be
achieved.
On August 12, 2004, we entered into a collaborative
agreement with Palatin Technologies, Inc. to jointly develop
and, on obtaining necessary regulatory approvals, commercialize
Palatins PT-141 for the treatment of male and female
sexual dysfunction. In connection with this agreement, we agreed
to pay potential milestone payments to Palatin of up to
$100.0 million upon achieving certain development and
35
regulatory approval targets. In the event of regulatory approval
and commercialization of PT-141, we may also pay potential net
sales milestone payments to Palatin of up to $130.0 million.
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Governmental Investigations and Securities
Litigation |
As previously reported, in March 2003 the SEC initiated a formal
investigation of King relating to, among other topics, sales of
our products to VitaRx and Prison Health Services, our
best price lists, the pricing of our pharmaceutical
products provided to governmental Medicaid agencies, the accrual
and payment of rebates on the product Altace®, the products
Fluogen® and Lorabid®, the King Benevolent Fund, Inc.,
our calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, we received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to our sales,
marketing and other business practices for Altace®,
Aplisol®, and Levoxyl®. We have also reviewed with the
staff of the SEC the circumstances giving rise to the
restatement of our previously issued financial statements for
2002, 2003 and the first two quarters of 2004.
In connection with our determination that we underpaid amounts
due to Medicaid and other government pricing programs from 1998
through 2002, we have continued to engage in discussions with
representatives of the SEC, the United States Attorney for the
Eastern District of Pennsylvania, the Department of Justice, the
National Association of Medicaid Fraud Control Units, the Office
of Inspector General of the Department of Health and Human
Services, the Department of Veterans Affairs, the Centers for
Medicare & Medicaid Services, and the Public Health Service.
Our objective in these discussions has been to achieve a
comprehensive settlement relating to all the matters being
investigated by or discussed with all the governmental
authorities.
We have not yet reached any agreements or understandings with
respect to the terms of such a settlement and may not ever be
able to reach such an agreement. However, based on the status of
the discussions to date, we now believe that it is reasonably
likely that we will be able to achieve a comprehensive
settlement with all relevant governmental parties on the
following terms:
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We previously accrued $130.4 million in respect of our
estimated underpayments to Medicaid and other government pricing
programs, and estimated settlement costs with all relevant
governmental parties. This amount includes $65.4 million
accrued for estimated underpayments to Medicaid and other
government pricing programs, and an additional
$65.0 million for estimated settlement costs to cover
interest, costs, fines, penalties and all other additional
amounts. Our current expectation is that the aggregate cost to
settle with the governmental authorities should not materially
exceed the amounts already accrued. |
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With respect to the matters being investigated by or discussed
with the staff of the SEC, we currently anticipate that we would
settle, without admitting or denying, one or more charges that
we failed to maintain adequate books and records and internal
controls. We anticipate that the action to be settled could also
include one or more charges that our public filings contained
material misstatements or omissions relating to our financial
results for some or all of the periods for which results have
been restated. We do not anticipate being required to restate
any results for periods prior to 2002. |
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We expect that we will be required to enter into a Corporate
Integrity Agreement with the Department of Health and Human
Services, which would require us to submit to audits relating to
our Medicaid rebate calculations over a five-year period. We do
not expect that the resolution of the pending investigations
will result in any prohibitions on our sales to Medicaid or any
related state or Federal program, nor do we expect any other
material restriction on our ability to conduct our business,
although we will be required to incur consultant fees and other
expenses in order to comply with the Corporate Integrity
Agreement. |
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We do not expect that any criminal charges will be asserted
against us or against any present or former director, officer or
employee in connection with the matters being investigated. |
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Our ability to achieve a settlement on these or other terms is
subject to substantial uncertainties. Our discussions to date
have been conducted with the staffs of various agencies and
other governmental authorities. We do not yet have any
agreements or understandings with any of them. Even if we were
to reach such an agreement or understanding with staff
personnel, it would be subject to the approval of numerous more
senior representatives of the governmental parties, including
the members of the U.S. Securities and Exchange Commission,
the United States Attorney for the Eastern District of
Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that those governmental parties reach numerous
agreements among themselves, and that the consummation of our
agreement with each governmental party would be dependent on
consummation of our agreements with other governmental parties.
We also expect that some aspects of a comprehensive settlement
would require court approval.
In light of these uncertainties, we stress that we may not be
able to reach a settlement with the governmental parties,
whether on the terms described above or at all. As a result, the
ultimate amount that we will actually have to pay to resolve
these matters could be materially more than the amount accrued
to date, and the terms could otherwise be materially less
favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.
The possible settlement described above would not apply to the
related pending class actions and derivative suits, or any other
claims by private plaintiffs. While we deny any liability, we
are unable to predict the outcome of the class actions and
derivative suits or reasonably estimate the range of loss, if
any.
For additional information, please see the section entitled
Risk Factors under the heading If we fail to
comply with our reporting and payment obligations under the
Medicaid rebate program or other governmental pricing programs,
we could be subject to additional reimbursements, penalties,
sanctions and fines which could have a material adverse effect
on our business.
As described above, the Company has accrued a total of
$130.4 million in respect of its estimated underpayments to
Medicaid and other governmental programs and estimated
settlement costs with all relevant governmental parties. The
full amount of this accrual has been placed into an
interest-bearing escrow account ($46.5 million in 2003,
$19.0 million in 2004 and $64.9 million in 2005) and
is included in restricted cash in the Companys financial
statements.
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported
class action complaints were filed by holders of our securities
against us, our directors, former directors, our executive
officers, former executive officers, a subsidiary, and a former
director of the subsidiary in the United States District Court
for the Eastern District of Tennessee, alleging violations of
the Securities Act of 1933 and/or the Securities Exchange Act of
1934. These 22 complaints have been consolidated in the United
States District Court for the Eastern District of Tennessee. In
addition, holders of our securities filed two class action
complaints alleging violations of the Securities Act of 1933 in
Tennessee state court. We removed these two cases to the United
States District Court for the Eastern District of Tennessee,
where these two cases were consolidated with the other class
actions. Plaintiffs in these actions unsuccessfully moved to
remand these two cases back to Tennessee state court. These two
actions therefore remain part of the consolidated action. The
district court has appointed lead plaintiffs in the consolidated
action, and those lead plaintiffs filed a consolidated amended
complaint on October 21, 2003 alleging that we, through
some of our executive officers, former executive officers,
directors, and former directors, made false or misleading
statements concerning our business, financial condition, and
results of operations during periods beginning February 16,
1999 and continuing until March 10, 2003. Plaintiffs in the
consolidated action have also named the underwriters of our
November 2001 public offering as defendants. We and other
defendants filed motions to dismiss the consolidated amended
complaint.
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On August 12, 2004, the United States District Court for
the Eastern District of Tennessee ruled on defendants
motions to dismiss. The Court dismissed all claims as to Jones
Pharma, Inc., a predecessor to one of our wholly owned
subsidiaries, King Research and Development, Inc., and as to
defendants Dennis Jones and Henry Richards. The Court also
dismissed certain claims as to five other individual defendants.
The Court denied the motions to dismiss in all other respects.
Following the Courts ruling, on September 20, 2004,
we and the other remaining defendants filed answers to
plaintiffs consolidated amended complaint. Discovery and
other proceedings in the case are continuing, and no trial date
has been set.
Seven purported shareholder derivative complaints have also been
filed in federal and state courts in Tennessee alleging a breach
of fiduciary duty, among other things, by some of our officers
and directors. On October 26, 2004, all of the defendants
named in this action filed a partial answer to the amended
consolidated derivative and class action complaint. Discovery in
this action has commenced. No trial date has been set.
Another purported class action complaint was filed on
August 16, 2004 in Tennessee state court against us and the
members of our board of directors. This new case largely asserts
substantially the same claims and seeks the same relief as the
class action claim that was recently added to the state
derivative action described above. Defendants in that action
filed a motion to dismiss on November 30, 2004; that motion
is pending and no hearing date has been set.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that we
and certain of our executive officers, former executive
officers, directors, former directors and an employee violated
fiduciary duties that they allegedly owed our 401(k) Retirement
Savings Plans participants and beneficiaries under ERISA.
The allegations underlying this action are similar in many
respects to those in the class action litigation described
above. The defendants filed a motion to dismiss the ERISA action
on March 5, 2004. The District Court Judge referred the
motion to a Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005. The plaintiffs have not appealed this
decision, and the deadline for filing any appeal has now passed.
We intend to defend all of these lawsuits vigorously but are
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.
If any governmental sanctions are imposed in excess of those
described above, or if we were not to prevail in the pending
litigation, neither of which we can predict or reasonably
estimate at this time, our business, financial condition,
results of operations and cash flows could be materially
adversely affected. Responding to the governmental
investigations, resolving the amounts owed to governmental
agencies in connection with the underpayments and defending us
in the pending litigation has resulted, and is expected to
continue to result, in a significant diversion of
managements attention and resources and the payment of
additional professional fees.
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Skelaxin® Patent Challenge |
Eon Labs, Inc., CorePharma, LLC and Mutual Pharmaceutical
Company have each filed an ANDA with the FDA seeking permission
to market a generic version of Skelaxin® 400 mg tablets.
Additionally, Eon Labs ANDA seeks permission to market a
generic version of Skelaxin® 800 mg tablets. United States
Patent Nos. 6,407,128, the 128 patent, and 6,683,102, the
102 patent, two method-of-use patents relating to
Skelaxin®, are listed in the FDAs Approved Drug
Products with Therapeutic Equivalence Evaluations, which is
known as the Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 and 102 patents. Mutual has
filed a Paragraph IV certification alleging noninfringement
and invalidity of the 102 patent. A patent infringement
suit was filed against Eon Labs on January 2, 2003 in
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the District Court for the Eastern District of New York;
CorePharma on March 7, 2003 in the District Court for the
District of New Jersey (subsequently transferred to the District
Court for the Eastern District of New York); and Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004 in the District Court for the
Eastern District of New York, concerning its proposed 800 mg
product. Pursuant to the Hatch-Waxman Act, the filing of the
suit against CorePharma provides us with an automatic stay of
FDA approval of CorePharmas ANDA for 30 months from
no earlier than January 24, 2003. Also pursuant to the
Hatch-Waxman Act, the filing of the suits against Eon Labs
provides us with an automatic stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002 and
November 3, 2004, respectively. We intend to vigorously
enforce our rights under the 128 and 102 patents to
the full extent of the law.
On March 9, 2004, we received a copy of a letter from the
FDA to all ANDA applicants for Skelaxin® stating that the
use listed in the FDAs Orange Book for the 128
patent may be deleted from the ANDA applicants product
labeling. We believe that this decision is arbitrary,
capricious, and inconsistent with the FDAs previous
position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information corresponding to the use listed in the
Orange Book. We concurrently filed a Petition for Stay of Action
requesting the FDA to stay approval of any generic metaxalone
products until the FDA has fully evaluated our Citizen Petition.
On March 12, 2004, the FDA sent a letter to us explaining
that our proposed labeling revision, which includes references
to additional clinical studies relating to food, age, and gender
effects, was approvable and only required certain formatting
changes. On April 5, 2004, we submitted amended labeling
text that incorporated those changes. On April 5, 2004,
Mutual filed a Petition for Stay of Action requesting the FDA to
stay approval of our proposed labeling revision until the FDA
has fully evaluated and ruled upon our Citizen Petition, as well
as all comments submitted in response to that petition.
Discussions with the FDA concerning appropriate labeling are
ongoing. CorePharma, Mutual and we have filed responses and
supplements to the pending Citizen Petition.
If our Citizen Petition is rejected, there is a substantial
likelihood that a generic version of Skelaxin® will enter
the market, and our business, financial condition, results of
operations and cash flows could be materially adversely
affected. We have entered into an agreement with a generic
pharmaceutical company to launch an authorized generic of
Skelaxin® in the event we face generic competition for
Skelaxin®. However, we cannot assure to what extent this
strategy will be successful.
Cobalt Pharmaceuticals, Inc. filed an ANDA with the FDA seeking
permission to market a generic version of Altace®. The
following U.S. patents are listed for Altace® in the
FDAs Orange Book: U.S. Patent Nos. 4,587,258, the
258 patent, and 5,061,722, the 722 patent, two
composition of matter patents related to Altace®, and U.S.
Patent No. 5,403,856, the 856 patent, a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
Hatch-Waxman Act, any generic manufacturer may file an ANDA with
Paragraph IV certification challenging the validity or
infringement of a patent listed in the FDAs Orange Book
four years after the pioneer company obtains approval of its
NDA. Cobalt has filed a Paragraph IV certification alleging
invalidity of the 722 patent, and we filed suit on
March 14, 2003 in the District Court for the District of
Massachusetts to enforce our rights under that patent. Pursuant
to the Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003.
Subsequent to filing our original complaint, we amended our
complaint to add an allegation of infringement of the 856
patent. The 856 patent covers one of Altace®s
three indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted
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Cobalt summary judgment of non-infringement of the
856 patent. The courts decision does not affect
Cobalts infringement of the 722 patent. Trial is
scheduled to begin September 12, 2005.
Lupin Ltd. (Lupin) has also filed an ANDA with the
FDA seeking permission to market a generic version of
Altace® (Lupins ANDA). In addition to its
ANDA, Lupin filed a Paragraph IV certification challenging
the validity and infringement of the 722 patent, and
seeking to market its generic version of Altace® before
expiration of the 722 patent. In July 2005, we filed
a civil action for infringement of the 722 patent against
Lupin in the U.S. District Court for the District of Maryland.
Pursuant to the Hatch-Waxman Act, the filing of the suit against
Lupin provides us with an automatic stay of FDA approval of
Lupins ANDA for up to 30 months from no earlier than
June 8, 2005.
We intend to vigorously enforce our rights under the 722
and 856 patents. If a generic version of Altace®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. As of June 30, 2005, we had net intangible assets
related to Altace® of $251.4 million.
Sicor Pharmaceuticals, Inc. (Sicor Pharma), a
generic drug manufacturer located in Irvine California, filed an
ANDA with the FDA seeking permission to market a generic version
of Adenoscan®. U.S. Patent No. 5,070,877 (the
877 patent) is assigned to King and is listed in the
FDAs Orange Book entry for Adenoscan®. Astellas
Pharma US, Inc. (Astellas) is the exclusive
licensee of certain rights under the 877 and has marketed
Adenoscan® in the U.S. since 1995. Sicor Pharma has
filed a Paragraph IV certification alleging invalidity of
the 877 patent and non-infringement of certain claims of
the 877 patent. We and Astellas filed suit against Sicor
Pharma and its parents/affiliates Sicor, Inc., Teva
Pharmaceuticals USA, Inc and Teva Pharmaceutical
Industries, Ltd., on May 26, 2005, in the United States
District Court for the District of Delaware to enforce our
rights under the 877 patent. Pursuant to the Hatch-Waxman
Act, the filing of that suit provides the Company an automatic
stay of FDA approval of Sicor Pharmas ANDA for
30 months from no earlier than April 16, 2005. We
intend to vigorously enforce our rights under the 877
patent. If a generic version of Adenoscan® enters the
market, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Teva Pharmaceuticals USA, Inc. filed an ANDA with the FDA
seeking permission to market a generic version of Sonata®
in 5 mg and 10 mg dosages. In addition to its ANDA,
Teva filed a Paragraph IV certification challenging the
enforceability of U.S. Patent 4,626,538 (the 538 patent)
listed in the Orange Book which expires in June 2008. We
filed suit against Teva in the United States District Court for
the District of New Jersey to enforce our rights under the
538 patent. Pursuant to the Hatch-Waxman Act, the filing
of that suit provides us an automatic stay of FDA approval of
Tevas ANDA for 30 months from no earlier than
June 21, 2005. We intend to vigorously enforce our rights
under the 538 patent. If a generic form of
Sonata® enters the market, the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected.
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Six Months Ended June 30, 2005 |
We generated net cash from continuing operations of
$316.8 million for the six months ended June 30, 2005.
Our net cash provided from operations was primarily the result
of $88.1 million net income from continuing operations,
adjusted for non-cash depreciation and amortization from
continuing operations of $81.3 million, an intangible asset
impairment of $126.9 million related to Sonata®, and
changes in working capital partially offset by a change in
deferred taxes from continuing operations of $13.4 million.
Changes in working capital include an increase in income taxes
payable of $56.2 million, a decrease in inventory from
continuing operations of $51.4 million, a decrease in
accounts payable of $29.3 million, a decrease in accrued
expenses of $32.6 million, and an increase in accounts
receivable of $15.0 million. We do not anticipate cash flow
for the remainder of 2005 to equal the level achieved in the
first six months of 2005 due to expected changes in working
capital and tax payments in the second half of 2005.
Investing activities reduced cash flow by $93.4 million
primarily due to an increase in restricted cash of
$73.4 million and the purchase of property, plant and
equipment of $19.9 million.
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Certain Indebtedness and Other Matters |
As of June 30, 2005, we have outstanding
$345.0 million of
23/4%
Convertible Debentures due November 15, 2021. These debt
securities were issued by us in a private placement in November
2001. Holders may require us to repurchase for cash all or part
of these debentures on November 15, 2006, November 15,
2011, and November 15, 2016 at a price equal to 100% of the
principal amount of the debentures plus accrued interest up to
but not including the date of repurchase.
We also have available as of June 30, 2005 up to $400.0
million under a five-year revolving credit facility that we
established in April 2002. The facility is collateralized
in general by all real estate with a value of $5.0 million
or more and all of our personal property and that of our
significant subsidiaries. Our obligations under the senior
secured revolving credit facility are unconditionally guaranteed
on a senior basis by most of our subsidiaries. The senior
secured revolving credit facility accrues interest at our
option, at either (a) the base rate, which is based on the
greater of (1) the prime rate or (2) the federal funds
rate plus one-half of 1%, plus an applicable spread ranging from
0.0% to 0.75% (based on a leverage ratio) or (b) the
applicable LIBOR rate plus an applicable spread ranging from
1.0% to 1.75% (based on a leverage ratio). In addition, the
lenders under the senior secured revolving credit facility are
entitled to customary facility fees based on (a) unused
commitments under the facility and (b) letters of credit
outstanding. We incurred $5.1 million of deferred financing
costs in connection with the establishment of this facility,
which are being amortized over five years, the life of the
senior secured revolving credit facility. This facility requires
us to maintain a minimum net worth of no less than
$1.2 billion plus 50% of our consolidated net income for
each fiscal quarter after April 23, 2002, excluding any
fiscal quarter for which consolidated income is negative; an
EBITDA to interest expense ratio of no less than 3.00 to 1.00;
and a funded debt to EBITDA ratio of no greater than 3.50 to
1.00 prior to April 24, 2004 and of no greater than 3.00 to
1.00 on or after April 24, 2004. As of June 30, 2005,
we have complied with these covenants. As of June 30, 2005,
there were no outstanding borrowings under this facility.
On September 20, 2001, our universal shelf registration
statement on Form S-3 was declared effective by the
Securities and Exchange Commission. This universal shelf
registration statement registered a total of $1.3 billion of our
securities for future offers and sales in one or more
transactions and in any combination of debt and/or equity.
During November 2001, we completed the sale of 17,992,000 newly
issued shares of common stock for $38.00 per share ($36.67 per
share net of commissions and expenses) resulting in net proceeds
of $659.8 million. As of June 30, 2005, there was
$616.3 million of securities remaining registered for future
offers and sales under the shelf registration statement.
However, due to delays in our filings of one or more reports
under the Securities Exchange Act of 1934, as amended, we
believe that we are not eligible to use a Form S-3
registration statement at the present time. Accordingly, unless
and until we regain eligibility to use Form S-3, we are not
able to offer and sell securities under our shelf registration
statement without first amending it to convert it to the
registration statement form, Form S-1, that is currently
available to us. Whether or not we seek to raise funds in the
public equity or debt markets in the near term, we may decide,
or the SEC may require us, to amend our shelf registration
statement for the purpose of converting it to Form S-1.
Capital expenditures, including capital lease obligations, were
$19.9 million and $28.5 million for the six months
ended June 30, 2005 and 2004, respectively. The principal
capital expenditures during the six months ended June 30,
2005 included property and equipment purchases, building
improvements for facility upgrades and costs associated with
improving our production capabilities, and costs associated with
moving production of some of our pharmaceutical products to our
facilities in St. Louis, Bristol and Rochester.
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Recently Issued Accounting Standards |
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting
Standard No. 123(R), Share-based Payment,
(SFAS 123(R)) that requires us to expense
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costs related to share-based payment transactions with
employees. The Securities and Exchange Commission issued an
Amendment to Rule 4-01(a) of Regulation S-X, changing
the compliance date for SFAS 123(R) to the first annual
reporting period beginning after June 15, 2005. We are in
the process of evaluating the effect that
SFAS No. 123(R) will have on our financial reporting.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin No. 43. SFAS No. 151 requires certain
abnormal expenditures to be recognized as expenses in the
current period. It also requires that the amount of fixed
production overhead allocated to inventory be based on the
normal capacity of the production facilities. The standard is
effective for the first fiscal year beginning January 1,
2006. We are currently evaluating the effect that
SFAS No. 151 will have on our financial reporting.
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Critical Accounting Policies |
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to inherent imprecision.
In the case of impairment testing, changes in estimates of
future cash flows could result in a material impairment charge
and, whether or not they result in an immediate impairment
charge, could result prospectively in a reduction in the
estimated remaining useful life of tangible or intangible
assets, which could be material to the financial statements.
Other significant estimates include accruals for Medicaid and
other rebates, returns and chargebacks, allowances for doubtful
accounts and estimates used in applying the revenue recognition
policy and accounting for the Co-Promotion Agreement with Wyeth.
We are subject to risks and uncertainties that may cause actual
results to differ from the related estimates, and our estimates
may change from time to time in response to actual developments
and new information.
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Intangible assets, goodwill, and other long-lived assets.
When we acquire product rights in conjunction with either
business or asset acquisitions, we allocate an appropriate
portion of the purchase price to intangible assets, goodwill and
other long-lived assets. The purchase price is allocated to
product rights and trademarks, patents, acquired research and
development, if any, and other intangibles using the assistance
of valuation experts. We estimate the useful lives of the assets
by factoring in the characteristics of the products such as:
patent protection, competition by products prescribed for
similar indications, estimated future introductions of competing
products, and other issues. The factors that drive the estimate
of the life of the asset are inherently uncertain. However,
patents have specific legal lives over which they are amortized.
Conversely, trademarks and product rights have no specific legal
lives. Trademarks and product rights will continue to be an
asset to us after the expiration of the patent, as their
economic value is not tied exclusively to the patent. We believe
that by establishing separate lives for the patent versus the
trademark and product rights, we are in essence using an
accelerated method of amortization for the product as a whole.
This results in greater amortization in earlier years when the
product is under patent protection, as we are amortizing both
the patent and the trademark and product rights, and less
amortization after the product has the potential for generic
competition, as the amortization on the |
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patent is eliminated. As the pattern of economic benefit cannot
be reliably determined, we use the straight-line method of
amortization for our intangibles. |
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We review our property, plant and equipment and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. We review our goodwill for possible impairment
annually, or whenever events or circumstances indicate that the
carrying amount may not be recoverable. In any event, we
evaluate the remaining useful lives of our intangible assets
each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. This evaluation is performed through our quarterly
evaluation of intangibles for impairment. In evaluating goodwill
for impairment, we estimate the fair value of our individual
business reporting units on a discounted cash flow basis.
Assumptions and estimates used in the evaluation of impairment
may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. Such assumptions
include projections of future cash flows and, in some cases, the
current fair value of the asset. In addition, our depreciation
and amortization policies reflect judgments on the estimated
useful lives of assets. |
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We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture of supply of materials,
the publication of negative results of studies or clinical
trials, or new legislation or regulatory proposals. |
The gross carrying amount and accumulated amortization as of
June 30, 2005 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
Altace
|
|
$ |
276,150 |
|
|
$ |
63,311 |
|
|
$ |
212,839 |
|
|
Other Cardiovascular
|
|
|
94,045 |
|
|
|
19,507 |
|
|
|
74,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
|
370,195 |
|
|
|
82,818 |
|
|
|
287,377 |
|
|
|
Anti-infective
|
|
|
221,593 |
|
|
|
56,590 |
|
|
|
165,003 |
|
|
|
Critical care
|
|
|
17,644 |
|
|
|
7,682 |
|
|
|
9,962 |
|
|
|
Endocrinology
|
|
|
28,841 |
|
|
|
13,606 |
|
|
|
15,235 |
|
|
Skelaxin
|
|
|
203,015 |
|
|
|
24,857 |
|
|
|
178,158 |
|
|
Sonata
|
|
|
54,199 |
|
|
|
20,015 |
|
|
|
34,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
257,214 |
|
|
|
44,872 |
|
|
|
212,342 |
|
|
Intal
|
|
|
106,192 |
|
|
|
11,570 |
|
|
|
94,622 |
|
|
Other Respiratory
|
|
|
12,396 |
|
|
|
3,311 |
|
|
|
9,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory
|
|
|
118,588 |
|
|
|
14,881 |
|
|
|
103,707 |
|
|
|
Other
|
|
|
81,027 |
|
|
|
23,191 |
|
|
|
57,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
1,095,102 |
|
|
|
243,640 |
|
|
|
851,462 |
|
Meridian Medical Technologies
|
|
|
146,217 |
|
|
|
14,618 |
|
|
|
131,599 |
|
Royalties
|
|
|
2,469 |
|
|
|
2,061 |
|
|
|
408 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
1,243,788 |
|
|
$ |
260,319 |
|
|
$ |
983,469 |
|
|
|
|
|
|
|
|
|
|
|
43
The amounts for impairments and amortization expense and the
amortization period used for the three months ended
June 30, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
Three Months Ended | |
|
|
June 30, 2005 | |
|
|
|
June 30, 2004 | |
|
|
| |
|
|
|
| |
|
|
|
|
Amortization | |
|
Life | |
|
|
|
Amortization | |
|
|
Impairments | |
|
Expense | |
|
(Years) | |
|
Impairments |
|
Expense | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(in thousands) | |
|
|
|
(in thousands) | |
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace
|
|
$ |
|
|
|
|
3,225 |
|
|
|
23 |
|
|
$ |
|
|
|
$ |
2,303 |
|
|
Other Cardiovascular
|
|
|
|
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
|
|
|
|
|
4,892 |
|
|
|
|
|
|
|
|
|
|
|
3,481 |
|
|
|
Anti-infective
|
|
|
|
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
2,632 |
|
|
|
Critical care
|
|
|
|
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
165 |
|
|
|
Endocrinology
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
287 |
|
|
Skelaxin
|
|
|
|
|
|
|
3,887 |
|
|
|
13.5 |
|
|
|
|
|
|
|
2,550 |
|
|
Sonata
|
|
|
126,923 |
|
|
|
2,993 |
|
|
|
7.5 |
|
|
|
|
|
|
|
3,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
126,923 |
|
|
|
6,880 |
|
|
|
|
|
|
|
|
|
|
|
5,925 |
|
|
Intal
|
|
|
|
|
|
|
1,392 |
|
|
|
20 |
|
|
|
|
|
|
|
1,065 |
|
|
Other respiratory
|
|
|
|
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory
|
|
|
|
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
1,208 |
|
|
|
Other
|
|
|
|
|
|
|
1,130 |
|
|
|
|
|
|
|
|
|
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
126,923 |
|
|
|
17,562 |
|
|
|
|
|
|
|
|
|
|
|
14,742 |
|
Meridian Medical Technologies
|
|
|
|
|
|
|
1,291 |
|
|
|
|
|
|
|
|
|
|
|
1,531 |
|
Royalties
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
126,923 |
|
|
$ |
18,864 |
|
|
|
|
|
|
|
|
|
|
$ |
16,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The amounts for impairments and amortization expense and the
amortization period used for the six months ended June 30,
2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
Six Months Ended | |
|
|
June 30, 2005 | |
|
|
|
June 30, 2004 | |
|
|
| |
|
|
|
| |
|
|
|
|
Amortization | |
|
Life | |
|
|
|
Amortization | |
|
|
Impairments | |
|
Expense | |
|
(Years) | |
|
Impairments | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
(in thousands) | |
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace
|
|
$ |
|
|
|
$ |
6,450 |
|
|
|
23 |
|
|
$ |
|
|
|
$ |
4,606 |
|
|
Other Cardiovascular
|
|
|
|
|
|
|
3,305 |
|
|
|
|
|
|
|
|
|
|
|
2,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
|
|
|
|
|
9,755 |
|
|
|
|
|
|
|
|
|
|
|
6,962 |
|
|
|
Anti-infective
|
|
|
|
|
|
|
5,267 |
|
|
|
|
|
|
|
|
|
|
|
5,263 |
|
|
|
Critical care
|
|
|
|
|
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
331 |
|
|
|
Endocrinology
|
|
|
|
|
|
|
476 |
|
|
|
|
|
|
|
14,362 |
|
|
|
942 |
|
|
Skelaxin
|
|
|
|
|
|
|
7,774 |
|
|
|
13.5 |
|
|
|
|
|
|
|
5,100 |
|
|
Sonata
|
|
|
126,923 |
|
|
|
5,986 |
|
|
|
7.5 |
|
|
|
|
|
|
|
6,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
126,923 |
|
|
|
13,760 |
|
|
|
|
|
|
|
|
|
|
|
11,850 |
|
|
Intal
|
|
|
|
|
|
|
2,753 |
|
|
|
20 |
|
|
|
|
|
|
|
2,129 |
|
|
Other respiratory
|
|
|
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory
|
|
|
|
|
|
|
3,020 |
|
|
|
|
|
|
|
|
|
|
|
2,416 |
|
|
|
Other
|
|
|
|
|
|
|
2,319 |
|
|
|
|
|
|
|
20,240 |
|
|
|
2,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
126,923 |
|
|
|
35,124 |
|
|
|
|
|
|
|
34,602 |
|
|
|
30,424 |
|
Meridian Medical Technologies
|
|
|
|
|
|
|
2,582 |
|
|
|
|
|
|
|
|
|
|
|
3,062 |
|
Royalties
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
126,923 |
|
|
$ |
37,727 |
|
|
|
|
|
|
$ |
34,602 |
|
|
$ |
33,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining patent amortization period compared to the
remaining amortization period for trademarks and product rights
associated with significant products is as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining Life at June 30, 2005 | |
|
|
| |
|
|
|
|
Trademark & | |
|
|
Patent | |
|
Product Rights | |
|
|
| |
|
| |
Altace
|
|
|
3 years 10 months |
|
|
|
16 years 6 months |
|
Skelaxin
|
|
|
|
|
|
|
11 years 6 months |
|
Sonata
|
|
|
3 years |
|
|
|
5 years 6 months |
|
Intal
|
|
|
|
|
|
|
17 years 5 months |
|
|
|
|
|
|
Inventories. Our inventories are valued at the lower of
cost or market value. We evaluate all of our inventory for short
dated or slow moving product and inventory commitments under
supply agreements based on projections of future demand and
market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we
provide a provision to reflect the lower value of that
inventory. This methodology recognizes projected inventory
losses at the time such losses are evident rather than at the
time goods are actually sold. We maintain supply agreements with
some of our vendors which contain minimum purchase requirements.
We estimate future inventory requirements based on current facts
and trends. Should our minimum purchase requirements under
supply agreements or our estimated |
45
|
|
|
|
|
future inventory requirements exceed actual inventory quantities
which we will be able to sell to our customers, we record a
charge in costs of revenues. |
|
|
|
Accruals for rebates, returns, and chargebacks. We
establish accruals for returns, chargebacks and commercial and
Medicaid rebates in the same period we recognize the related
sales. The accruals reduce revenues and are included in accrued
expenses. At the time a rebate or chargeback payment is made or
a product return is received, which occurs with a delay after
the related sale, we record a reduction to accrued expenses and,
at the end of each quarter, adjust accrued expenses for
differences between estimated and actual payments. Due to
estimates and assumptions inherent in determining the amount of
returns, chargebacks and rebates, the actual amount of product
returns and claims for chargebacks and rebates may be different
from our estimates. |
|
|
|
Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily
based on historical sales and return rates. We estimate our
Medicaid rebate and commercial contractual rebate accruals based
on estimates of usage by rebate-eligible customers, estimates of
the level of inventory of our products in the distribution
channel that remain potentially subject to those rebates, and
the terms of our contractual and regulatory rebate obligations.
We estimate our chargeback accrual based on our estimates of the
level of inventory of our products in the distribution channel
that remain subject to chargebacks, and specific contractual and
historical chargeback rates. |
|
|
Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves. We also monitor wholesale
inventory levels and adjust the reserve as appropriate. |
|
|
|
Accrual for Rebates (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
Balance at January 1, net of prepaid amounts
|
|
$ |
172,161 |
|
|
$ |
213,893 |
|
Current provision related to sales made in current period
|
|
|
55,456 |
|
|
|
72,717 |
|
Current provision related to sales made in prior periods
|
|
|
(9,202 |
) |
|
|
(1,397 |
) |
Actual rebates
|
|
|
(77,083 |
) |
|
|
(74,701 |
) |
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$ |
141,332 |
|
|
$ |
210,512 |
|
|
|
|
|
|
|
|
Current provision related to sales made in current period
|
|
|
81,154 |
|
|
|
75,754 |
|
Current provision related to sales made in prior periods
|
|
|
1,087 |
|
|
|
9,173 |
|
Actual rebates
|
|
|
(75,617 |
) |
|
|
(82,826 |
) |
|
|
|
|
|
|
|
Balance at June 30, net of prepaid amounts
|
|
$ |
147,956 |
|
|
$ |
212,613 |
|
|
|
|
|
|
|
|
46
|
|
|
Accrual for Returns (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
122,863 |
|
|
$ |
82,477 |
|
Current provision
|
|
|
(5,867 |
) |
|
|
36,797 |
|
Supplemental provision
|
|
|
1,429 |
|
|
|
|
|
Actual returns
|
|
|
(45,394 |
) |
|
|
(30,636 |
) |
|
|
|
|
|
|
|
Balance at March 31
|
|
$ |
73,031 |
|
|
$ |
88,638 |
|
|
|
|
|
|
|
|
Current provision
|
|
|
8,209 |
|
|
|
49,164 |
|
Supplemental provision
|
|
|
1,958 |
|
|
|
|
|
Actual returns
|
|
|
(15,009 |
) |
|
|
(37,955 |
) |
|
|
|
|
|
|
|
Balance at June 30
|
|
$ |
68,189 |
|
|
$ |
99,847 |
|
|
|
|
|
|
|
|
|
|
|
Accrual for Chargebacks (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
2005 | |
|
(restated) | |
|
|
| |
|
| |
Balance January 1
|
|
$ |
27,953 |
|
|
$ |
25,349 |
|
Current provision
|
|
|
33,298 |
|
|
|
27,606 |
|
Actual chargebacks
|
|
|
(36,788 |
) |
|
|
(29,169 |
) |
|
|
|
|
|
|
|
Balance at March 31
|
|
$ |
24,463 |
|
|
$ |
23,786 |
|
|
|
|
|
|
|
|
Current provision
|
|
|
21,179 |
|
|
|
44,155 |
|
Actual chargebacks
|
|
|
(31,741 |
) |
|
|
(35,319 |
) |
|
|
|
|
|
|
|
Balance at June 30
|
|
$ |
13,901 |
|
|
$ |
32,622 |
|
|
|
|
|
|
|
|
|
|
|
Based on data received from our inventory management agreements
with our three key wholesale customers, during the first quarter
of 2005, there was a significant reduction of wholesale
inventory levels of our products. While our calculation for
returns reserves is based on historical sales and return rates
over the period which customers have a right of return, it gives
consideration to the amount of wholesale inventory levels. The
significant reduction in wholesale inventories of our products
during the first quarter of 2005 resulted in a decrease of
approximately $25 million in our reserve for returns and a
corresponding increase in net sales from branded
pharmaceuticals. In the second quarter of 2005, an additional
reduction in wholesale inventories resulted in a decrease of
approximately $5 million in our reserve for returns and a
corresponding increase in net sales from branded
pharmaceuticals. The 2005 current provision amounts
in the table Accrual for Returns, above, has
therefore been reduced by these amounts. |
|
|
|
|
|
Revenue recognition. Revenue is recognized when title and
risk of loss are transferred to customers, collection of sales
is reasonably assured, and we have no further performance
obligations. This is generally at the time products are received
by the customer. Accruals for estimated returns, rebates and
chargebacks, determined based on historical experience, reduce
revenues at the time of sale and are included in accrued
expenses. Medicaid and certain other governmental pricing
programs involve particularly difficult interpretations of
relevant statutes and regulatory guidance, which are complex
and, in certain respects, ambiguous. Moreover, prevailing
interpretations of these statutes and guidance can change over
time. Royalty revenue is recognized based on a percentage of
sales (namely, contractually agreed-upon royalty rates) reported
by third parties. |
47
RISK FACTORS
You should carefully consider the risks described below and
the other information contained in this report, including our
unaudited consolidated financial statements and related notes.
You should also consider the information contained in our annual
report on Form 10-K for the year ended December 31,
2004, including our audited consolidated financial statements
and related notes. The risks described below are not the only
ones facing our company. Additional risks not presently known to
us or that we currently deem immaterial may also impair our
business operations. If any of the adverse events described in
this Risk Factors section or other sections of this
report or our annual report on Form 10-K for the year ended
December 31, 2004 actually occurs, our business, results of
operations and financial condition could be materially adversely
affected, the trading price, if any, of our securities could
decline and you might lose all or part of your investment.
Risks Related to our Business
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|
|
Investigations by the Securities and Exchange Commission
and Office of Inspector General of the Department of Health and
Human Services, other possible governmental investigations, and
securities and derivative litigation could have a material
adverse effect on our business. |
As previously reported, in March 2003 the SEC initiated a formal
investigation of King relating to, among other topics, sales of
our products to VitaRx and Prison Health Services, our
best price lists, the pricing of our pharmaceutical
products provided to governmental Medicaid agencies, the accrual
and payment of rebates on the product Altace®, the products
Fluogen® and Lorabid®, the King Benevolent Fund, Inc.,
our calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, we received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to our sales,
marketing and other business practices for Altace®,
Aplisol® and Levoxyl®. We have also reviewed with the
staff of the SEC the circumstances giving rise to the
restatement of our previously issued financial statements for
2002, 2003 and the first two quarters of 2004.
In connection with our determination that we underpaid amounts
due to Medicaid and other government pricing programs from 1998
through 2002, we have continued to engage in discussions with
representatives of the U.S. Securities and Exchange Commission,
the United States Attorney for the Eastern District of
Pennsylvania, the Department of Justice, the National
Association of Medicaid Fraud Control Units, the Office of
Inspector General of the Department of Health and Human
Services, the Department of Veterans Affairs, the Centers for
Medicare & Medicaid Services, and the Public Health Service.
Our objective in these discussions has been to achieve a
comprehensive settlement relating to all the matters being
investigated by or discussed with all the governmental
authorities.
We have not yet reached any agreements or understandings with
respect to the terms of such a settlement, and we cannot assure
you that we will ever be able to reach such an agreement. Based
on the status of the discussions to date, however, we now
believe that it is reasonably likely that we will be able to
achieve a comprehensive settlement with all relevant
governmental parties on the terms described in the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations under the
heading Governmental Investigations and Securities
Litigation.
Our ability to achieve a settlement on these or other terms is
subject to substantial uncertainties. Our discussions to date
have been conducted with the staffs of various agencies and
other governmental authorities. We do not yet have any
agreements or understandings with any of them. Even if we were
to reach such an agreement or understanding with staff
personnel, it would be subject to the approval of numerous more
senior representatives of the governmental parties, including
the members of the U.S. Securities and Exchange Commission,
the United States Attorney for the Eastern District of
Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that the governmental parties reach numerous agreements
among
48
themselves, and that the consummation of our agreement with each
governmental party would be dependent on consummation of our
agreements with other governmental parties. We also expect that
some aspects of a comprehensive settlement would require court
approval.
In light of these uncertainties, we stress that we may not be
able to reach a settlement with the governmental parties,
whether on the terms described above or at all. As a result, the
ultimate amount that we will actually have to pay to resolve
these matters could be materially more than the amount accrued
to date, and the terms could otherwise be materially less
favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.
The possible settlement described above would not apply to the
related pending class actions and derivative suits or any other
claims by private plaintiffs. While we deny any liability, we
are unable to predict the outcome of the class actions and
derivative suits or reasonably estimate the range of loss, if
any.
For additional information, please see the risk factor entitled
If we fail to comply with our reporting and payment
obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business, and the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations under the
heading Governmental Investigations and Securities
Litigation.
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported class
action complaints were filed by holders of our securities
against us, our directors, former directors, our executive
officers, former executive officers, a subsidiary, and a former
director of the subsidiary in the United States District Court
for the Eastern District of Tennessee, alleging violations of
the Securities Act of 1933 and/or the Securities Exchange Act of
1934. These 22 complaints have been consolidated in the United
States District Court for the Eastern District of Tennessee. In
addition, holders of our securities filed two class action
complaints alleging violations of the Securities Act of 1933 in
Tennessee state court. We removed these two cases to the United
States District Court for the Eastern District of Tennessee,
where these two cases were consolidated with the other class
actions. Plaintiffs in these actions unsuccessfully moved to
remand these two cases back to Tennessee state court. These two
actions therefore remain part of the consolidated action. The
district court has appointed lead plaintiffs in the consolidated
action, and those lead plaintiffs filed a consolidated amended
complaint on October 21, 2003 alleging that we, through
some of our executive officers, former executive officers,
directors, and former directors, made false or misleading
statements concerning our business, financial condition, and
results of operations during periods beginning February 16,
1999 and continuing until March 10, 2003. Plaintiffs in the
consolidated action have also named the underwriters of our
November 2001 public offering as defendants. We and other
defendants filed motions to dismiss the consolidated amended
complaint.
On August 12, 2004, the United States District Court for
the Eastern District of Tennessee ruled on defendants
motions to dismiss. The Court dismissed all claims as to Jones
Pharma, Inc., a predecessor to one of our wholly owned
subsidiaries, King Research and Development, Inc., and as to
defendants Dennis Jones and Henry Richards. The Court also
dismissed certain claims as to five other individual defendants.
The Court denied the motions to dismiss in all other respects.
Following the Courts ruling, on September 20, 2004,
we and the other remaining defendants filed answers to
plaintiffs consolidated amended complaint. Discovery and
other proceedings in the case are continuing, and no trial date
has been set.
Seven purported shareholder derivative complaints have also been
filed in federal and state courts in Tennessee alleging a breach
of fiduciary duty, among other things, by some of our officers
and directors. On October 26, 2004, all of the defendants
named in this action filed an answer to the amended consolidated
derivative and class action complaint. Discovery in this action
has commenced. No trial date has been set.
49
Another purported class action complaint was filed on
August 16, 2004 in Tennessee state court against us and the
members of our board of directors. This new case largely asserts
substantially the same claims and seeks the same relief as the
class action claim that was recently added to the state
derivative action described above. Defendants in that action
filed a motion to dismiss on November 30, 2004; that motion
is pending and no hearing date has been set.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act, which we
refer to as ERISA. As amended, the complaint alleges
that we and certain of our executive officers, former executive
officers, directors, former directors and an employee violated
fiduciary duties that they allegedly owed our 401(k) Retirement
Savings Plans participants and beneficiaries under ERISA.
The allegations underlying this action are similar in many
respects to those in the class action litigation described
above. The defendants filed a motion to dismiss the ERISA action
on March 5, 2004. The District Court Judge referred the
motion to a Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005. The plaintiffs have not appealed this
decision, and the deadline for filing any appeal has now passed.
We intend to defend all of these lawsuits vigorously but are
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any. If any governmental
sanctions are imposed, or if we were not to prevail in the
pending litigation, neither of which we can predict or
reasonably estimate at this time, our business, financial
condition, results of operations and cash flows could be
materially adversely affected. Responding to the governmental
investigations, resolving the amounts owed to governmental
agencies in connection with the underpayments and defending us
in the pending litigation has resulted, and is expected to
continue to result, in a significant diversion of
managements attention and resources and the payment of
additional professional fees.
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If we cannot successfully enforce our rights under the
patents relating to three of our largest products, Altace®,
Skelaxin®, Sonata®, and the patent relating to
Adenoscan®, or if we are unable to secure or enforce our
rights under other patents, trademarks, trade secrets or other
intellectual property, our results of operations could be
materially adversely affected. |
Cobalt Pharmaceuticals, Inc., a generic drug manufacturer
located in Mississauga, Ontario, Canada, filed an ANDA with the
FDA seeking permission to market a generic version of
Altace®. The following U.S. patents are listed for
Altace® in the FDAs Orange Book: United States Patent
Nos. 4,587,258 (the 258 patent), and 5,061,722
(the 722 patent), two composition of matter patents
related to Altace®, and United States Patent
No. 5,403,856, (the 856 patent), a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
Hatch-Waxman Act, any generic manufacturer may file an ANDA with
a certification, known as a Paragraph IV
certification, challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and we filed suit on March 14,
2003 in the District Court for the District of Massachusetts to
enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003. In
March 2004, Cobalt stipulated to infringement of the
722 patent. Subsequent to filing our original
complaint, we amended our complaint to add an allegation of
infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-infringement of the
856 patent. The courts decision does not affect
Cobalts infringement of the 722 patent. Trial
is scheduled to begin September 12, 2005.
Lupin Ltd. (Lupin) filed an ANDA with the FDA
seeking permission to market a generic version of Altace®
(Lupins ANDA). In addition to its ANDA, Lupin
filed a Paragraph IV certification
50
challenging the validity and infringement of the 722
patent, and seeking to market its generic version of
Altace® before expiration of the 722 patent. In July
2005, we filed a civil action for infringement of the 722
patent against Lupin in the U.S. District Court for the District
of Maryland. Pursuant to the Hatch-Waxman Act, the filing of the
suit against Lupin provides us with an automatic stay of FDA
approval of Lupins ANDA for up to 30 months from no
earlier than June 8, 2005.
We intend to vigorously enforce our rights under the 722
and 856 patents. If a generic version of Altace®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. As of June 30, 2005, we had net intangible assets
related to Altace® of $251.4 million. If a generic
version of Altace® enters the market, the Company may have
to write off a portion of the patent intangible assets and the
other intangible assets associated with this product.
Eon Labs, Inc., CorePharma, LLC and Mutual Pharmaceutical Co.,
Inc. have each filed an ANDA with the FDA seeking permission to
market a generic version of Skelaxin® 400 mg tablets.
Additionally, Eon Labs ANDA seeks permission to market a
generic version of Skelaxin® 800 mg tablets. United States
Patent Nos. 6,407,128 (the 128 patent) and
6,683,102 (the 102 patent), two method-of-use patents
relating to Skelaxin®, are listed in the FDAs Orange
Book and do not expire until December 3, 2021. Eon Labs and
CorePharma have each filed Paragraph IV certifications
against the 128 patent and the 102 patent
alleging noninfringement and invalidity of these patents. Mutual
has filed a Paragraph IV certification against the
102 patent alleging noninfringement and invalidity of
that patent. We filed a patent infringement suit against Eon
Labs on January 2, 2003 in the District Court for the
Eastern District of New York; against CorePharma on
March 7, 2003 in the District Court for the District of New
Jersey (subsequently transferred to the District Court for the
Eastern District of New York); and against Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004, in the District Court for the
Eastern District of New York concerning its proposed 800 mg
product. Pursuant to the Hatch-Waxman Act, the filing of the
suit against CorePharma provides us with an automatic stay of
FDA approval of CorePharmas ANDA for 30 months from
no earlier than January 24, 2003. Also pursuant to the
Hatch-Waxman Act, the filing of the suits against Eon Labs
provides us with an automatic stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002 and
November 3, 2004, respectively. We intend to vigorously
enforce our rights under the 128 and
102 patents to the full extent of the law.
On March 9, 2004, we received a copy of a letter from the
FDA to all ANDA applicants for Skelaxin® stating that the
use listed in the FDAs Orange Book for the
128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information corresponding to the use listed in the
Orange Book. King concurrently filed a Petition for Stay of
Action requesting the FDA to stay approval of any generic
metaxalone products until the FDA has fully evaluated our
Citizen Petition.
On March 12, 2004, the FDA sent a letter to us explaining
that our proposed labeling revision, which includes references
to additional clinical studies relating to food, age, and gender
effects, was approvable and only required certain formatting
changes. On April 5, 2004, we submitted amended labeling
text that incorporated those changes. On April 5, 2004,
Mutual filed a Petition for Stay of Action requesting the FDA to
stay approval of our proposed labeling revision until the FDA
has fully evaluated and ruled upon our Citizen Petition, as well
as all comments submitted in response to that petition.
Discussions with the FDA concerning appropriate labeling are
ongoing. CorePharma, Mutual and we have filed responses and
supplements to the pending Citizen Petition.
If our Citizen Petition is rejected, there is a substantial
likelihood that a generic version of Skelaxin® will enter
the market, and our business, financial condition, results of
operations and cash flows could be materially adversely
affected. In an attempt to mitigate this risk, we have entered
into an agreement with a
51
generic pharmaceutical company to launch an authorized generic
of Skelaxin® in the event of generic competition. However,
we cannot assure to what extent this strategy will be
successful. As of June 30, 2005, we had net intangible
assets related to Skelaxin® of $178.2 million. If demand
for Skelaxin® declines below current expectations, we may
have to write off a portion or all of these intangible assets.
Sicor Pharmaceuticals, Inc. (Sicor Pharma), a
generic drug manufacturer located in Irvine California, filed an
ANDA with the FDA seeking permission to market a generic version
of Adenoscan®. U.S. Patent No. 5,070,877 (the
877 patent) is assigned to us and is listed in the
FDAs Orange Book entry for Adenoscan®. Astellas
Pharma US, Inc. (Astellas) is the exclusive
licensee of certain rights under the 877 and has marketed
Adenoscan® in the US since 1995. A substantial portion
of the revenues from our royalties segment is derived from
Astellas based on its net sales of Adenoscan®. Sicor Pharma
has filed a Paragraph IV certification alleging invalidity
of the 877 patent and non-infringement of certain claims
of the 877 patent. We and Astellas filed suit against
Sicor Pharma and its parents/affiliates Sicor, Inc., Teva
Pharmaceuticals USA, Inc and Teva Pharmaceutical
Industries, Ltd., on May 26, 2005, in the United States
District Court for the District of Delaware to enforce our
rights under the 877 patent. Pursuant to the Hatch-Waxman
Act, the filing of that suit provides us an automatic stay of
FDA approval of Sicor Pharmas ANDA for 30 months from
no earlier than April 16, 2005. We intend to vigorously
enforce our rights under the 877 patent. If a generic
version of Adenoscan® enters the market, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.
Teva Pharmaceuticals USA, Inc. filed an ANDA with the FDA
seeking permission to market a generic version of Sonata®.
In addition to its ANDA, Teva filed a Paragraph IV
certification challenging the enforceability of U.S. Patent
4,626,538 (the 538 patent) listed in the Orange Book which
expires in June 2008. We filed suit against Teva in the United
States District Court for the District of New Jersey to enforce
our rights under the 538 patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Tevas ANDA for
30 months from no earlier than June 21, 2005. We
intend to vigorously enforce our rights under the
538 patent. If a generic form of Sonata® enters
the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
We may not be successful in securing or maintaining proprietary
patent protection for other of our products or for products and
technologies we develop or license. In addition, our competitors
may develop products, including generic products, similar to
ours using methods and technologies that are beyond the scope of
our intellectual property protection, which could reduce our
sales.
We also rely upon trade secrets, unpatented proprietary know-how
and continuing technological innovation in order to maintain our
competitive position. We cannot assure you that others will not
independently develop substantially equivalent proprietary
technology and techniques or otherwise gain access to our trade
secrets and technology, or that we can adequately protect our
trade secrets and technology.
If we are unable to secure or enforce patent rights, trademarks,
trade secrets or other intellectual property, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.
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We are subject to the risk of additional litigation and
regulatory proceedings or actions in connection with the
restatement of prior period financial statements. |
We previously restated our previously issued financial
statements for the fiscal years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004. We may in
the future be subject to class action suits, other litigation or
regulatory proceedings or actions arising in relation to the
restatement of our prior period financial statements. Any
expenses incurred in connection with such a potential litigation
or regulatory proceeding or action not covered by available
insurance or any adverse resolution of this potential litigation
or regulatory proceeding or action could have a material adverse
effect on our business, results of operations, cash flows and
financial condition. Further, any litigation or regulatory
proceeding or action may be time consuming, and it may distract
our management from the conduct of our business.
52
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Management concluded that we did not have a sufficient
number of finance and accounting resources performing
supervisory review and monitoring activities as of year-end 2004
and, accordingly, that we did not maintain effective controls
over that period-end financial reporting process. We cannot
assure you that we will be able to remediate this material
weakness and conclude that our internal control over financial
reporting is effective as of the end of 2005 or that the
material weakness will not result in material misstatements of
our financial statements. |
Under the Sarbanes-Oxley Act of 2002 and the rules issued
thereunder, management is required to conduct an evaluation of
the effectiveness of internal control over financial reporting
as of each year-end. We are also required to include in our
Annual Reports on Form 10-K a report on managements
assessment of the effectiveness of our internal control over
financial reporting. Our registered public accounting firm also
issues an audit report on managements assessment and our
internal control over financial reporting.
Management concluded that, as a result of the loss of certain
finance personnel, the challenges of hiring new personnel while
a merger was pending and the resource requirements necessary to
address the restatement of our financial statements, we did not
have a sufficient number of finance and accounting resources
performing supervisory review and monitoring activities as of
the end of 2004. To address this material weakness, we are in
the process of addressing this material weakness by actively
recruiting additional managerial level finance and accounting
resources.
We cannot assure you that management will not identify one or
more additional significant deficiencies or material weaknesses
in our internal control over financial reporting during 2005,
that the steps we take to address any significant deficiencies
or material weaknesses will be successful, that a significant
deficiency or material weakness will not result in material
errors in our financial statements before it is remediated, that
management will be able to complete its assessment of internal
control over financial reporting in a timely fashion in 2005, or
that management will be able to conclude on the basis of its
evaluation that our internal control over financial reporting
was effective as of the end of 2005.
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If sales of our major products or royalty payments to us
decrease, our results of operations could be materially
adversely affected. |
Altace®, Skelaxin®, Thrombin-JMI®, Sonata®,
Levoxyl® and royalty revenues for the last twelve months
ended June 30, 2005 accounted for 28.5%, 19.1%, 14.0%,
4.8%, 8.0% and 5.0% of our total revenues from continuing
operations, respectively, or 79.4% in total. We believe that
these sources of revenue may constitute a significant portion of
our revenues for the foreseeable future. Accordingly, any factor
adversely affecting sales of any of these products or products
for which we receive royalty payments could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
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Although we have an obligation to indemnify our officers
and directors, we may not have sufficient insurance coverage
available for this purpose and may be forced to pay these
indemnification costs directly and we may not be able to
maintain existing levels of coverage, which could make it
difficult to attract or retain qualified directors and
officers. |
Our charter and bylaws require that we indemnify our directors
and officers to the fullest extent provided by applicable
Tennessee law. Although we have purchased liability insurance
for our directors and officers to fund such obligations, if our
insurance carrier should deny coverage, or if the
indemnification costs exceed the insurance coverage, we would be
forced to bear some or all of these indemnification costs
directly, which could be substantial and may have an adverse
effect on our business, financial condition, results of
operations and cash flows. If the cost of this insurance
continues to increase significantly, or if this insurance
becomes unavailable, we may not be able to maintain or increase
our levels of insurance coverage for our directors and officers,
which could make it difficult to attract or retain qualified
directors and officers.
53
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We are required annually, or on an interim basis as
needed, to review the carrying value of our intangible assets
and goodwill for impairment. If events such as generic
competition or inability to manufacture or obtain sufficient
supply of product occur that cause the sales of our products to
decline, the intangible asset value of any declining product
could become impaired. |
As of June 30, 2005, we had $1.2 billion of net
intangible assets and goodwill. Intangible assets primarily
include the net book value of various product rights,
trademarks, patents and other intangible rights. If a change in
circumstances causes us to lower our future sales forecast for a
product, we may be required to write off a portion of the net
book value of the intangible assets associated with that
product. Any impairment of the net book value of any product or
combination of products, depending on the size of the product or
products, could result in a material adverse effect on our
business, financial condition and results of operations. In
evaluating goodwill for impairment, we estimate the fair value
of our individual business reporting units on a discounted cash
flow basis. In the event the value of an individual business
reporting unit declines significantly, it could result in a
non-cash impairment charge.
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If we cannot implement our strategy to grow our business
through increased sales, acquisitions, development and
in-licensing, our business or competitive position in the
pharmaceutical industry may suffer. |
Our current strategy is focused on increasing sales of our
existing products and enhancing our competitive standing through
acquisitions or in-licensing of products in development and
FDA-approved products that complement our business and enable us
to promote and sell new products through existing marketing and
distribution channels. Moreover, since we engage in limited
proprietary research activity with respect to the development of
new chemical entities, we rely heavily on purchasing or
licensing products in development and FDA-approved products from
other companies.
We are engaged in the development and licensing of new products.
For example, we are
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engaged in the development of binodenoson, a myocardial
pharmacologic stress imaging agent; |
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engaged in the development of PT-141, an investigational new
drug for the treatment of erectile dysfunction and female sexual
dysfunction; |
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engaged in the development of T-62, an investigational drug for
the treatment of neuropathic pain; |
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engaged in the development of MRE0094, an investigational drug
for the topical treatment of chronic diabetic foot ulcers; |
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engaged in the development of a new inhaler for Intal®
using the alternative propellant HFA for which the FDA has
issued an approvable letter; |
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engaged in the development of an Altace®/diuretic
combination product; and |
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engaged in the development of a diazepam-filled auto-injector. |
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and
capabilities substantially greater than ours, in the development
and licensing of new products. We cannot assure you that we will
be able to
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engage in product life-cycle management to develop new
indications and line extensions for existing and acquired
products; |
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successfully develop, license or successfully commercialize new
products on a timely basis or at all; |
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develop or license new products already in development in a cost
effective manner; or |
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obtain any FDA approvals necessary to successfully implement the
strategies described above. |
If we are not successful in the development or licensing of new
products already in development, including the failure to obtain
any necessary FDA approval, our business, financial condition,
and results of operations could be materially adversely affected.
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Further, other companies may license or develop products or may
acquire technologies for the development of products that are
the same as or similar to the products we have in development or
that we license. Because there is rapid technological change in
the industry and because many other companies may have more
financial resources than we do, other companies may
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develop or license their products more rapidly than we can, |
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complete any applicable regulatory approval process sooner than
we can, |
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market or license their products before we can market or license
our products, or |
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offer their newly developed or licensed products at prices lower
than our prices, |
and thereby have a negative impact on the sales of our existing,
newly developed or licensed products. The inability to effect
acquisitions or licenses of additional branded products in
development and FDA-approved products could limit the overall
growth of our business. Furthermore, even if we obtain rights to
a pharmaceutical product or acquire a company, we may not be
able to generate sales sufficient to create a profit or
otherwise avoid a loss. Technological developments or the
FDAs approval of new products or of new therapeutic
indications for existing products may make our existing products
or those products we are licensing or developing obsolete or may
make them more difficult to market successfully, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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If we cannot integrate the business of companies or
products we acquire, our business may suffer. |
The integration of acquisitions into our business requires
significant management attention and may require the further
expansion of our sales force. In order to manage our
acquisitions effectively, we must maintain adequate operational,
financial and management information systems, integrate the
systems that we acquire into our existing systems, ensure that
the acquired systems meet our standards for internal control
over financial reporting, and motivate and effectively manage an
increasing number of employees. Our acquisitions have
significantly expanded our product offerings, operations and
number of employees. Our future success will also depend in part
on our ability to retain or hire qualified employees to operate
our expanding facilities efficiently in accordance with
applicable regulatory standards. If we cannot integrate our
acquisitions successfully, these changes and acquisitions could
have a material adverse effect on our business, financial
condition, results of operations and cash flows and on our
ability to make the necessary certifications with respect to our
internal controls.
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We do not have proprietary protection for most of our
branded pharmaceutical products, and our sales could suffer from
competition by generic substitutes. |
Although most of our revenue is generated by products not
subject to competition from generic products, there is no
proprietary protection for most of our branded pharmaceutical
products, and generic substitutes for many of these products are
sold by other pharmaceutical companies. Even our products that
currently have no generic substitute could face generic
competition if generics are developed by other companies and
approved by the FDA. The entry of generic substitutes for any of
our products could adversely affect our business, financial
condition, results of operations and cash flows. In addition,
governmental and other pressure to reduce pharmaceutical costs
may result in physicians prescribing products for which there
are generic substitutes. Also, our branded products for which
there is no generic form available may face competition from
different therapeutic agents used for the same indications for
which our branded products are used. Increased competition from
the sale of generic pharmaceutical products or from different
therapeutic agents used for the same indications for which our
branded products are used may cause a decrease in revenue from
our branded products and could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.
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If we cannot sell our products in amounts greater than our
minimum purchase requirements under some of our supply
agreements or sell our products in accordance with our
forecasts, our results of operations and cash flows may be
adversely affected. |
Some of our supply agreements or purchase orders, including
those related to Altace® and Skelaxin®, require us to
purchase certain minimum levels of active ingredients or
finished goods. If we are unable to maintain market exclusivity
for our products, if our product life-cycle management is not
successful, if we fail to sell our products in accordance with
the forecasts we develop as required by our supply agreements or
if we do not terminate supply agreements at times that are
optimal for us, we may incur losses in connection with the
purchase commitments under the supply agreements or purchase
orders. In the event we incur losses in connection with the
purchase commitments under our supply agreements or purchase
orders, there may be a material adverse effect upon our results
of operations and cash flows.
Additionally, we purchase raw materials and some of our finished
goods based on our forecast for sales of our products. We also
manufacture many of our finished goods based on these forecasts.
If we do not meet expected forecasts for sales, we could
purchase inventory quantities in excess of expected demand. This
purchase of excess inventory could have a material adverse
effect on our results of operations and cash flows.
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Any significant delays or difficulties in the manufacture
of or supply of materials for our products may reduce our profit
margins and revenues, limit the sales of our products, or harm
our products reputations. |
We manufacture many of our products in facilities we own and
operate. These products include Altace®, Thrombin-JMI®
and Levoxyl®, which together represented approximately
50.5% of our revenues for the last twelve months ended
June 30, 2005. Many of our production processes are complex
and require specialized and expensive equipment. Any unforeseen
delays or interruptions in our manufacturing operations may
reduce our profit margins and revenues. If we are unable to
resume manufacturing after any interruption, we may not be able
to distribute our products as planned. Furthermore, growing
demand for our products could exceed our ability to supply the
demand. If such situations occur, it may be necessary for us to
seek alternative manufacturers, which could adversely impact our
ability to produce and distribute our products. We cannot assure
you that we would be able to utilize third-party manufacturers
for our products in a timely manner or at all. In addition, our
manufacturing output may decline as a result of power outages,
supply shortages, accidents, natural disasters or other
disruptions of the manufacturing process. Even though we carry
business interruption insurance policies, we may suffer losses
as a result of business interruptions that exceed the coverage
available under our insurance policies.
A portion or all of many of our product lines, including
Altace®, Skelaxin®, Sonata®, Intal®,
Tilade®, Synercid® and Cortisporin®, are
currently manufactured by third parties. Our dependence upon
third parties for the manufacture of our products may adversely
impact our profit margins or may result in unforeseen delays or
other problems beyond our control. For example, if any of these
third parties are not in compliance with applicable regulations,
the manufacture of our products could be delayed, halted or
otherwise adversely affected. If for any reason we are unable to
obtain or retain third-party manufacturers on commercially
acceptable terms, we may not be able to distribute our products
as planned. If we encounter delays or difficulties with contract
manufacturers in producing or packaging our products, the
distribution, marketing and subsequent sales of these products
would be adversely affected, and we may have to seek alternative
sources of supply or abandon or sell product lines on
unsatisfactory terms. We might not be able to enter into
alternative supply arrangements at commercially acceptable
rates, if at all. We also cannot assure you that the
manufacturers we utilize will be able to provide us with
sufficient quantities of our products or that the products
supplied to us will meet our specifications.
We have begun construction of facilities to produce
Bicillin® at our Rochester, Michigan facility. The third
party manufacturer that produced Bicillin® for us recently
closed its plant. If our inventory of Bicillin® is not
sufficient to sustain demand during the period we are
constructing our Bicillin® manufacturing facility, or if we
experience delays in obtaining regulatory authorizations or
experience production difficulties at our Bicillin®
manufacturing facility, sales of this product may be reduced or
the
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market for the product may be permanently diminished, either of
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. For
the last twelve months ended June 30, 2005, net sales of
Bicillin® were $39.6 million representing 2.5% of our
total revenues.
We are also in the process of transferring the manufacture of
some of our other products that are currently manufactured by
third parties to our manufacturing facilities. We expect to
complete these transfers prior to the expiration of the
agreements concerning supply of these products. However, we
cannot assure you that we will complete the transfers prior to
the expiration of the supply agreements, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We require a supply of quality raw materials and components to
manufacture and package pharmaceutical products for us and for
third parties with which we have contracted. Currently, we rely
on over 500 suppliers to deliver the necessary raw materials and
components. Some of the contracts we have for the supply of raw
materials have short terms, and there is no assurance that we
will be able to secure extension of the terms of such
agreements. However, if we are unable to obtain sufficient
quantities of any of the raw materials or components required to
produce and package our products, we may not be able to
distribute our products as planned.
The occurrence of any of these events could result in
significant backorders for our products, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows and could adversely affect
our market share for the products and the reputation of our
products.
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If third-party developers of some of our new product
candidates and reformulated products fail to devote sufficient
time and resources to our concerns, or if their performance is
substandard or otherwise fails to comply with the terms of their
agreements with us, the introduction of new or reformulated
products may not be successful. |
We develop products and product line extensions through research
and development and through contractual relationships with third
parties that develop new products, including new product
formulations, on our behalf. Our reliance on third parties for
the development of some of our products exposes us to risks
which could cause delays in the development of new products or
reformulated products or could cause other problems beyond our
control. These third-party developers
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may not be successful in developing the products or product line
extensions for us; |
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may face financial or business related difficulties which could
make it difficult or impossible for them to continue business
operations; or |
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may otherwise breach or terminate their agreements with us. |
If any of these events occur and we are unable to successfully
develop these products and new product formulations by other
means, our business, financial condition, results of operations
and cash flows could be materially and adversely affected.
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We are near maximum capacity at our Middleton, Wisconsin
facility which limits our ability to increase production of
Thrombin-JMI®. |
We are currently working to expand our production capacity for
Thrombin-JMI®. We cannot assure you that our plans to
expand our production capacity for Thrombin-JMI® will be
successful and/or timely. If we cannot successfully and timely
expand our production capacity for Thrombin-JMI®, our
ability to increase production of Thrombin-JMI® will be
limited, thereby limiting our unit sales growth for this product.
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Wholesaler and distributor buying patterns and other
factors may cause our quarterly results to fluctuate, and these
fluctuations may adversely affect our profitability. |
Our results of operations, including, in particular, product
sales revenue, may vary from quarter to quarter due to many
factors. Wholesalers and distributors represent a substantial
portion of our sales. Buying patterns of our wholesalers and
distributors may vary from time to time. In the event
wholesalers and distributors with whom we do business determine
to limit their purchases of our inventory, sales of our products
could be adversely affected. For example, in advance of an
anticipated price increase, many of our customers may order
pharmaceutical products in larger than normal quantities. The
ordering of excess quantities in any quarter could cause sales
of some of our branded pharmaceutical products to be lower in
subsequent quarters than they would have been otherwise. As part
of our ongoing efforts to facilitate improved management of
wholesale inventory levels of our branded pharmaceutical
products, we entered into inventory management agreements with
each of our three key wholesale customers during the second
quarter of 2004. We rely on the accuracy of the data that each
customer provides to us on a regular basis pursuant to these
agreements. Other factors that may affect quarterly results
include expenditures related to the acquisition, sale and
promotion of pharmaceutical products, a changing customer base,
the availability and cost of raw materials, interruptions in
supply by third-party manufacturers, new products introduced by
us or our competitors, the mix of products we sell, sales and
marketing expenditures, product recalls, competitive pricing
pressures and general economic and industry conditions that may
affect customer demand. We cannot assure you that we will be
successful in maintaining or improving our profitability or
avoiding losses in any future period.
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The insolvency of any of our principal customers,
wholesale pharmaceutical distributors, could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. |
Similar to other pharmaceutical companies, our principal
customers are primarily wholesale pharmaceutical distributors.
The wholesale distributor network for pharmaceutical products
has in recent years been subject to increasing consolidation,
which has increased our, and other industry participants,
customer concentration. Accordingly, three key customers
accounted for approximately 70.0% of our revenues and a
significant portion of our accounts receivable for the fiscal
year ended December 31, 2004. The insolvency of any of our
principal customers could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
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Our wholly owned subsidiary, King Research and
Development, successor to Jones Pharma Incorporated, is a
defendant in litigation which is currently being handled by its
insurance carriers. Should this coverage be inadequate or
subsequently denied or were we to lose some of these lawsuits,
our results of operations could be adversely affected. |
Our wholly owned subsidiary, King Research and Development,
successor to Jones Pharma Incorporated, is a defendant in 188
multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine, which is usually
referred to as fen/phen. In 1996, Jones acted as a
distributor of Obenix®, a branded phentermine product.
Jones also distributed a generic phentermine product. We believe
that Jones phentermine products have been identified in
less than 100 of the foregoing cases. The plaintiffs in these
cases claim injury as a result of ingesting a combination of
these weight-loss drugs. They seek compensatory and punitive
damages as well as medical care and court-supervised medical
monitoring. The plaintiffs claim liability based on a variety of
theories including, but not limited to, product liability,
strict liability, negligence, breach of warranties and
misrepresentation. These suits are filed in various
jurisdictions throughout the United States, and in each of these
suits King Research and Development is one of many defendants,
including manufacturers and other distributors of these drugs.
King Research and Development denies any liability incident to
the distribution of Jones phentermine products and intends
to pursue all defenses available to it. King Research and
Development has tendered defense of these lawsuits to its
insurance carriers for handling and they are currently defending
King Research and Development in these suits. In the event that
insurance coverage is
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inadequate to satisfy any resulting liability, King Research and
Development will have to resume defense of these lawsuits and be
responsible for the damages, if any, that are awarded against it.
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Sales of Thrombin-JMI® may be affected by the
perception of risks associated with some of the raw materials
used in its manufacture; if we are unable to successfully
develop purification procedures at our facilities that are in
accordance with the FDAs expectations for biological
products generally, the FDA could limit our ability to
manufacture biological products at those facilities. |
The source material for our product Thrombin-JMI® comes
from bovine plasma and lung tissue which has been certified by
the United States Department of Agriculture for use in the
manufacture of pharmaceutical products. Bovine-sourced
materials, particularly those from outside the United States,
may be of some concern because of potential transmission of
bovine spongiform encephalopathy, or BSE. However,
we have taken precautions to minimize the risks of contamination
from BSE in our source materials. Our principal precaution is
the use of bovine materials only from FDA-approved sources in
the United States. Accordingly, all source animals used in our
production of Thrombin-JMI® are of United States origin.
Additionally, source animals used in production of
Thrombin-JMI® are generally less than 18 months of age
(BSE has not been identified in animals less than 30 months
of age).
We have two approved vendors as sources of supply of the bovine
raw materials. Any interruption or delay in the supply of these
materials could adversely affect the sales of
Thrombin-JMI®. In addition to other actions taken by us and
our vendors to minimize the risk of BSE, we are developing steps
to further purify the material of other potential contaminants.
We will continue surveillance of the source and believe that the
risk of BSE contamination in the source materials for
Thrombin-JMI® is very low. While we believe that our
procedures and those of our vendor for the supply, testing and
handling of the bovine material comply with all federal, state,
and local regulations, we cannot eliminate the risk of
contamination or injury from these materials. There are high
levels of global public concern about BSE. Physicians could
determine not to administer Thrombin-JMI® because of the
perceived risk which could adversely affect our sales of the
product. Any injuries resulting from BSE contamination could
expose us to extensive liability. Also there is currently no
alternative to the bovine-sourced materials for
Thrombin-JMI®. If public concern for the risk of BSE
infection in the United States should increase, the manufacture
and sale of Thrombin-JMI® and our business, financial
condition, results of operations and cash flows could be
materially and adversely affected.
The FDA expects manufacturers of biological products to have
validated processes capable of removing extraneous viral
contaminants to a high level of assurance. As a result, many
manufacturers of biologics are currently engaged in developing
procedures to remove potential extraneous viral contaminants
from their products. We are in the process of developing
appropriate processing steps to achieve maximum assurance for
the removal of potential extraneous viral contaminants from
Thrombin-JMI®, which does not include BSE because it is not
a viral contaminant. If we are not successful in gaining FDA
approval for these processes, our ability to manufacture
Thrombin-JMI® may be adversely affected. We cannot assure
you that we will be successful in these efforts. Failure to
obtain the FDAs approval for these procedures could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
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On November 15, 2006, we may be required to
repurchase our
23/4%
Convertible Debentures due November 15, 2021. |
During the fourth quarter of 2001 we issued
23/4%
Convertible Debentures due November 15, 2021 in an
aggregate amount of $345.0 million. The price at which the
debentures are convertible into common stock is $50.16, subject
to adjustments spelled out in the documents governing the
debentures. If the price of our stock has not reached that
amount by November 15, 2006, we may be required to
repurchase all or a portion of the debentures representing the
$345.0 million on November 15, 2006 if some or all of
the holders of the debentures request that we repurchase their
debentures. We cannot assure you that a significant repurchase
requirement at that time would not have a material adverse
effect on our business, financial condition, results of
operations or cash flows.
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A failure by Dey, L.P. to successfully market the
EpiPen® auto-injector or an increase in competition could
have a material adverse effect on our results of
operations. |
Dey, L.P. markets our EpiPen® auto-injector through a
supply agreement with us that expires on December 31, 2015.
Under the terms of the agreement, we grant Dey the exclusive
right and license to market, distribute and sell EpiPen®
worldwide. We understand that a new competitive product received
FDA approval and may enter the market in the near future. The
new product, TwinJect® Auto-Injector (epinephrine)
injection, is not a therapeutically equivalent product but has
the same indications, same usage and the same route of delivery
as EpiPen®. Users of EpiPen® would have to obtain a
new prescription in order to substitute TwinJect®. The
supply agreement with Dey includes minimum purchase requirements
that are less than Deys purchases in recent years. A
failure by Dey to successfully market and distribute
EpiPen® or an increase in competition could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
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Our relationship with the U.S. Department of Defense and
other government entities is subject to risks associated with
doing business with the government. |
All U.S. government contracts provide that they may be
terminated for the convenience of the government as well as for
default. Our Meridian Medical Technologies segment has
pharmaceutical products that are presently sold primarily to the
U.S. Department of Defense, which we refer to as
DoD, under an Industrial Base Maintenance Contract,
which we refer to as IBMC. The current IBMC expires
in July 2006. Although we have reason to believe the DoD will
renew the IBMC based on our relationship over many years, we
cannot assure you that they will. In the event the DoD does not
renew the IBMC, our business, financial condition, results of
operations and cash flows could be materially adversely
affected. Additionally, the unexpected termination of one or
more of our significant government contracts could result in a
material adverse effect on our business, financial condition,
results of operations and cash flows. A surge capability
provision allows for the coverage of defense mobilization
requirements in the event of rapid military deployment. If this
surge capability provision becomes operative, we may be required
to devote more of our Meridian Medical Technologies segment
manufacturing capacity to the production of products for the
government which could result in less manufacturing capacity
being devoted to products in this segment with higher profit
margins.
Our supply contracts with the DoD are subject to post-award
audit and potential price determination. These audits may
include a review of our performance on the contract, our pricing
practices, our cost structure and our compliance with applicable
laws, regulations and standards. Any costs found to be
improperly allocated to a specific contract will not be
reimbursed, while costs already reimbursed must be refunded.
Therefore, a post-award audit or price redetermination could
result in an adjustment to our revenues. From time to time the
DoD makes claims for pricing adjustments with respect to
completed contracts. If a government audit uncovers improper or
illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines
and suspension or disqualification from doing business with the
government.
Other risks involved in government sales include the
unpredictability in funding for various government programs and
the risks associated with changes in procurement policies and
priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injectors to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A loss in government funding of these programs
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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If we fail to comply with our reporting and payment
obligations under the Medicaid rebate program or other
governmental pricing programs, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business. |
Medicaid reporting and payment obligations are highly complex
and in certain respects ambiguous. If we fail to comply with
these obligations, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business.
As discussed in this Risk Factors section under the
heading Investigations by the Securities and Exchange
Commission and Office of Inspector General at the Department of
Health and Human Services, other possible governmental
investigations, and securities and derivative litigation could
have a material adverse effect on our business, and
elsewhere in this report, we have determined that we underpaid
amounts due under Medicaid and other governmental pricing
programs during the period from 1998 to 2002. We have previously
accrued $130.4 million in respect of our estimated
underpayments to Medicaid and other government pricing programs
and estimated settlement costs with all relevant governmental
parties. Our ability to achieve a settlement on these or other
terms is subject to substantial uncertainties.
We implemented, in 2003, a new information technology system
that is intended to significantly enhance the accuracy of our
calculations for estimating amounts due under Medicaid and other
governmental pricing programs; however, our processes for these
calculations and the judgments involved in making these
calculations will continue to involve subjective decisions and
manual input, and, as a result, these calculations will remain
subject to the risk of errors.
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Our Co-Promotion Agreement for Altace® with Wyeth
could be terminated, could be assigned to another company by
Wyeth, or Wyeth could market a competing product. |
We have a Co-Promotion Agreement with Wyeth, pursuant to which
Wyeth has certain contractual rights regarding the allocation of
resources regarding the marketing of Altace®. Should Wyeth
exercise its rights to reduce the allocation of these resources
to the marketing of this product, sales of Altace® could be
materially adversely affected.
Our Co-Promotion Agreement for Altace® with Wyeth could,
under some circumstances, be terminated. Wyeth must give us six
months written notice of its intent to sell, market or
distribute any product competitive with Altace®. Once we
have been notified in writing of Wyeths intent to market,
sell or distribute a competing product, Wyeth has 90 days
to inform us as to whether it intends to divest its interest in
the competing product. If Wyeth elects not to divest the
competing product or fails to divest the product within one year
of providing notice to us of its plan to divest the competing
product, then both of us must attempt to establish acceptable
terms under which we would co-promote the competing product for
the remaining term of the Co-Promotion Agreement. Alternatively,
we and Wyeth could agree upon another commercial relationship.
If we and Wyeth are unable to establish acceptable terms, then
we have the option at our discretion to reacquire all the
marketing rights to Altace® and terminate the Co-Promotion
Agreement upon 180 days prior written notice to Wyeth. In
the event we decided to reacquire all the marketing rights to
Altace® we would be obligated to pay Wyeth an amount of
cash equal to twice the net sales of Altace® in the United
States for the 12-month period preceding the reacquisition.
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If we are unable to obtain approval of new HFA propellants
for Intal® and Tilade®, our sales of these products
could be adversely affected. |
Under government regulations, chlorofluorocarbon compounds are
being phased out because of environmental concerns. Our products
Intal® and Tilade® currently use these compounds as
propellants. The FDA has issued an approvable letter with
respect to the new drug application, or NDA covering
a new inhaler for Intal® using the alternative propellant
HFA. The approvable letter provides that final approval of the
NDA for Intal® HFA is subject to addressing certain FDA
comments solely pertaining to the chemistry, manufacturing, and
controls section of the NDA covering the product. In the event
we cannot also obtain final approval for alternative propellants
for Intal® and Tilade® before the final phase-out date
for use of chlorofluorocarbon compounds or if we are unable to
maintain an adequate supply of
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chlorofluorocarbon compounds for the production of these
products prior to this date, our ability to market these
products could be materially adversely affected, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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If the operations of our centralized distribution facility
were interrupted, our business could be harmed. |
For efficiency purposes, we rely on one centralized distribution
facility which is located in Bristol, Tennessee. An interruption
in operations at this facility could have a material adverse
effect on our business, financial conditions, results of
operations and cash flows.
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The loss of our key personnel or an inability to attract
new personnel could harm our business. |
We are highly dependent on the principal members of our
management staff, the loss of whose services might impede the
achievement of our strategic objectives. We cannot assure you
that we will be able to attract and retain key personnel in
sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support growth and integration.
The loss of the services of key personnel or the failure to
attract such personnel could have a material adverse effect on
us.
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Our shareholder rights plan, charter and bylaws discourage
unsolicited takeover proposals and could prevent shareholders
from realizing a premium on their common stock. |
We have a shareholder rights plan that may have the effect of
discouraging unsolicited takeover proposals. The rights issued
under the shareholder rights plan would cause substantial
dilution to a person or group which attempts to acquire us on
terms not approved in advance by our Board of Directors. In
addition, our charter and bylaws contain provisions that may
discourage unsolicited takeover proposals that shareholders may
consider to be in their best interests. These provisions include
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a classified Board of Directors; |
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the ability of our Board of Directors to designate the terms of
and issue new series of preferred stock; |
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advance notice requirements for nominations for election to our
Board of Directors; and |
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special voting requirements for the amendment of our charter and
bylaws. |
We are also subject to anti-takeover provisions under Tennessee
laws, each of which could delay or prevent a change of control.
Together these provisions and the rights plan may discourage
transactions that otherwise could involve payment of a premium
over prevailing market prices for common stock.
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Our stock price is volatile, which could result in
substantial losses for investors purchasing shares. |
The trading price of our common stock is likely to be volatile.
The stock market in general and the market for emerging
pharmaceutical companies, such as King in particular, have
experienced extreme volatility. Many factors contribute to this
volatility, including
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variations in our results of operations; |
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perceived risks and uncertainties concerning our business; |
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announcements of earnings; |
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developments in the governmental investigations or securities
litigation; |
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failure to meet or exceed our own projections for revenue,
product sales and earnings per share; |
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failure to meet timelines for product development or other
projections or forward-looking statements we may make to the
public; |
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failure to meet or exceed security analysts financial
projections for our company; |
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comments or recommendations made by securities analysts; |
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general market conditions; |
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perceptions about market conditions in the pharmaceutical
industry; |
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announcements of technological innovations or the results of
clinical trials or studies; |
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changes in marketing, product pricing and sales strategies or
development of new products by us or our competitors; |
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changes in domestic or foreign governmental regulations or
regulatory approval processes; and |
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announcements concerning regulatory compliance and government
agency reviews. |
This volatility may have a significant impact on the market
price of our common stock. Moreover, the possibility exists that
the stock market in general, and in particular the securities of
emerging pharmaceutical companies such as King, could experience
extreme price and volume fluctuations unrelated to operating
performance. The volatility of our common stock imposes a
greater risk of capital losses on our shareholders than would a
less volatile stock. In addition, such volatility makes it
difficult to ascribe a stable valuation to a shareholders
holdings of our common stock.
Risks Related to Our Industry
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Failure to comply with laws and government regulations
could affect our ability to operate our business. |
Virtually all aspects of our activities are regulated by federal
and state statutes and government agencies. The manufacturing,
processing, formulation, packaging, labeling, distribution and
advertising of our products, and disposal of waste products
arising from these activities, are subject to regulation by one
or more federal agencies, including the FDA, the Drug
Enforcement Agency, which we refer to as the DEA,
the Federal Trade Commission, the Consumer Product Safety
Commission, the U.S. Department of Agriculture, the
Occupational Safety and Health Administration, and the
Environmental Protection Agency, which we refer to as the
EPA, as well as by foreign governments in countries
where we distribute some of our products.
Noncompliance with applicable FDA policies or requirements could
subject us to enforcement actions, such as suspensions of
manufacturing or distribution, seizure of products, product
recalls, fines, criminal penalties, injunctions, failure to
approve pending drug product applications or withdrawal of
product marketing approvals. Similar civil or criminal penalties
could be imposed by other government agencies, such as the DEA,
the EPA or various agencies of the states and localities in
which our products are manufactured, sold or distributed, and
could have ramifications for our contracts with government
agencies such as the Department of Veterans Affairs or the
Department of Defense. These enforcement actions could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
All manufacturers of human pharmaceutical products are subject
to regulation by the FDA under the authority of the Food, Drug
and Cosmetics Act, which we refer to as the FDC Act,
or the Public Health Service Act, which we refer to as the
PHS Act, or both. New drugs, as defined in the FDC
Act, and new human biological drugs, as defined in the PHS Act,
must be the subject of an FDA-approved new drug or biologic
license application before they may be marketed in the United
States. Some prescription and other drugs are not the subject of
an approved marketing application but, rather, are marketed
subject to the FDAs regulatory discretion and/or
enforcement policies. Any change in the FDAs enforcement
discretion and/or policies could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
We manufacture some pharmaceutical products containing
controlled substances and, therefore, are also subject to
statutes and regulations enforced by the DEA and similar state
agencies which impose security, record keeping, reporting and
personnel requirements on us. Additionally, we manufacture
biological drug products for human use and are subject to
regulatory obligations as a result of these aspects
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of our business. There are additional FDA and other regulatory
policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting
adverse events associated with our products with which we must
continuously comply. Noncompliance with any of these policies or
requirements could result in enforcement actions which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
The FDA has the authority and discretion to withdraw existing
marketing approvals and to review the regulatory status of
marketed products at any time. For example, the FDA may require
an approved marketing application for any drug product marketed
if new information reveals questions about a drugs safety
or efficacy. All drugs must be manufactured in conformity with
current Good Manufacturing Practices, which we refer to as
cGMPs, and drug products subject to an approved
application must be manufactured, processed, packaged, held and
labeled in accordance with information contained in the approved
application.
While we believe that all of our currently marketed
pharmaceutical products comply with FDA enforcement policies,
have approval pending or have received the requisite agency
approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can
ensure that noncomplying drugs are no longer marketed and that
advertising and marketing materials and campaigns are in
compliance with FDA regulations. In addition, modifications,
enhancements, or changes in manufacturing sites of approved
products are in many circumstances subject to additional FDA
approvals which may or may not be received and which may be
subject to a lengthy FDA review process. Our manufacturing
facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies.
Manufacturing operations could be interrupted or halted in any
of those facilities if a government or regulatory authority is
unsatisfied with the results of an inspection. Any interruptions
of this type could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
We cannot determine what effect changes in regulations,
enforcement positions, statutes or legal interpretations, when
and if promulgated, adopted or enacted, may have on our business
in the future. These changes could, among other things, require
modifications to our manufacturing methods or facilities,
expanded or different labeling, new approvals, the recall,
replacement or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of
certain products and scientific substantiation. These changes,
or new legislation, could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
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An increase in product liability claims or product recalls
could harm our business. |
We face an inherent business risk of exposure to product
liability claims in the event that the use of our technologies
or products is alleged to have resulted in adverse effects.
These risks exist for products in clinical development and with
respect to products that have received regulatory approval for
commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able
to avoid significant product liability exposure. We currently
have product liability insurance in the amount of
$80.0 million for aggregate annual claims including a
$20.0 million self-insured retention; however, we cannot
assure you that the level or breadth of any insurance coverage
will be sufficient to cover fully all potential claims. Also,
adequate insurance coverage might not be available in the future
at acceptable costs, if at all. For example, we are now not able
to obtain product liability insurance with respect to our
products Menest®, Delestrogen® and Pitocin®, each
a womens healthcare product. With respect to any product
liability claims relating to these products, we could be
responsible for any monetary damages awarded by any court or any
voluntary monetary settlements. Significant judgments against us
for product liability for which we have no insurance could have
a material adverse effect on our business, financial condition,
results of operations and cash flows.
Product recalls or product field alerts may be issued at our
discretion or at the discretion of the FDA, other government
agencies or other companies having regulatory authority for
pharmaceutical product sales. From time to time, we may recall
products for various reasons, including failure of our products
to
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maintain their stability through their expiration dates. Any
recall or product field alert has the potential of damaging the
reputation of the product. To date, these recalls have not been
significant and have not had a material adverse effect on our
business, financial condition, results of operations and cash
flows. However, we cannot assure you that the number and
significance of recalls will not increase in the future. Any
significant recalls could materially affect our sales, the
prescription trends for the products and damage the reputation
of the products. In these cases, our business, financial
condition, results of operations and cash flows could be
materially adversely affected.
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Any reduction in reimbursement levels by managed care
organizations or other third-party payors may have an adverse
effect on our revenues. |
Commercial success in producing, marketing and selling branded
prescription pharmaceutical products depends, in part, on the
availability of adequate reimbursement from third-party health
care payors, such as the government, private health insurers and
managed care organizations. Third-party payors are increasingly
challenging whether to reimburse certain pharmaceutical products
and medical services. For example, many managed health care
organizations limit reimbursement of pharmaceutical products.
These limits may take the form of formularies with differential
co-pay tiers. The resulting competition among pharmaceutical
companies to maximize their product reimbursement has generally
reduced growth in average selling prices across the industry. We
cannot assure you that our products will be appropriately
reimbursed or included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry
generally will not negatively impact our operations.
The commercial success of some of our products is dependent, in
part, on whether third-party reimbursement is available for the
use of our products by hospitals, clinics, doctors, pharmacies
and patients. Third-party payors include state and federal
governments, under programs such as Medicaid and other
entitlement programs, as well as managed care organizations,
private insurance plans and health maintenance organizations.
Because of the growing size of the patient population covered by
third party reimbursement, it is important to our business that
we market our products to reimbursers that serve many of these
organizations. Payment or reimbursement of only a portion of the
cost of our prescription products could make our products less
attractive, from a net-cost perspective, to patients, suppliers,
retail pharmacies and prescribing physicians. Managed care
organizations and other third-party payors try to negotiate the
pricing of products to control their costs. Managed care
organizations and pharmacy benefit managers typically develop
reimbursement coverage strategies, including formularies, to
reduce their cost for medications. Formularies can be based on
the prices and/or therapeutic benefits of the available
products. Due to their lower costs, generics receive more
favorable reimbursement. The breadth of the products reimbursed
varies considerably from one managed care organization to
another, and many formularies include alternative and
competitive products or therapies for treatment of particular
medical conditions. Denial of a product from reimbursement can
lead to its sharply reduced usage in the managed care
organization patient population. If our products are not
included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies
increasingly favor generic products, our market share and gross
margins could be negatively affected, as could our overall
business and financial condition.
We have addressed our contract relationship with managed care
organizations in an effort to increase the attractiveness of
reimbursements for our products. We take reserves for the
estimated amounts of rebates we will pay to managed care
organizations each quarter. Any increased usage of our products
through Medicaid or managed care programs will increase the
amount of rebates that we owe. We cannot assure you that our
products will be included on the formulary lists of managed care
organizations or that adverse reimbursement issues will not have
a material effect on our business, financial condition, results
of operations or cash flows.
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If we fail to comply with the safe harbors provided under
various federal and state laws, our business could be adversely
affected. |
We are subject to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback
laws and false claims laws. Anti-kickback laws make it illegal
for a prescription
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drug manufacturer to solicit, offer, receive, or pay any
remuneration in exchange for, or to include, the referral of
business, including the purchase or prescription of a particular
drug. The federal government has published regulations that
identify safe harbors or exemptions for certain
payment arrangements that do not violate the anti-kickback
statutes. We seek to comply with these safe harbors. Due to the
breadth of the statutory provisions and the absence of guidance
in the form of regulations or court decisions addressing some of
our practices, it is possible that our practices might be
challenged under anti-kickback or similar laws. False claims
laws prohibit anyone from knowingly (in the civil context), or
knowingly and willfully (in the criminal context), presenting,
or causing to be presented for payment to third-party payors
(including Medicaid and Medicare) claims for reimbursed drugs or
services that are false or fraudulent, claims for items or
services not provided as claimed, or claims for medically
unnecessary items or services. Our activities relating to the
sale and marketing of our products are currently a subject of
investigation by the Office of Inspector Generals, and as
such they are likely to be subject to scrutiny under these laws.
As discussed in this Risk Factors section under the
heading The investigations by the Securities and Exchange
Commission and Office of Inspector General of the Department of
Health and Human Services, other possible governmental
investigations, and securities, derivative, and ERISA litigation
could have a material adverse effect on our business and
elsewhere in this report, we are in the process of quantifying
and reporting to governmental agencies our underpayment of
amounts due under Medicaid and other governmental pricing
programs.
Violations of fraud and abuse laws may be punishable by civil
and/or criminal sanctions, including fines and civil monetary
penalties, as well as the possibility of exclusion from federal
health care programs, including Medicaid and Medicare. Any such
violations could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
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In the future, the publication of negative results of
studies or clinical trials may adversely impact our
products. |
From time to time studies or clinical trials on various aspects
of pharmaceutical products are conducted by academics or others,
including government agencies, the results of which, when
published, may have dramatic effects on the markets for the
pharmaceutical products that are the subject of the study. The
publication of negative results of studies or clinical trials
related to our products or the therapeutic areas in which our
products compete could adversely affect our sales, the
prescription trends for our products and the reputation of our
products. In the event of the publication of negative results of
studies or clinical trials related to our branded pharmaceutical
products or the therapeutic areas in which our products compete,
our business, financial condition, results of operations and
cash flows could be materially adversely affected. Additionally,
potential write-offs of the intangible assets associated with
the affected products could materially adversely affect our
results of operations.
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New legislation or regulatory proposals may adversely
affect our revenues. |
A number of legislative and regulatory proposals aimed at
changing the health care system, including the cost of
prescription products, importation and reimportation of
prescription products from countries outside the United States
and changes in the levels at which pharmaceutical companies are
reimbursed for sales of their products, have been proposed.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, these proposals, as well as the adoption of any
proposal, may exacerbate industry-wide pricing pressures and
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. For example, in
2000, Congress directed the FDA to adopt regulations allowing
the reimportation of approved drugs originally manufactured in
the United States back into the United States from other
countries where the drugs were sold at a lower price. Although
the Secretary of Health and Human Services has refused to
implement this directive, in July 2003 the House of
Representatives passed a similar bill that does not require the
Secretary of Health and Human Services to act. The reimportation
bills have not yet resulted in any new laws or regulations;
however, these and other initiatives could decrease the price we
receive for our products. Additionally, sales of our products in
the United States could be adversely affected by the
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importation of products that some may deem to be equivalent to
ours that are manufactured by others and are available outside
the United States. Many States have implemented or are in the
process of implementing regulations requiring pharmaceutical
companies to provide them with certain marketing and pricing
information. While we intend to comply with these regulations,
we are unable at this time to predict or estimate the effect of
these regulations, if any.
Changes in the Medicare, Medicaid or other governmental programs
or the amounts paid by those programs for our services may
adversely affect our earnings. These programs are highly
regulated and subject to frequent and substantial changes and
cost containment measures. In recent years, changes in these
programs have limited and reduced reimbursement to providers.
The Medicare Prescription Drug, Improvement and Modernization
Act of 2003, creates a voluntary prescription drug benefit
under the Social Security Act, which we refer to as
Medicare Drug Benefit. Beginning in 2006, Medicare
beneficiaries entitled to Part A or enrolled in
Part B, as well as certain other Medicare enrollees, will
be eligible for the Medicare Drug Benefit. Regulations
implementing the Medicare Drug Benefit were published
January 28, 2005. The Medicare Drug Act requires that the
Federal Trade Commission conduct a study and make
recommendations regarding additional legislation that may be
needed concerning the Medicare Drug Benefit. We are unable at
this time to predict or estimate the financial effect of this
new legislation.
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The pharmaceutical industry is highly competitive, and
other companies in our industry have much greater resources than
we do. |
In our industry, comparatively smaller pharmaceutical companies
like us compete with large, global pharmaceutical companies with
substantially greater financial resources for the acquisition of
products in development, currently marketed products,
technologies and companies. We cannot assure you that
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we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies; |
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additional competitors will not enter the market; or |
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competition for acquisition of products in development,
currently marketed products, companies and technologies will not
have a material adverse effect on our business, financial
condition and results of operations. |
We also compete with pharmaceutical companies in marketing and
selling pharmaceutical products. The selling prices of
pharmaceutical products typically decline as competition
increases. Further, other products now in use, developed or
acquired by other pharmaceutical companies may be more effective
or offered at lower prices than our current or future products.
Competitors may also be able to complete the regulatory process
sooner and, therefore, may begin to market their products in
advance of ours. We believe that competition for sales of our
products is will continue to be based primarily on product
efficacy, safety, reliability, availability and price.
Competition for Acquisitions. We compete with other
pharmaceutical companies for product and product line
acquisitions. These competitors include Biovail Corporation,
Forest Laboratories, Inc., Galen Holdings plc, Medicis
Pharmaceutical Corporation, Shire Pharmaceuticals Group plc,
Watson Pharmaceuticals, Inc., and other companies which also
acquire branded pharmaceutical products and product lines,
including those in development, from other pharmaceutical
companies. We cannot assure you that
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we will be able to continue to acquire or license commercially
attractive pharmaceutical products, companies or technologies; |
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additional competitors will not enter the market; or |
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competition for acquisition of products in development,
currently marketed products, companies and technologies will not
have a material adverse effect on our business, financial
condition and results of operations. |
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Product Competition. Additionally, since our currently
marketed products are generally established and commonly sold,
they are subject to competition from products with similar
qualities.
Our largest product Altace® competes in a very competitive
and highly genericized market with other cardiovascular
therapies.
Our product Skelaxin® competes in a highly genericized
market with other muscle relaxants.
Our product Sonata® competes with other insomnia treatments
in a highly competitive market. Additionally, other potential
competitive insomnia products could enter the market within the
next year.
Our product Levoxyl® competes in a competitive and highly
genericized market with other levothyroxine sodium products.
We intend to market these products aggressively by, among other
things:
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detailing and sampling to the primary prescribing physician
groups, and |
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sponsoring physician symposiums, including continuing medical
education seminars. |
Many of our branded pharmaceutical products have either a strong
market niche or competitive position. Some of our branded
pharmaceutical products face competition from generic
substitutes.
The manufacturers of generic products typically do not bear the
related research and development costs and, consequently, are
able to offer such products at considerably lower prices than
the branded equivalents. We cannot assure you that any of our
products will remain exclusive without generic competition, or
maintain their market share, gross margins and cash flows as a
result of these efforts, the failure of which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
A Warning About Forward-Looking Statements
This report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information which
are based on forecasts of future results and estimates of
amounts that are not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of
terms and phrases, such as anticipate,
believe, could, estimate,
expect, intend, may,
plan, predict, project,
will and other similar terms and phrases, including
references to assumptions. These statements are contained in the
Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections, as well as
other sections of this report.
Forward-looking statements in this report include, but are not
limited to:
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the future potential of, including anticipated net sales and
prescription trends for our branded pharmaceutical products,
particularly Altace®, Skelaxin®, Thrombin-JMI®,
Sonata® and Levoxyl®; |
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expectations regarding the enforceability and effectiveness of
product-related patents, including in particular patents related
to Altace®, Skelaxin®, Sonata® and
Adenoscan®; |
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expected trends and projections with respect to particular
products, reportable segment and income and expense line items; |
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the adequacy of our liquidity and capital resources; |
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anticipated capital expenditures; |
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the development and approval of binodenoson, our next generation
cardiac pharmacologic stress-imaging agent; PT-141, an
investigational new drug for the treatment of erectile
dysfunction and female sexual dysfunction; T-62, an
investigational drug for the treatment of neuropathic pain; |
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MRE0094, an investigational drug for the topical treatment of
chronic diabetic foot ulcers; pre-clinical programs; and product
life-cycle development projects; |
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the development and approval of a diazepam-filled auto-injector,
new inhaler for Intal® and Tilade® using the
alternative propellant HFA, and an Altace®/diuretic
combination product; |
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our successful execution of our growth strategies; |
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anticipated developments and expansions of our business; |
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our plans for the manufacture of some of our products, including
but not limited to, the anticipated expansion of our
manufacturing capacity for Thrombin-JMI®; |
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anticipated increases in sales of acquired products or royalty
revenues; |
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the success of our Co-Promotion Agreement with Wyeth; |
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the high cost and uncertainty of research, clinical trials and
other development activities involving pharmaceutical products; |
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the development of product line extensions; |
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the unpredictability of the duration or future findings and
determinations of the FDA, including the pending applications
related to our diazepam-filled auto-injector and a new
Intal® inhaler formulation utilizing HFA, and other
regulatory agencies worldwide; |
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the products which we expect to offer; |
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the intent, belief or current expectations, primarily with
respect to our future operating performance; |
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expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates; |
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expectations regarding the outcome of various pending legal
proceedings including the Altace® and Skelaxin® patent
challenges, the SEC and Office of Inspector General
investigations, other possible governmental investigations,
securities litigation, and other legal proceedings described in
this report; and |
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expectations regarding our financial condition and liquidity as
well as future cash flows and earnings. |
These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to be materially different from those contemplated by
our forward-looking statements. These known and unknown risks,
uncertainties and other factors are described in detail in the
Risk Factors section and in other sections of this
report.
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Item 3. |
Quantitative and Qualitative Disclosures about Market
Risk |
Certain of our financial instruments are subject to market
risks, including interest rate risk. Our financial instruments
are not currently subject to foreign currency risk or commodity
price risk. We have no financial instruments held for trading
purposes.
As of June 30, 2005, there were no significant changes in
our qualitative or quantitative market risk since the end of our
fiscal year ended December 31, 2004.
We have marketable securities which are carried at fair value
based on current market quotes. Gains and losses on securities
are based on the specific identification method.
The fair market value of long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value
of fixed interest rate debt will increase as interest rates rise
and decrease as interest rates fall. In addition, the fair value
of our convertible debentures is impacted by our stock price.
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Item 4. |
Controls and Procedures |
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Internal Control Over Financial Reporting |
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. All internal control systems have
inherent limitations. Therefore, internal control over financial
reporting, no matter how well-designed, may not prevent or
detect misstatements. Also, controls may become inadequate in
future periods because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate.
As required by the Sarbanes-Oxley Act of 2002 and the rules
issued thereunder, management previously conducted an evaluation
of the effectiveness of our internal control over financial
reporting as of December 31, 2004, based on the framework
and criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. That previous
evaluation concluded that, as of December 31, 2004, we did
not maintain effective internal control over the period-end
financial reporting process because we did not have a sufficient
number of finance and accounting resources performing
supervisory review and monitoring activities as a result of the
loss of certain finance personnel, the challenges of hiring new
personnel while a merger was pending and the resource
requirements to address the previous restatement of our
financial statements.
Although this deficiency resulted in certain errors during 2004
that were not detected by the period-end monitoring activities,
it did not result in any audit adjustments or material
misstatements of our financial statements as of year-end.
However, the significance of a deficiency in internal control
over financial reporting depends on the potential for a
misstatement, not on whether a misstatement actually occurred. A
material weakness is defined as a significant deficiency or
combination of significant deficiencies, that results in
more than a remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected. Considering the above, management
concluded that as of December 31, 2004 the finance and
accounting resource constraints constituted a material weakness
in supervisory review and monitoring activities in connection
with the period-end financial reporting process. Because of this
material weakness, management concluded that our internal
control over financial reporting was not effective as of
December 31, 2004.
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Remediation of Material Weakness |
We have increased and are continuing to increase the number of
finance and accounting resources performing supervisory review
and monitoring activities related to the period-end financial
reporting process by actively recruiting additional managerial
level finance and accounting resources. While we are still in
the process of remediating the material weakness, this material
weakness did not result in any adjustments or material
misstatements of our financial statements as of March 31,
2005 or June 30, 2005.
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Changes in Internal Control Over Financial Reporting |
Except as discussed above, there have been no changes in our
internal control over financial reporting that occurred during
the quarter ended June 30, 2005, that have materially
affected, or are reasonably likely to affect, our internal
control over financial reporting.
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Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act of
1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required financial disclosure.
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Management, with the participation of the Chief Executive
Officer and Chief Financial Officer, carried out an evaluation,
as required by Rule 13a-15(b) under the Exchange Act of the
effectiveness of the design and operation of the disclosure
controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of June 30, 2005.
In making this evaluation, management considered the material
weakness discussed above, together with the remedial steps we
have taken.
Based on this evaluation by management, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of
June 30, 2005, due to the material weakness discussed
above, our disclosure controls and procedures were not effective
at the reasonable assurance level. It should be noted that
disclosure controls and procedures cannot provide absolute
assurance of achieving the objectives of disclosure controls and
procedures.
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PART II OTHER INFORMATION
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Item 1. |
Legal Proceedings |
The information required by this Item is incorporated by
reference to Note 9 to the condensed consolidated financial
statements included elsewhere in this report.
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Item 4. |
Submission of Matters to a Vote of Security Holders |
At the annual meeting of shareholders on May 31, 2005, the
shareholders voted on the following proposals with the results
as indicated:
1. Elected five directors to serve as follows:
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For | |
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Withhold Authority | |
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Class III: (terms expiring 2007)
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Gregory D. Jordan, Ph.D.
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210,462,821 |
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8,841,721 |
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Brian A. Markison
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215,468,119 |
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3,836,423 |
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Class I: (terms expiring 2008)
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R. Charles Moyer, Ph.D.
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210,515,123 |
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8,789,419 |
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D. Gregory Rooker
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209,679,574 |
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9,624,968 |
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Ted G. Wood
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210,796,552 |
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8,507,990 |
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Directors continuing in service include: Earnest W. Deavenport,
Jr., Elizabeth M. Greetham and Philip M. Pfeffer. |
2. Ratified and approved the King Pharmaceuticals, Inc.
Incentive Plan as follows:
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For
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144,920,198 |
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Against
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28,875,955 |
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Abstention
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1,409,855 |
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Item 5. |
Other Information |
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Approval of 2005 Executive Management Incentive Award |
On March 15, 2005, the Compensation and Human Resources
Committee (the Committee) of the Companys
Board of Directors (the Board), approved the King
Pharmaceuticals, Inc. 2005 Executive Management Incentive Award
(the EMIA). The EMIA established annual bonus awards
that may be earned by the Companys executive officers for
fiscal year 2005.
The establishment of the 2005 EMIA involved setting threshold,
target and stretch goals, along with related award percentages,
for each executive. These goals and award percentages are to be
used to determine the amount of each executives award, if
any. The 2005 award payments will be paid based on the
achievement of predetermined revenue targets and earnings per
share ratios, in addition to approximately four individual
operational objectives. The award percentage to be determined
for each financial objective is based on the respective
executives ability to impact the accomplishment of that
objective. The award percentage of each operational objective is
based on the importance of that objective to the Companys
overall success. The actual award payments will depend upon
whether and the extent to which the specific objectives are
achieved.
Also on March 15, 2005, the Committee approved the
individual operational objectives applicable to the Chief
Executive Officer and the Companys other executive
officers. These objectives are generally individually tailored
to the particular executive officers business unit,
division or functional area. The
72
foregoing description is a summary only. Interested persons
should refer to the actual EMIA attached hereto as
Exhibit 10.4 and incorporated herein by reference.
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Approval of Incentive Plan |
On May 31, 2005, at the Companys annual meeting of
shareholders, the Companys shareholders approved the King
Pharmaceuticals, Inc. Incentive Plan (the Incentive
Plan). The Incentive Plan provides for the issuance to
employees and directors of the Company of up to 30,000,000
shares of the Companys common stock through the grant of
stock options, stock appreciation rights, restricted stock,
restricted stock units, dividend equivalents and equity-based
performance awards, as well as cash. The purpose of the
Incentive Plan is to foster and promote the long-term financial
success of the Company and materially increase shareholder value.
The Company previously adopted the 1997 Incentive and
Nonqualified Stock Option Plan for Employees of King
Pharmaceuticals, Inc. (the Stock Option Plan) and
the 1998 Non-Employee Director Stock Option Plan (the
Non-Employee Director Plan), which were intended to
provide similar equity-based compensation incentives through the
grant of stock options. Effective upon the adoption of the
Incentive Plan by the Companys shareholders on
May 31, 2005, the Stock Option Plan and the Non-Employee
Director Plan terminated. All outstanding grants under either
the Stock Option Plan or the Non-Employee Director Plan have
continued in full force and effect, subject to their original
terms. A copy of the Incentive Plan is attached as
Appendix B to the Companys Definitive Proxy Statement
filed with the Securities and Exchange Commission on
April 28, 2005, and is incorporated herein by reference.
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Amendment of Non-Employee Director Compensation Policy |
On July 22, 2005, the Board amended the Compensation Policy
for Non-Employee Directors of King Pharmaceuticals, Inc., as
amended (the Policy), to include an annual
Non-Executive Chairman of the Board Retainer in the amount of
$150,000. The Policy, as amended and restated, is attached
hereto as Exhibit 10.6, and is incorporated herein by
reference.
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2005 Increases to Base Salaries |
On July 22, 2005, the Board, upon recommendation of the
Committee, approved increases to the 2005 annual base salaries
of Brian A. Markison, President and Chief Executive Officer,
Stephen J. Andrzejewski, Chief Commercial Officer, and Frederick
Brouillette, Jr., Corporate Compliance Officer, to $825,000,
$380,000 and $296,000, respectively.
Such salary increases are set forth in the Salary Amendments For
Certain Executive Officers chart attached hereto as
Exhibit 10.7, and incorporated herein by reference.
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Adoption of Executive Deferred Compensation Plan |
On July 20, 2005, the Committee approved the King
Pharmaceuticals, Inc. Executive Deferred Compensation Plan (the
Deferred Compensation Plan). The purpose of the
Deferred Compensation Plan is to provide certain key employees
of the Company and its wholly-owned subsidiaries with an
opportunity to voluntarily defer receipt of a portion of their
salary, bonus, and other specified cash compensation into a
variety of investment options beginning on September 1,
2005. The Deferred Compensation Plan is intended to be an
unfunded arrangement within the meaning of the Employee
Retirement Income Security Act of 1974, as amended. The
foregoing description is a summary only. A copy of the Deferred
Compensation Plan is attached hereto as Exhibit 10.8, and
is incorporated herein by reference.
73
(a) Exhibits
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10 |
.1 |
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Offer letter to Joseph Squicciarino dated May 25, 2005. |
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10 |
.2 |
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Offer letter to Eric J. Bruce dated May 19, 2005. |
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10 |
.3* |
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Retirement and Consulting Agreement, dated as of April 1,
2005, and Waiver, Release and Non-Solicitation, Noncompete and
Nondisclosure Agreement, dated as of May 12, 2005, by and
between King Pharmaceuticals, Inc. and James R. Lattanzi. |
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10 |
.4 |
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2005 Executive Management Incentive Award. |
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10 |
.5 |
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King Pharmaceuticals, Inc. Incentive Plan (incorporated by
reference to the definitive proxy statement, filed
April 28, 2005, related to the 2005 annual meeting of
shareholders). |
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10 |
.6 |
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Compensation Policy for Non-Employee Directors. |
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10 |
.7 |
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Salary Amendments For Certain Executive Officers. |
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10 |
.8 |
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King Pharmaceuticals, Inc. Executive Deferred Compensation Plan. |
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31 |
.1 |
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Certification of Brian A. Markison, President and Chief
Executive Officer of King Pharmaceuticals, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31 |
.2 |
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Certification of Joseph Squicciarino, Chief Financial Officer of
King Pharmaceuticals, Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32 |
.1 |
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Certification of Brian A. Markison, President and Chief
Executive Officer of King Pharmaceuticals, Inc., pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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32 |
.2 |
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Certification of Joseph Squicciarino, Chief Financial Officer of
King Pharmaceuticals, Inc., pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
Confidential treatment requested as to certain portions, which
portions have been filed separately with the Securities and
Exchange Commission. |
74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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KING PHARMACEUTICALS, INC. |
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By: |
/s/ Brian A. Markison
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Brian A. Markison |
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President and Chief Executive Officer |
Date: August 9, 2005
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By: |
/s/ Joseph Squicciarino
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Joseph Squicciarino |
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Chief Financial Officer |
Date: August 9, 2005
75