KING PHARMACEUTICALS, INC. - FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended December 31, 2005
OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-15875
King Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
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Tennessee |
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54-1684963 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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501 Fifth Street
Bristol, Tennessee
(Address of Principal Executive Offices) |
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37620
(Zip Code) |
Registrants telephone number, including area code:
(423) 989-8000
Securities registered under Section 12(b) of the Exchange
Act:
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(Title of each class) |
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(Name of each exchange on which registered) |
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Common Stock and Associated
Preferred Stock Purchase Rights |
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New York Stock Exchange |
Securities registered under Section 12(g) of the Exchange
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity as of June 30, 2005 was
$2,516,525,051 The number of shares of Common Stock, no par
value, outstanding at February 27, 2006 was 242,080,103.
Documents Incorporated by Reference:
Certain information required in Part III of this Annual
Report on Form 10-K is incorporated
by reference from the registrants Proxy Statement for
its 2006 annual meeting of shareholders.
TABLE OF CONTENTS
PART I
King Pharmaceuticals, Inc. was incorporated in the State of
Tennessee in 1993. Our wholly owned subsidiaries are Monarch
Pharmaceuticals, Inc.; King Pharmaceuticals Research and
Development, Inc.; Meridian Medical Technologies, Inc.;
Parkedale Pharmaceuticals, Inc.; King Pharmaceuticals of
Nevada, Inc.; and Monarch Pharmaceuticals Ireland Limited.
Our principal executive offices are located at 501 Fifth Street,
Bristol, Tennessee 37620. Our telephone number is
(423) 989-8000 and our facsimile number is
(423) 274-8677. Our website is www.kingpharm.com where you
may view our Corporate Code of Conduct and Ethics. To the extent
permitted by U.S. Securities and Exchange Commission
(SEC) and New York Stock Exchange (NYSE)
regulations, we intend to disclose information as to any
amendments to the Code and any waivers from provisions of the
Code for our principal executive officer, principal financial
officer, and certain other officers by posting the information
on our website. We make available through our website, free of
charge, our annual reports on
Form 10-K, our
quarterly reports on
Form 10-Q, our
current reports on
Form 8-K and any
amendments, as well as other documents, as soon as reasonably
practicable after their filing. These filings are also available
to the public over the Internet at the website of the SEC, at
http://www.sec.gov. You may also read and copy any document that
we file at the SECs Public Reference Room located at
450 Fifth Street, NW, Washington, DC 20549. Please call the
SEC at 1-800-SEC-0330
for further information on the Public Reference Room.
King is a vertically integrated pharmaceutical company that
develops, manufactures, markets and sells branded prescription
pharmaceutical products. By vertically integrated,
we mean that we have the following capabilities:
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sales and marketing, |
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research and development, |
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business development, |
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manufacturing, |
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packaging, |
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distribution, |
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quality control and assurance, and |
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regulatory management. |
Through a national sales force and through marketing alliances,
we market our branded pharmaceutical products to general/family
practitioners, internal medicine physicians, cardiologists,
endocrinologists, psychiatrists, neurologists, pain specialists,
sleep specialists, and hospitals across the United States and in
Puerto Rico.
Our corporate strategy is focused on three key therapeutic
areas: cardiovascular/metabolic, neuroscience, and
hospital/acute care products. We believe each of our key
therapeutic areas has significant market potential and our
organization is aligned accordingly.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
and through prudent product life-cycle management. By
product life-cycle management, we mean the extension
of the economic life of a product, including seeking and gaining
all necessary related governmental approvals, by such means as:
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securing U.S. Food and Drug Administration, which we refer
to as the FDA, approved new label indications; |
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developing and producing different strengths; |
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producing different package sizes; |
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developing new dosage forms; and |
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developing new product formulations. |
Our strategy also focuses on growth through the acquisition of
novel branded pharmaceutical products in later stages of
development and the acquisition of pharmaceutical technologies,
particularly those products and technologies that we believe
have significant market potential and complement our three key
therapeutic areas of focus. Using our internal resources and a
disciplined business development process, we strive to be a
leader and partner of choice in bringing innovative,
clinically-differentiated therapies and technologies to market
in our key therapeutic areas. We may also seek company
acquisitions that add products or products in development,
technologies or sales and marketing capabilities to our key
therapeutic areas or that otherwise complement our operations.
We also work to achieve organic growth by continuing to develop
investigational drugs.
Branded pharmaceutical products represent one of our business
segments. In accordance with our corporate strategy, our branded
pharmaceutical products can be divided primarily into the
following therapeutic areas:
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cardiovascular/metabolic; |
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neuroscience; |
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hospital/acute care; and |
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other. |
Our Meridian Medical Technologies segment consists of our
auto-injector business, which includes
EpiPen®.
In March 2006, we acquired the rights to market and sell
EpiPen®
throughout Canada until 2015. Royalties, another of our business
segments, are derived from products we previously successfully
developed and have licensed to third parties. Additionally, we
manufacture third-party pharmaceutical products under contracts
with a variety of pharmaceutical and biotechnology companies.
Accordingly, contract manufacturing represents a segment of our
business.
The following table summarizes net revenues by operating segment
(in thousands), almost all of which are derived from activities
within the United States and Puerto Rico.
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For the Years Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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Branded pharmaceuticals
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$ |
1,542,124 |
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$ |
1,076,517 |
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$ |
1,272,350 |
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Meridian Medical Technologies
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129,261 |
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123,329 |
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124,157 |
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Royalties
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78,128 |
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78,474 |
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68,365 |
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Contract manufacturing
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22,167 |
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26,045 |
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27,289 |
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Other
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1,201 |
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(1 |
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628 |
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Total
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$ |
1,772,881 |
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$ |
1,304,364 |
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$ |
1,492,789 |
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For information regarding profit and loss and total assets
associated with each segment, see Note 20 to the Notes to
Consolidated Financial Statements in this report.
Recent Milestones
On March 1, 2006, we acquired substantially all of the
assets of Allerex Laboratory LTD. The primary asset purchased
from Allerex was the exclusive right to market and sell
EpiPen®
throughout Canada. We further negotiated with Dey, L.P., an
extension of those exclusive rights to market and sell
EpiPen®
in Canada through 2015.
In February 2006, we entered into a collaboration with Arrow
International Limited and certain of its affiliates
(collectively, Arrow) to commercialize novel
formulations of ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted us
rights to certain current and
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future New Drug Applications (NDAs) regarding novel
formulations of ramipril and intellectual property, including
patent rights and technology licenses relating to these novel
formulations. Under certain conditions, Arrow will be
responsible for the manufacture and supply of new formulations
of ramipril for us. Additionally, we have granted Cobalt
Pharmaceuticals, Inc. a non-exclusive right to enter into the
U.S. ramipril market with a generic form of the currently
marketed
Altace®
product, which would be supplied by us. Cobalt is an affiliate
of Arrow, but is not a party to the collaboration.
Pursuant to the agreements, we made an upfront payment to Arrow
of $35.0 million. Arrow will also receive payments from us
of $50.0 million based on the timing of certain events and
could receive an additional $25.0 million based on the
occurrence of certain conditions. Additionally, Arrow will earn
fees for the manufacture and supply of new formulations of
ramipril.
On December 6, 2005, we entered into a cross-license
agreement with Mutual Pharmaceutical Company, Inc. Under the
terms of the agreement, each party granted the other a license
to certain intellectual property relating to metaxalone.
Pursuant to the agreement, we paid Mutual $35.0 million and
will pay royalties on net sales of metaxalone products. Our
current formulation of metaxalone is
Skelaxin®.
The royalty rate may increase depending on the achievement of
certain regulatory and commercial milestones.
On November 9, 2005, we entered into a collaborative
agreement with Pain Therapeutics, Inc. to develop and
commercialize Pain Therapeutics drug candidate
Remoxy and other abuse-resistant opioid painkillers.
Remoxy, which is an abuse-resistant version of long-acting
oxycodone, is an investigational drug in late-stage clinical
development for the treatment of severe to chronic pain. We have
worldwide exclusive rights to commercialize Remoxy and the
other abuse-resistant opioid drugs that are developed pursuant
to the collaboration, other than in Australia and New Zealand.
Under the terms of the agreement, we made an upfront cash
payment of $150.0 million to Pain Therapeutics. We may also
make additional cash milestone payments of up to
$150.0 million based on the successful clinical and
regulatory development of Remoxy and other abuse-resistant
opioid products. This amount includes a $15.0 million cash
payment upon acceptance of a regulatory filing for Remoxy
and an additional $15.0 million upon its approval. In
addition, we will pay all research and development expenses
relating to the collaboration up to a maximum of
$100.0 million. We will record net sales of all products
subject to the collaboration and pay Pain Therapeutics a royalty
of 15% of the cumulative net sales up to $1.0 billion and
20% of the cumulative net sales over $1.0 billion. We are
also responsible for the payment of third-party royalty
obligations of Pain Therapeutics related to products developed
under this collaboration.
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 compound, which is also known as
bremelanotide, for the treatment of male and female sexual
dysfunction. Pursuant to the terms of the agreement, Palatin has
granted us a co-exclusive license with Palatin to PT-141 in
North America and an exclusive right to collaborate in the
licensing or sublicensing of PT-141 with Palatin outside North
America. PT-141 is the first compound in a new drug class called
melanocortin receptor agonists under development to treat sexual
dysfunction. This new chemical entity is being evaluated in
Phase II clinical trials studying the efficacy and safety
profile of varying doses of this novel compound in men
experiencing erectile dysfunction (ED) and women
experiencing female sexual dysfunction (FSD). We
paid Palatin approximately $20.0 million on entering into
the collaborative agreement, which included a $3.4 million
equity investment in Palatin. During the third quarter of 2005,
we made an additional equity investment of $10.0 million in
Palatin under the terms of the collaborative agreement. This
investment reduced the equity portion of the milestone payments
due Palatin upon completion of Phase II clinical trials by the
same amount. In addition to the initial purchase price and the
investment during 2005, we may also pay potential milestone
payments to Palatin of up to $90.0 million for achieving
certain ED and FSD development and regulatory approval targets.
A portion of these milestone payments will consist of additional
equity investments in Palatin. After regulatory approval and
commercialization of PT-141, we may also pay potential milestone
payments to Palatin of up to $130.0 million upon achieving
specified annual North American net sales thresholds. We
will share all
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collaboration, development and marketing costs associated with
and net profits derived from
PT-141 based upon an
agreed percentage.
On June 12, 2003, we acquired the primary care business of
Elan Corporation, plc, and that of some of its subsidiaries, in
the United States and Puerto Rico, including the rights to
Sonata®
and
Skelaxin®,
and Elans United States primary care field sales force.
Product rights subject to the agreement include those related to
Sonata®,
a nonbenzodiazepine treatment for insomnia, and
Skelaxin®,
a muscle relaxant, in the United States, its territories and
possessions, and Puerto Rico. Under the terms of the agreement,
Elans sale of
Skelaxin®
included related NDAs, copyrights, trademarks, patents and
rights pertaining to potential new formulations of
Skelaxin®.
Elans sale of
Sonata®
included its rights to the product, as well as certain related
copyrights. We also acquired certain intellectual property,
regulatory, and other assets relating to
Sonata®
directly from Wyeth. The total purchase price of
$814.4 million included the cost of acquisition, assumed
liabilities and a portion of contingent liabilities. The
purchase price also included the transfer of inventory with a
value of approximately $40.4 million. In addition to the
initial purchase price, we paid $25.0 million during
January 2004, as a milestone payment to Elan relating to the
ongoing exclusivity of
Skelaxin®.
We also pay Wyeth royalties on the current formulation of
Skelaxin®
from the date of closing.
On January 8, 2003, we acquired Meridian Medical
Technologies, Inc. for $253.9 million in cash paid to
Meridians shareholders in exchange for their shares of
Meridian common stock. Meridian pioneered the development, and
is the leading manufacturer, of auto-injectors for the
self-administration of injectable drugs. An auto-injector is a
pre-filled, pen-like device that allows a patient or caregiver
to automatically inject a precise drug dosage quickly, easily,
safely and reliably. Meridians commercial pharmaceutical
products primarily include
EpiPen®,
an auto-injector filled with epinephrine for the emergency
treatment of anaphylaxis resulting from severe or allergic
reactions to insect stings or bites, foods, drugs and other
allergens, as well as idiopathic or exercise-induced
anaphylaxis. Meridian manufactures
EpiPen®
under a supply agreement with Dey L.P., which markets the
product. Other Meridian pharmaceutical products include:
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AtroPen®
and
ComboPen®,
nerve agent antidotes; |
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the Antidote Treatment Nerve Agent Auto-injector, a nerve gas
antidote utilizing Meridians patented dual chambered
auto-injector and injection process; and |
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auto-injectors filled with diazepam for treatment of seizures
and morphine for pain management that are primarily sold to the
U.S. Department of Defense (DoD) under an
Industrial Base Maintenance Contract. |
Meridian also markets nerve agent antidotes to allied foreign
governments. These products are used by these foreign allies
primarily for military defense purposes, and occasionally for
homeland security.
Industry
The pharmaceuticals industry is a highly competitive global
business composed of a variety of participants, including large
and small branded pharmaceutical companies, specialty and
niche-market pharmaceutical companies, biotechnology firms,
large and small research and drug development organizations, and
generic drug manufacturers. These participants compete on a
number of factors, including technological innovation or
novelty, clinical efficacy, safety, convenience or ease of
administration and cost-effectiveness. In order to promote their
products to physicians and consumers, industry participants
devote considerable resources to advertising, marketing and
sales force personnel, distribution mechanisms and relationships
with medical and research centers, physicians and patient
advocacy and support groups.
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The industry is affected by the following factors, among others:
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the aging of the patient population, including diseases specific
to the aging process and demographic factors, including obesity,
diabetes, cardiovascular disease, and patient and physician
demand for products that meet chronic or unmet medical needs; |
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technological innovation, both in drug discovery and corporate
processes; |
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merger and acquisition activity whereby pharmaceutical companies
are acquiring one another or smaller biotechnology companies and
divestitures of products deemed non-strategic; |
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cost containment and downward price pressure from managed care
organizations and governmental entities, both in the United
States and overseas; |
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increased drug development, manufacturing and compliance costs
for pharmaceutical producers; |
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the rise of generic companies and challenges to patent
protection and exclusivity; |
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more frequent product liability litigation; |
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increased governmental scrutiny of the healthcare sector,
including issues of patient safety, cost, efficacy and
reimbursement/insurance matters; and |
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the cost of advertising and marketing, including
direct-to-consumer
advertising on television and in print. |
Branded Pharmaceuticals
We market a variety of branded prescription products that
primarily can be divided into the following therapeutic areas:
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cardiovascular/ metabolic (including
Altace®,
Corgard®,
Levoxyl®
and
Cytomel®), |
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neuroscience (including
Sonata®
and
Skelaxin®), |
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hospital/ acute care (including
Thrombin-JMI®,
Bicillin®,
Synercid®
and
Intal®), and |
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other. |
Our branded pharmaceutical products are generally in high-volume
therapeutic categories and we believe they are well known for
their indications (for example,
Altace®,
Skelaxin®,
Sonata®
and
Levoxyl®).
Branded pharmaceutical products represented 87.0% and 82.5% of
our total net revenues for each of the years ended
December 31, 2005 and 2004.
Cardiovascular/ Metabolic.
Altace®,
an angiotensin converting enzyme (ACE) inhibitor, is
our primary product within this category. In August 1999, the
results of the Heart Outcomes Prevention Evaluation trial (the
HOPE trial) were released. The HOPE trial determined
that
Altace®
significantly reduces the rates of stroke, myocardial infarction
(heart attack) and death from cardiovascular causes in a broad
range of high-risk cardiovascular patients. On October 4,
2000, the FDA approved our supplemental NDA (sNDA)
related to
Altace®.
This approval permits the promotion of
Altace®
to reduce the risk of stroke, myocardial infarction (heart
attack) and death from cardiovascular causes in patients 55 and
over, with either a history of coronary artery disease, stroke
or peripheral vascular disease, or with diabetes and one other
cardiovascular risk factor (hypertension, elevated total
cholesterol levels, low high-density lipoprotein
(HDL) levels, cigarette smoking or documented
microalbuminuria).
Corgard®
is a beta-blocker indicated for the management of hypertension
as well as long-term management of patients with angina
pectoris.
Altace®
and
Corgard®
are marketed primarily to primary care physicians and
cardiologists.
Levoxyl®
and
Cytomel®,
which are indicated for the treatment of thyroid disorders, are
marketed primarily to primary care physicians and
endocrinologists.
Neuroscience. Products in this category include
Sonata®
and
Skelaxin®.
Sonata®
is a nonbenzodiazepine treatment for insomnia which is promoted
primarily to primary care physicians,
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neurologists, psychiatrists and sleep specialists.
Skelaxin®
is a muscle relaxant indicated for the relief of discomforts
associated with acute, painful musculoskeletal conditions. This
product is marketed primarily to primary care physicians,
neurologists, orthopedic surgeons and pain specialists.
Hospital/ Acute Care. Products in this category are
marketed primarily to hospitals. Our largest products in this
category are
Thrombin-JMI®,
Bicillin®
and
Synercid®.
Thrombin-JMI®
aids in controlling minor bleeding during surgery.
Synercid®
is an injectable antibiotic, primarily administered in
hospitals, indicated for treatment of vancomycin-resistant
enterococcus faecium and treatment of some complicated skin and
skin structure infections. This category also includes several
anti-infective products, including
Bicillin®,
that are marketed primarily to general/family practitioners and
internal medicine physicians and are prescribed to treat
uncomplicated infections of the respiratory tract, urinary
tract, eyes, ears and skin. These products are generally in
technologically mature product segments.
Intal®
and
Tilade®
are oral multi-dose inhalers of non-steroidal anti-inflammatory
agents indicated for the preventive management of asthma.
Other. We also have other products that are marketed
primarily to primary care physicians and certain specialists.
Some of our branded prescription products are described below:
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Product |
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Product Description and Indication |
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Cardiovascular/ Metabolic |
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Altace®(1)
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A hard-shell capsule for oral administration indicated for the
treatment of hypertension and reduction of the risk of stroke,
myocardial infarction (heart attack) and death from
cardiovascular causes in patients 55 and over with either a
history of coronary artery disease, stroke or peripheral
vascular disease or with diabetes and one other cardiovascular
risk factor (such as elevated cholesterol levels or cigarette
smoking).
Altace®
is also indicated in stable patients who have demonstrated
clinical signs of congestive heart failure after sustaining
acute myocardial infarction. |
Corgard®(2)
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A beta-blocker tablet, indicated for the management of
hypertension as well as long-term management of patients with
angina pectoris. |
Levoxyl®
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Color-coded, potency marked tablets indicated for thyroid
hormone replacement or supplemental therapy for hypothyroidism. |
Cytomel®
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A tablet indicated in the medical treatment of hypothyroidism.
The only commercially available thyroid hormone tablet
containing T(3) as a single entity. |
Neuroscience
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Sonata®
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A nonbenzodiazepine capsule treatment for insomnia. |
Skelaxin®
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A muscle relaxant tablet indicated for the relief of discomforts
associated with acute, painful musculoskeletal conditions. |
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Product |
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Product Description and Indication |
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Hospital/ Acute Care
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Thrombin-JMI®
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A chromatographically purified topical (bovine) thrombin
solution indicated as an aid to hemostasis whenever oozing blood
and minor bleeding from capillaries and small venules is
accessible. |
Synercid®
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An injectable antibiotic indicated for treatment of certain
complicated skin and skin structure infections. |
Bicillin®
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A penicillin-based antibiotic suspension for deep muscular
injection indicated for the treatment of infections due to
penicillin-G-susceptible microorganisms that are susceptible to
serum levels common to this particular dosage form. |
Intal®
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An oral multi-dose inhaler of a non-steroidal anti-inflammatory
agent for the preventive management of asthma. |
Tilade®
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An oral multi-dose inhaler of a non-steroidal anti-inflammatory
agent for the preventive management of asthma. |
Other
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Menest®
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A film-coated esterified estrogen tablet for the treatment of
vasomotor symptoms of menopause, atrophic vaginitis, kraurosis
valvae, female hypogonadism, female castration, primary ovarian
failure, breast cancer and prostatic carcinoma. |
Delestrogen®
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An injectable estrogen replacement therapy. |
Aplisol®
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Aids in the detection of infections with mycobacterium
tuberculosis. |
Neosporin®(3)
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A prescription strength ophthalmic ointment and solution
indicated for the topical treatment of ocular infections. It is
also formulated as a prescription strength genito-urinary
concentrated sterile irrigant indicated for short-term use as a
continuous irrigant or rinse to help prevent infections
associated with the use of indwelling catheters. |
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(1) |
We acquired licenses for the exclusive rights in the United
States under various patents to the active ingredient in
Altace®. |
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(2) |
We acquired a fully paid license to
Corgard®
in the United States. |
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(3) |
We have exclusive licenses, free of royalty obligations, to
manufacture and market prescription formulations of
Neosporin®. |
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Net sales of certain of our branded prescription products for
the year ended December 31, 2005 are set forth in the
tables below.
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Net sales | |
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(in millions) | |
Cardiovascular/Metabolic
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Altace®
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$ |
554.4 |
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Levoxyl®
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139.5 |
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Cytomel®
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36.2 |
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Corgard®
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6.6 |
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Neuroscience
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Skelaxin®
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$ |
344.6 |
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Sonata®
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83.2 |
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Hospital/Acute Care
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Thrombin-JMI®
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$ |
220.6 |
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Bicillin®
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54.0 |
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Synercid®
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12.4 |
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Intal®
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12.2 |
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Other
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Aplisol®
|
|
$ |
16.4 |
|
Neosporin®
|
|
|
9.6 |
|
Menest®
|
|
|
7.3 |
|
Delestrogen®
|
|
|
6.2 |
|
Meridian Medical Technologies
Our Meridian Medical Technologies segment consists primarily of
our auto-injector business. We pioneered the development, and
are a manufacturer, of auto-injectors for the
self-administration of injectable drugs. An auto-injector is a
pre-filled, pen-like device that allows a patient or caregiver
to automatically inject a precise drug dosage quickly, easily,
safely and reliably. Auto-injectors are a convenient,
disposable, one-time use drug delivery system designed to
improve the medical and economic value of injectable drug
therapies.
The commercial pharmaceutical business of our Meridian segment
primarily consists of
EpiPen®,
an auto-injector filled with epinephrine for the emergency
treatment of anaphylaxis resulting from severe or allergic
reactions to insect stings or bites, foods, drugs and other
allergens, as well as idiopathic or exercise-induced
anaphylaxis. We have a supply agreement with Dey, L.P., in which
we granted Dey the exclusive right to market, distribute, and
sell
EpiPen®
worldwide. The supply agreement expires December 31, 2015.
Our Meridian segment also includes pharmaceutical products that
are presently sold primarily to the DoD, under an Industrial
Base Maintenance Contract which is terminable by the DoD at its
convenience. These products include the nerve agent
antidotes AtroPen®
and
ComboPen®,
and the Antidote Treatment Nerve Agent Auto-injector, which we
refer to as the ATNAA.
AtroPen®
is an atropine-filled auto-injector and
ComboPen®
consists of an atropine-filled auto-injector and a
pralidoxime-filled auto-injector. The ATNAA utilizes a dual
chambered auto-injector and injection process to administer
atropine and pralidoxime, providing an improved, more efficient
means of delivering these nerve agent antidotes. Other products
sold to the DoD also include a diazepam-filled auto-injector for
the treatment of seizures and a morphine-filled auto-injector
for pain management.
On March 1, 2006, we acquired substantially all of the
assets of Allerex Laboratory LTD. The primary asset purchased
from Allerex was the exclusive right to market and sell
EpiPen®
throughout Canada. We further negotiated with Dey, L.P., an
extension of those exclusive rights to market and sell
EpiPen®
in Canada through 2015.
8
Royalties
We have successfully developed two currently marketed
adenosine-based products,
Adenoscan®
and
Adenocard®,
for which we receive royalty revenues. Specifically, we are
party to an agreement under which Astellas Pharma US, Inc.
(formerly Fujisawa Healthcare, Inc.) manufactures and markets
Adenoscan®
and
Adenocard®
in the United States and Canada in exchange for royalties.
We have licensed exclusive rights to Sanofi-Aventis SA to
manufacture and market
Adenocard®
in countries other than the United States, Canada and Japan in
exchange for royalties. We have licensed exclusive rights to
Sanofi-Aventis to manufacture and market
Adenoscan®
in Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland, and the
United Kingdom in exchange for royalties. Sanofi-Aventis
has received marketing approval for
Adenoscan®
in a number of these countries. We have licensed exclusive
rights to Suntory to manufacture and market
Adenoscan®
and
Adenocard®
in Japan in exchange for royalties.
Royalties received by us from sales of
Adenoscan®
and
Adenocard®
outside of the United States and Canada are shared equally with
Astellas. Astellas, on its own behalf and ours, obtained a
license to additional intellectual property rights for
intravenous adenosine in cardiac imaging and the right to use
intravenous adenosine as a cardioprotectant in combination with
thrombolytic therapy, balloon angioplasty and coronary bypass
surgery. For additional information on our royalty agreements,
please see the section below entitled Intellectual
Property.
Contract Manufacturing
We utilize a portion of our excess manufacturing capacity to
provide third-party contract manufacturing. We currently provide
contract manufacturing for other pharmaceutical and
biotechnology companies. Contract manufacturing as a percentage
of total revenues equaled approximately 1.3% for the year ended
December 31, 2005. We believe contract manufacturing
provides a means of absorbing overhead costs and, as such, is an
efficient utilization of excess capacity.
Sales and Marketing
Our commercial operations organization, which includes sales and
marketing, is based in Princeton, New Jersey. We have a sales
force consisting of approximately 1,000 individuals in the
United States and Puerto Rico. We distribute our branded
pharmaceutical products primarily through wholesale
pharmaceutical distributors. These products are ordinarily
dispensed to the public through pharmacies by prescription. Our
marketing and sales promotions for branded pharmaceutical
products principally target general/family practitioners,
internal medicine physicians, cardiologists, endocrinologists,
neurologists, psychiatrists, pain specialists, sleep specialists
and hospitals through detailing and sampling to encourage
physicians to prescribe more of our products. The sales force is
supported and supplemented by
co-promotion
arrangements, telemarketing and direct mail, as well as through
advertising in trade publications and representation at regional
and national medical conventions. Our telemarketing and direct
mailing efforts are performed primarily by using a computer
sampling system which we developed to distribute samples to
physicians. We identify and target physicians through data
available from IMS America, Ltd. and
Scott-Levin, suppliers
of prescriber prescription data. We seek new international
markets for product lines for which we have international
rights. The marketing and distribution of these products in
foreign countries generally require the prior registration of
the products in those countries. We generally seek to enter into
distribution agreements with companies with established foreign
marketing and distribution capabilities since we do not have a
distribution mechanism in place for distribution outside the
United States and Puerto Rico.
Similar to other pharmaceutical companies, our principal
customers are wholesale pharmaceutical distributors. The
wholesale distributor network for pharmaceutical products has in
recent years been subject to increasing consolidation, which has
increased our, and other industry participants, customer
concentration. In addition, the number of independent drug
stores and small chains has decreased as retail consolidation
has occurred. For the year ended December 31, 2005,
approximately 69% of our gross sales
9
were attributable to three key wholesalers: Cardinal/Bindley
(28%), McKesson Corporation (27%) and Amerisource Bergen
Corporation (14%).
Manufacturing
Our manufacturing facilities are located in Bristol, Tennessee;
Rochester, Michigan; Middleton, Wisconsin; St. Petersburg,
Florida; and St. Louis, Missouri. These facilities have
manufacturing, packaging, laboratory, office and warehouse
space. We are licensed by the Drug Enforcement Agency, which we
refer to as the DEA, a division of the Department of
Justice, to procure and produce controlled substances. We
manufacture certain of our own branded pharmaceutical products,
as well as products owned by other pharmaceutical companies
under manufacture and supply contracts.
We can produce a broad range of dosage forms, including sterile
solutions, lyophylized
(freeze-dried)
products, injectables, tablets and capsules, creams and
ointments, suppositories and powders. We believe our
manufacturing capabilities allow us to capture higher margins
and pursue drug development and product line extensions more
efficiently. We manufacture a portion of the finished dosage
form of
Altace®
at our Bristol facility. However, currently many of our product
lines, including
Skelaxin®,
Sonata®,
Delestrogen®,
Intal®,
Tilade®,
Synercid®
and
Cortisporin®
are manufactured for us by third parties. As of
December 31, 2005, we estimate capacity utilization was
approximately 30% at the Bristol facility, approximately 20% at
the Rochester facility, approximately 100% at the Middleton
facility, approximately 65% at the St. Petersburg facility and
approximately 75% at the St. Louis facility.
In addition to manufacturing, we have fully integrated
manufacturing support systems including quality assurance,
quality control, regulatory management and logistics. We believe
that these support systems enable us to maintain high standards
of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies
that do not have such support systems in-house must outsource
these services.
We require a supply of quality raw materials and components to
manufacture and package drug products for us and for third
parties with whom we have contracted. Generally, we have not had
difficulty obtaining raw materials and components from
suppliers. Currently, we rely on more than 500 suppliers to
deliver the needed raw materials and components for our products.
Research and Development
We are engaged in the development of chemical compounds,
including new chemical entities, which provide us with strategic
pipeline opportunities for the commercialization of new branded
prescription pharmaceutical products. In addition to developing
new chemical compounds, we pursue means of enhancing the value
of existing products through new uses, formulations, and drug
delivery technology that may provide additional benefits to
patients and improvements in the quality and efficiency of our
manufacturing processes.
We invest in research and development because we believe it is
important to our long-term growth. We presently employ
approximately 70 people in research and development, including
pre-clinical and toxicology experts, pharmaceutical formulations
scientists, clinical development experts, medical affairs
personnel, regulatory affairs experts, data
scientists/statisticians and project managers.
In the conduct of our research and development, we utilize a
virtual model led by our project management personnel, providing
us with substantial flexibility and allowing high efficiency
while minimizing internal fixed costs. Utilizing this model, we
supplement our internal efforts by collaborating with
independent research organizations, including educational
institutions and research-based pharmaceutical and biotechnology
companies, and contracting with other parties to perform
research in their facilities. We use the services of physicians,
hospitals, medical schools, universities, and other research
organizations worldwide to conduct clinical trials to establish
the safety and effectiveness of new products. We seek
investments in external research and technologies that hold the
promise to complement and strengthen our
10
own research efforts. These investments can take many forms,
including in-licensing arrangements, development agreements,
joint ventures, and the acquisition of products in development.
Drug development is time-consuming and expensive. Only a small
percentage of chemical compounds discovered by researchers prove
to be both medically effective and safe enough to become an
approved medicine. The process from discovery to regulatory
approval typically takes 10 to 15 years or longer. Drug
candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive
regulatory approval.
Clinical trials are conducted in a series of sequential phases,
with each phase designed to address a specific research
question. In Phase I clinical trials, researchers test a
new drug or treatment in a small group of people to evaluate the
drugs safety, determine a safe dosage range, and identify
side effects. In Phase II clinical trials, researchers give
the drug or treatment to a larger population to assess
effectiveness and to further evaluate safety. In Phase III
clinical trials, researchers give the drug or treatment to an
even larger population to confirm its effectiveness, monitor
side effects, compare it to commonly used treatments, and
collect information that will allow the drug or treatment to be
used safely. The results of Phase III clinical trials are
pivotal for purposes of obtaining FDA approval of a new product.
Our development projects, including those for which we have
collaboration agreements with third parties, include the
following:
|
|
|
|
|
Remoxytm,
an investigational drug for the treatment of severe to chronic
pain, which is currently in Phase III clinical trials; |
|
|
|
Binodenoson, our next generation cardiac pharmacologic
stress-imaging agent, which is currently in Phase III
clinical trials; |
|
|
|
Vanquixtm,
a diazepam-filled auto-injector for the treatment of acute,
repetitive epileptic seizures, which is currently in
Phase III clinical trials; |
|
|
|
PT-141, an investigational drug for the treatment of ED and FSD,
which is currently in late Phase II clinical trials; |
|
|
|
MRE0094, an investigational drug for the topical treatment of
chronic diabetic neuropathic foot ulcers, which is currently in
Phase II clinical trials; and |
|
|
|
T-62, an investigational drug for the treatment of neuropathic
pain, for which we have completed Phase I clinical trials. |
Development projects, including those in which we have
collaboration agreements with third parties, that involve
currently marketed compounds include the following:
|
|
|
|
|
a novel formulation involving ramipril for which an NDA is
pending; |
|
|
|
an
Altace®/diuretic
combination product; |
|
|
|
a large multinational study (DREAM) to evaluate the ability
of
Altace®
to prevent diabetes; |
|
|
|
a program to evaluate whether
Altace®
slows the progression of chronic kidney disease, for which an
sNDA was submitted to the FDA last year; |
|
|
|
a program to evaluate the safety and efficacy of
Altace®
in children, for which an sNDA was submitted to the FDA last
year, and for which we expect to receive an additional six
months of patent exclusivity; |
|
|
|
a new formulation of
Intal®,
for the long-term management of asthma, utilizing the
environmentally friendly propellant hydrofluoroalkane
(HFA); and |
|
|
|
a potential new formulation of
metaxalone®. |
Our research and development expenses were $74.0 million in
2005, $67.9 million in 2004 and $44.1 million in 2003,
excluding research and development in-process at the time of
acquisition of a
11
product. In-process research and development expenses were
$188.7 million for the year ended December 31, 2005,
$16.3 million for the year ended December 31, 2004 and
$194.0 million for the year ended December 31, 2003.
Government Regulation
Our business and our products are subject to extensive and
rigorous regulation at both the federal and state levels. Nearly
all of our products are subject to pre-market approval
requirements. New drugs are approved under, and are subject to,
the Food, Drug and Cosmetics Act (FDC Act), and
related regulations. Biological drugs are subject to both the
FDC Act and the Public Health Service Act, which we refer to as
the PHS Act, and related regulations. Biological
drugs are licensed under the PHS Act.
At the federal level, we are principally regulated by the FDA as
well as by the DEA, the Consumer Product Safety Commission, the
Federal Trade Commission, the U.S. Department of
Agriculture, the Occupational Safety and Health Administration,
and the U.S. Environmental Protection Agency
(EPA). The FDC Act, the regulations promulgated
thereunder, and other federal and state statutes and
regulations, govern, among other things, the development,
testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our
products and those manufactured by and for third parties.
Product development and approval within this regulatory
framework requires a number of years and involves the
expenditure of substantial resources.
When we acquire the right to market an existing approved
pharmaceutical product, both we and the former application
holder are required to submit certain information to the FDA.
This information, if adequate, results in the transfer to us of
marketing rights to the pharmaceutical products. We are also
required to report to the FDA, and sometimes acquire prior
approval from the FDA, certain changes in an approved NDA, as
set forth in the FDAs regulations. When advantageous, we
transfer the manufacture of acquired branded pharmaceutical
products to other manufacturing facilities which may include our
manufacturing facilities, when appropriate, after regulatory
requirements are satisfied. In order to transfer manufacturing
of acquired products, the new manufacturing facility must
demonstrate, by filing information with the FDA, that it can
manufacture the product in accordance with current Good
Manufacturing Practices, referred to as cGMPs, and
the specifications and conditions of the approved marketing
application. For changes requiring pre-market approval, there
can be no assurance that the FDA will grant such approval in a
timely manner, if at all.
The FDA also mandates that drugs be manufactured, packaged and
labeled in conformity with cGMPs. In complying with cGMPs,
manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to ensure that
the products meet applicable specifications and other
requirements to ensure product safety and efficacy.
The FDA and other government agencies periodically inspect drug
manufacturing facilities to ensure compliance with applicable
cGMP and other regulatory requirements. Failure to comply with
these statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or recall of a
product. Adverse experiences with the use of products must be
reported to the FDA and could result in the imposition of market
restrictions through labeling changes or in product removal.
Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.
The federal government has extensive enforcement powers over the
activities of pharmaceutical manufacturers including the
authority to withdraw product approvals, commence actions to
seize and prohibit the sale of unapproved or non-complying
products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions,
voluntary or involuntary recalls, and civil monetary and
criminal penalties. Such a restriction or prohibition on sales
or withdrawal of approval of products marketed by us could
materially adversely affect our business, financial condition or
results of operations.
12
We also manufacture and sell pharmaceutical products which are
controlled substances as defined in the Controlled
Substances Act and related federal and state laws, which
establish certain security, licensing, record keeping, reporting
and personnel requirements administered by the DEA and state
authorities. The DEA has a dual mission of law enforcement and
regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement
authority with the Federal Bureau of Investigation, another
division of the Department of Justice. The DEAs regulatory
responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled
substances, the substances themselves and the equipment and raw
materials used in their manufacture and packaging in order to
prevent such articles from being diverted into illicit channels
of commerce. We maintain appropriate licenses and certificates
with the DEA and applicable state authorities in order to engage
in the development, manufacturing and distribution of
pharmaceutical products containing controlled substances.
The distribution of pharmaceutical products is subject to the
Prescription Drug Marketing Act (PDMA), a part of
the FDC Act, which regulates distribution activities at both the
federal and state level. Under the PDMA and its implementing
regulations, states are permitted to require registration of
manufacturers and distributors who provide pharmaceuticals even
if these manufacturers or distributors have no place of business
within the state. States are also permitted to adopt regulations
limiting the distribution of product samples to licensed
practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product
handling and facility storage and security requirements intended
to prevent the sale of pharmaceutical product samples or other
diversions.
A number of states have passed laws specifically designed to
track and regulate specified activities of pharmaceutical
companies. Other states presently have pending legislation that
will have similar effects. Some of these state laws require the
tracking and reporting of advertising or marketing activities
within the state. Others limit spending on items provided to
healthcare providers or state officials.
We cannot determine what effect new laws, changes in
regulations, statutes or legal interpretation, when and if
adopted or enacted, may have on our business in the future. New
laws, regulations, standards, or interpretations could, among
other things, require changes to manufacturing methods, expanded
or different labeling, the recall, replacement or discontinuance
of certain products, additional record keeping or expanded
documentation or could limit the way we advertise and/ or market
our products. These changes, or new legislation, could have a
material adverse effect on our business, financial condition or
results of operations.
Environmental Matters
Our operations are subject to numerous and increasingly
stringent federal, state and local environmental laws and
regulations concerning, among other things, the generation,
handling, storage, transportation, treatment and disposal of
toxic and hazardous substances and the discharge of pollutants
into the air and water. Environmental permits and controls are
required for some of our operations and these permits are
subject to modification, renewal and revocation by the issuing
authorities. We believe that our facilities are in substantial
compliance with our permits and environmental laws and
regulations and do not believe that future compliance with
current environmental laws will have a material adverse effect
on our business, financial condition or results of operations.
Our environmental capital expenditures and costs for
environmental compliance may increase in the future as a result
of changes in environmental laws and regulations or as a result
of increased manufacturing activities at any of our facilities.
Competition
We compete with other pharmaceutical companies, including large,
global pharmaceutical companies, for the acquisition of products
and technologies in later stages of development. We also compete
with other pharmaceutical companies for currently marketed
products and product line acquisitions. Competitors include
Biovail Corporation, Forest Laboratories, Inc., Shire
Pharmaceuticals Group plc,
13
Medicis Pharmaceutical Corporation, Watson Pharmaceuticals,
Inc., Wyeth, Pfizer Inc., Bristol Myers Squibb, Sanofi Aventis,
GlaxoSmithKline and other companies which also acquire branded
pharmaceutical products and product lines from, and enter into
licensing arrangements with, other pharmaceutical companies.
Additionally, since our products are generally established and
commonly sold, they are subject to competition from products
with similar qualities. Our branded pharmaceutical products may
be subject to competition from alternate therapies during the
period of patent protection and thereafter from generic
equivalents. The manufacturers of generic products typically do
not bear the related research and development costs and
consequently are able to offer such products at considerably
lower prices than the branded equivalents. There are, however, a
number of factors which enable products to remain profitable
once patent protection has ceased. These include the
establishment of a strong brand image with the prescriber or the
consumer, supported by the development of a broader range of
alternative formulations than the manufacturers of generic
products typically supply.
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. For a manufacturer to launch a generic substitute,
it must prove to the FDA when filing an application to make a
generic substitute that the branded pharmaceutical product and
the generic substitute are therapeutically bioequivalent. By
focusing our efforts in part on products with patent protection,
challenging bioequivalence or complex manufacturing
requirements, we believe that we are better positioned to
maintain market share and produce sustainable, high margins and
cash flows.
The FDA requires that generic applicants claiming invalidity or
non-infringement of status listed by a NDA holder give the NDA
holder notice each time an abbreviated new drug application
(ANDA,) is either submitted or amended to claim
invalidity or non-infringement of listed patents. If the NDA
holder files a patent infringement suit against the generic
applicant within 45 days of receiving such notice, the FDA
is barred (or stayed) from approving the ANDA for 30 months
unless specific events occurred sooner. To avoid multiple
30-month stays for the
same branded drug, the relevant provisions of the Hatch-Waxman
Act (21 U.S.C. §§ 355(j)(2) and (5))
indicate that a
30-month stay will only
attach to patents that are listed in the FDAs Approved
Drug Products with Therapeutic Equivalence Evaluations,
which we refer to as the FDAs Orange Book, at
the time an ANDA is originally filed. Although the ANDA filer is
still required to certify against a newly-listed patent, the NDA
holder can still bring suit based upon infringement of that
patent, but such a suit will not trigger an additional
30-month stay of FDA
approval of the ANDA.
Only patents listed in the FDAs Orange Book are eligible
for protection by a
30-month stay of FDA
approval of the ANDA. We are required to list all patents that
claim a composition of matter relating to a drug or a method of
using a drug. The FDAs regulations prohibit listing of
certain types of patents, including patents claiming certain
metabolites (the active moiety that results from the bodys
metabolism of the drug substance), intermediates (namely,
substances not present in the finished product), certain methods
of use, or patents claiming certain product packaging. As such,
some patents that may issue are not eligible for listing in the
FDAs Orange Book and thus not eligible for protection by a
30-month stay.
Intellectual Property
|
|
|
Patents, Licenses and Proprietary Rights |
We consider the protection of discoveries in connection with our
development activities important to our business. The patent
positions of pharmaceutical companies, including ours, are
uncertain and involve legal and factual questions which can be
difficult to resolve. We seek patent protection in the United
States and selected foreign countries where and when appropriate.
In connection with the
Altace®
product line, we acquired a license for the exclusive rights in
the United States and Puerto Rico to various Aventis patents,
including the rights to the active ingredients in
Altace®
having patents listed in the FDAs Orange Book that expire
in October 2008 and April 2012. Our
14
rights include the use of the active ingredients in
Altace®
generally in combination as human therapeutic or human
diagnostic products in the United States.
Skelaxin®
has two method-of-use
patents listed in the FDAs Orange Book, which do not
expire until December 2021.
Sonata®
has a composition of matter patent listed in the FDAs
Orange Book that expires in June 2008.
We own patent rights in the United States related to the HFA
formulation of
Intal®
until September 2017, a composition of matter patent in the
United States for
Tilade®
until October 2006 and a formulation patent in the United States
for
Synercid®
until November 2017.
We have exclusive licenses expiring in June 2036 for the
prescription formulations of
Neosporin®.
These licenses are subject to early termination in the event we
fail to meet specified quality control standards, including cGMP
regulations with respect to the products, or commit a material
breach of other terms and conditions of the licenses which would
have a significant adverse effect on the uses of the licensed
products retained by the licensor, including, among other
things, marketing products under these trade names outside the
prescription field.
We own the intellectual property rights associated with
Meridians dual-chambered auto-injector and injection
process, which include a patent in the United States that
expires in April 2010.
We receive royalties on sales of
Adenoscan®,
a product that we successfully developed.
Adenoscan®
has patent coverage that extends to March 2015.
In addition to the intellectual property for the currently
marketed products described above, we also have acquired
intellectual property related to various products currently
under development. For example, we have acquired rights to
intellectual property relating to T-62 and certain related
backup compounds currently under development for the treatment
for neuropathic pain. In connection with our collaborative
agreement with Pain Therapeutics, Inc., we have acquired an
exclusive license (subject to preexisting license rights granted
by Pain Therapeutics) to certain intellectual property rights
related to opioid formulations, including Remoxy, which is
currently in development for the treatment of
moderate-to-severe
chronic pain. In connection with our collaborative agreement
with Palatin Technologies, Inc., we have acquired a co-exclusive
license to intellectual property rights related to PT-141,
currently being developed for the treatment of male and female
sexual dysfunction. Furthermore, in connection with the
development of MRE0094, we have acquired exclusive licenses to
composition and method patents related to adenosine receptor
agonists for the topical treatment of chronic diabetic foot
ulcers. Also, we have acquired exclusive rights to patents
related to binodenoson, the pharmacologic stress agent specific
to the adenosine receptor necessary for increased cardiac blood
flow. Also, we have acquired certain intellectual property
rights from Mutual Pharmaceutical Company, Inc. related to
metaxalone, the active pharmaceutical ingredient in
Skelaxin®,
and we have acquired certain intellectual property rights from
Arrow related to ramipril, the active pharmaceutical ingredient
in
Altace,®
as previously discussed.
We also rely upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop and sustain
our competitive position. There can be no assurance that others
will not independently develop substantially equivalent
proprietary technology and techniques or otherwise gain access
to our trade secrets or disclose the technology or that we can
adequately protect our trade secrets.
For a discussion of challenges to our patents by generic drug
manufacturers, please see the section entitled Risk
Factors under the heading If we cannot successfully
enforce our rights under the patents relating to three of our
largest products,
Altace®,
Skelaxin®
and
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.
15
We sell our branded products under a variety of trademarks. We
believe that we have valid proprietary interests in all
currently used trademarks, including those for our principal
branded pharmaceutical products registered in the United States.
Backlog
As of February 24, 2006, we had no material backlog.
Employees
As of February 24, 2006, we employed 2,795 full-time and
four part-time persons. Approximately 185 employees of the
Rochester facility are covered by a collective bargaining
agreement with the Paper, Allied Industrial, Chemical &
Energy Workers, International Union (PACE), Local
No. 60178, which expires on February 28, 2008.
Approximately 301 employees of the St. Louis facility
are covered by a collective bargaining agreement with the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen
and Helpers of America Union, Local No. 688, which expires
February 28, 2008. We believe our employee relations are
good.
16
You should carefully consider the risks described below and
the other information contained in this report, including our
audited consolidated financial statements and related notes. The
risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. If any
of the adverse events described in this Risk Factors
section or other sections of this report actually occurs, our
business, results of operations and financial condition could be
materially adversely affected, the trading price, if any, of our
securities could decline and you might lose all or part of your
investment.
Risks Related to our Business
|
|
|
The securities and derivative litigation or the continuing
SEC investigation could have a material adverse effect on our
business. |
Subsequent to the announcement of the SEC investigation
described in Item 3, Legal Proceedings,
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 in connection
with our underpayment of rebates owed to Medicaid and other
governmental pricing programs, and certain transactions between
us and the Benevolent Fund. 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. 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 Incorporated, a predecessor to one of our wholly owned
subsidiaries, King Pharmaceuticals Research and Development,
Inc. (King Research and Development), 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 in
this action has commenced. The Court has set a trial date of
April 10, 2007.
We have estimated a probable loss contingency for the class
action lawsuit described above. We believe this loss contingency
will be paid on behalf of us by our insurance carriers.
Accordingly, as of December 31, 2005, we have recorded a
liability and a receivable for this amount, classified in
accrued expenses and prepaid and other current assets,
respectively, in our consolidated financial statements.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of our
current and former officers and directors, with respect to the
same events at issue in the federal securities litigation
described above. These cases have been consolidated, and on
October 3, 2003, plaintiffs filed a consolidated amended
complaint. On November 17, 2003, defendants filed a motion
to dismiss or stay the consolidated amended complaint. The court
denied the motion to dismiss, but granted a stay of proceedings.
On October 11, 2004, the court lifted the stay to permit
plaintiffs to file a further amended complaint adding class
action claims related to our then-anticipated merger with Mylan
Laboratories, Inc.
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On October 26, 2004, defendants filed a partial answer to
the further amended complaint, and moved to dismiss the
newly-added claims. Following the termination of the Mylan
merger agreement, plaintiffs voluntarily dismissed these claims.
Discovery with respect to the remaining claims in the case has
commenced. No trial date has been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
In August 2004, a separate class action lawsuit was filed in
Tennessee state court, asserting claims solely with respect to
our then-anticipated merger with Mylan Laboratories. Defendants
filed a motion to dismiss the case on November 30, 2004,
which remains pending. We believe that the claims in this case
are moot following termination of the Mylan merger agreement.
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 alleged
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 were 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.
The SEC investigation of our previously disclosed errors
relating to reserves for product returns is continuing, and it
is possible that this investigation could result in the
SECs imposing fines or other sanctions on us.
We are unable currently to predict the outcome or reasonably
estimate the range of potential loss, if any, except as noted
above, in the pending litigation. If we were not to prevail in
the pending litigation, or if any governmental sanctions are
imposed in excess of those described above, 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 SEC
investigation 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®
and
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. (Cobalt), 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 Approved Drug Products with Therapeutic
Equivalence Evaluations, which is known as the Orange
Book; United States Patent No. 5,061,722 (the
722 patent), a composition-of-matter
patent, and United States Patent No. 5,403,856 (the
856 patent), a
method-of-use patent,
with expiration dates of 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
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NDA. Cobalt filed a Paragraph IV certification alleging
invalidity of the 722 patent, and Aventis Pharma
Deutschland GmbH (Aventis) and the Company 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, our filing of that
suit provided us an automatic stay of FDA approval of
Cobalts ANDA for 30 months from no earlier than
February 5, 2003. That 30 month stay expired in August
2005 and on October 24, 2005, the FDA granted final
approval of Cobalts ANDA. 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. On February 27, 2006,
the Company, Aventis and Cobalt agreed that, subject to certain
conditions, within 38 days, all parties will submit a joint
stipulation dismissing without prejudice the litigation before
the U.S. District Court of Massachusetts.
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 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 civil actions for infringement of the
722 patent against Lupin in the U.S. District
Courts for the District of Maryland and the Eastern District of
Virginia. 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. On February 1, 2006, the
Maryland and Virginia cases were consolidated into a single
action in the Eastern District of Virginia. Trial is currently
scheduled to begin in that action on June 6, 2006.
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 December 31, 2005, we had net intangible
assets related to
Altace®
of $239.5 million. If a generic version of
Altace®
enters the market, the Company may have to write off a portion
or all 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.
(Mutual), 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
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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. A
patent infringement suit was filed 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
provided 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 provided 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. In an attempt to mitigate this risk, we have
entered into an agreement with a generic pharmaceutical company
to launch an authorized generic of
Skelaxin®
in the event of generic competition. However, we cannot provide
any assurance regarding the degree to which this strategy will
be successful, if at all. As of December 31, 2005, we had
net intangible assets related to
Skelaxin®
of $170.4 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), 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 U.S. since 1995. A substantial portion of the
revenues from our royalties segment is derived from Astellas
from its net sales of
Adenoscan®.
Sicor 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 and its parents/affiliates Sicor, Inc., Teva
Pharmaceuticals USA, Inc. (Teva) 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-
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Waxman Act, the filing of that suit provides us an automatic
stay of FDA approval of Sicors ANDA for 30 months
from no earlier than April 16, 2005. We do not expect trial
to begin before February 2007. 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 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 validity and 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, our
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. As of December 31, 2005,
we had net intangible assets related to
Sonata®
of $12.9 million. 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 similar to ours, including generic
products, 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 have entered into agreements with manufacturers and/or
distributors of generic pharmaceutical products with whom we are
presently engaged, or have been previously engaged in
litigation, and these activities could subject us to claims that
we have violated federal and/or state anti-trust laws. |
We have negotiated and entered into a number of agreements with
manufacturers and/or distributors of generic pharmaceutical
products with whom we are presently engaged or have previously
been engaged in litigation. Governmental and/or private parties
may allege that these arrangements violate applicable state or
federal anti-trust laws. If a court or other governmental body
were to conclude that a violation of these laws had occurred,
liability based on such a finding could be material and may
adversely affect us.
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We cannot assure you that we will be able to comply with
the terms and conditions of our corporate integrity agreement
with the Office of Inspector General of the United States
Department of Health and Human Services. |
In October 2005, as part of our settlement of the government
pricing investigation of our company (see Item 3. Legal
Proceedings, below), we entered into a five-year corporate
integrity agreement (CIA) with the Office of
Inspector General of the United States Department of Health and
Human Services (HHS/ OIG). The purpose of the CIA,
which applies to all of our U.S. subsidiaries and employees, is
to promote compliance with the federal health care and
procurement programs in which we participate, including the
Medicaid Drug Rebate Program, the Medicare Program, the 340B
Drug Pricing Program, and the Veterans Administration Pricing
Program.
In addition to the challenges associated with complying with the
regulations applicable to each of these programs (as discussed
below), we are required, among other things, to keep in place
our current compliance program, provide specified training to
employees, retain an independent review organization to
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conduct periodic audits of our Medicaid Rebate and Medicare
Average Sales Price calculations and our automated systems,
processes, policies and practices related to government pricing
calculations, and to provide periodic reports to HHS/ OIG.
Implementing the broad array of processes, policies, and
procedures necessary to comply with the CIA 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.
Failing to meet the CIA obligations could have serious
consequences for us including stipulated monetary penalties for
each instance of non-compliance. In addition, flagrant or
repeated violations of the CIA could result in our being
excluded from participating in government health care programs,
which could have a material adverse effect on our business.
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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 may distract our
management from the conduct of our business.
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We cannot assure you that we will be able to maintain
effective internal control over financial reporting. |
Under Section 404 of the Sarbanes-Oxley Act of 2002 and the
rules issued thereunder, management is required to conduct an
evaluation of the effectiveness of our 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 has concluded that our internal control over
financial reporting was effective as of December 31, 2005
and that it provided reasonable assurance regarding the
reliability of our financial reporting and the preparation of
our financial statements in accordance with generally accepted
accounting principles. We cannot assure you that management will
not identify one or more significant deficiencies or material
weaknesses in our internal control over financial reporting
during 2006 or thereafter, 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 2006 or thereafter, or that
management will be able to conclude on the basis of its
evaluation that our internal control over financial reporting is
effective as of the end of 2006 or a later period.
If we fail to maintain effective internal control over financial
reporting, including adapting this control to changing
conditions and requirements, such a failure could have a
material adverse effect on our business and the value of our
common stock.
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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®,
Levoxyl®,
Sonata®
and royalty revenues for the last twelve months ended
December 31, 2005 accounted for 31.3%, 19.4%, 12.4%, 7.9%,
4.7% and 4.4% of our total
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revenues from continuing operations, respectively, or 80.1% in
total. We believe that these sources of revenue may constitute a
significant portion of our revenues for the foreseeable future.
However, the agreements associated with some sources of royalty
income may be terminated upon short notice and without cause or
may be subject to substantial competition in the near 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. 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 a material
adverse effect on our business, financial condition, results of
operations and cash flows. If the cost of this insurance
increases significantly, or if this insurance becomes
unavailable, we may not be able to increase or maintain our
levels of insurance coverage for our directors and officers,
which could make it difficult to attract or retain qualified
directors and officers.
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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 December 31, 2005, we had $1.1 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 to increase sales of our existing
products and to enhance our competitive standing through
acquisitions or in-licensing of products, either in development
or previously approved by the FDA, 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 engaged in the development of:
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Remoxytm,
an investigational drug for the treatment of severe to chronic
pain; |
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binodenoson, a myocardial pharmacologic stress imaging agent; |
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PT-141, an investigational new drug for the treatment of
erectile dysfunction and female sexual dysfunction; |
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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; |
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a new inhaler for
Intal®
using the alternative propellant HFA for which the FDA has
issued an approvable letter; |
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a potential new formulation of metaxalone; |
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a novel formulation of ramipril for which an NDA is pending; |
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an
Altace®/diuretic
combination product; and |
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Vanquixtm,
a diazepam-filled auto-injector. |
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial, human and other
resources substantially greater than ours, in the development
and licensing of new products. We cannot assure you that we will
be able to
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engage in product life-cycle management to develop new
indications and line extensions for existing and acquired
products, |
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successfully develop, license or commercialize new products on a
timely basis or at all, |
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continue to develop products already in development in a cost
effective manner, or |
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obtain any FDA approvals necessary to successfully implement the
strategies described above. |
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.
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, or appropriately and successfully manage
and coordinate third-party collaborative development activities,
our business may suffer. |
The integration of acquisitions into our business of in-licensed
or acquired assets or businesses, as well as the coordination
and collaboration of development, sales and marketing efforts
with third parties,
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requires significant management attention and may require the
further expansion of our support personnel, sales force and
other human resources. In order to manage our in-license and
acquisition activity effectively, we must maintain adequate
operational, financial and management information systems,
integrate the systems that we acquire into our existing systems,
and ensure that the acquired systems meet our standards for
internal control over financial reporting. Our future success
will also depend in part on our ability to hire, retain and
motivate qualified employees to manage expanded operations
efficiently and in accordance with applicable regulatory
standards. If we cannot manage our third-party collaborations
and integrate in-licensed and acquired assets successfully, or,
if we do not establish and maintain an appropriate
administrative, support and control infrastructure to support
these activities, this could have a material adverse effect on
our business, financial condition, results of operations and
cash flows and on our ability to make the necessary
certifications with respect to our internal controls.
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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 51.6% of our revenues
for the last twelve months ended December 31, 2005. Many of
our production processes are complex and
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require specialized and expensive equipment. If we are not in
compliance with applicable regulations, the manufacture of our
products could be delayed, halted or otherwise adversely
affected. Any unforeseen delays or interruptions in our
manufacturing operations may reduce our profit margins and
revenues. In the event of an 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 arrange for third parties to
manufacture our products in a timely manner or at all. In
addition, our manufacturing output may be interrupted by power
outages, supply shortages, accidents, natural disasters or other
disruptions. 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.
Many of our product lines, including
Altace®,
Skelaxin®,
Sonata®,
Intal®,
Tilade®,
Synercid®
and
Cortisporin®,
are currently manufactured in part or entirely by third parties.
Our dependence upon third parties for the manufacture of our
products may adversely effect 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 use 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 location. The third-party
manufacturer that produced
Bicillin®
for us 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 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 year ended December 31, 2005, net sales of
Bicillin®
were $54.0 million, representing 3.0% 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 and third parties with whom we contract require a supply of
quality raw materials and components to manufacture and package
our pharmaceutical products. Currently, we and our third-party
manufacturers rely on over 500 suppliers to deliver the
necessary raw materials and components. Some of our contracts
for the supply of raw materials have short durations, and there
is no assurance that we will be able to secure extension of the
terms of such agreements. If we or our third-party manufacturers
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, or if we mismanage the development process,
the introduction of new or reformulated products may not be
successful. |
We develop and manage the development of 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, or we mismanage these processes or
the third parties who perform services on our behalf, 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 short-term
profitability. |
Our results of operations, including, in particular, product
sales revenue, may vary from quarter to quarter due to many
factors. Sales to wholesalers and distributors represent a
substantial portion of our total sales. Buying patterns of our
wholesalers and distributors may vary from time to time. In the
event wholesalers and distributors with whom we do business
determine to limit their purchases of our products, sales of our
products could be adversely affected. For example, in advance of
an anticipated price increase, 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 have entered into inventory management and data
services agreements with each of our three key wholesale
customers. These agreements provide wholesalers incentives to
manage inventory levels and provide timely and accurate data
with respect to inventory levels held, and valuable data
regarding sales and marketplace activity. We rely on the
timeliness and accuracy of the data that each customer provides
to us on a regular basis pursuant to these agreements. If our
wholesalers fail to provide us with timely and accurate data in
accordance with the agreements, our estimates for certain
reserves included in our financial statements could be
materially and adversely affected.
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
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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, who are
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 69% of our revenues and a
significant portion of our accounts receivable for the fiscal
year ended December 31, 2005. 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 143
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
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. |
For the year ended December 31, 2005, our product
Thrombin-JMI®
accounted for 12.4% of our total revenues from continuing
operations. The source material for
Thrombin-JMI®
comes from bovine plasma and lung tissue which has been
certified by the United States Department of Agriculture for use
in the manufacture of pharmaceutical products. Bovine-sourced
materials, particularly those from outside the United States,
may be of some concern because of potential transmission of
bovine spongiform encephalopathy, or BSE. However,
we have taken precautions to minimize the risks of contamination
from BSE in our source materials. 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).
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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, or we may elect to
repurchase them sooner. |
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 and the debentures are not refinanced or
repurchased, 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.
Alternatively, we may elect to repurchase some or all of the
debentures, by negotiation with debenture holders, a buy-back
program, or a tender offer, prior to November 15, 2006. We
cannot assure you that a significant repurchase would not have a
material adverse effect on our business, financial condition,
results of operations, cash flows or liquidity.
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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 entered the market in the third quarter of
2005. 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 relationships with the U.S. Department of Defense
and other government entities are 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
DoD under an Industrial Base Maintenance Contract
(IBMC). The current IBMC expires in July 2006.
Although we have reason to believe the DoD will renew the IBMC
based on our relationship of 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.
Since 2003, we have implemented new information technology
systems that are 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, as a result, these calculations will remain
subject to the risk of errors.
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If our operations were disrupted by a natural disaster or
other catastrophic event, our business could be harmed. |
A natural disaster, cyber-attack, terrorist attack, or other
catastrophic event could result in a significant interruption of
our normal business operations and have a material adverse
effect on our business, financial conditions, results of
operations and cash flows.
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For example, for efficiency, we rely upon a central distribution
facility, located in Bristol, Tennessee. An interruption in
operations at this facility could limit our ability to deliver
our products to customers. Similarly, our business depends upon
centralized electronic communication, analysis and recordkeeping
systems. Damage to these systems could limit the normal
operation of many aspects of our business, such as receipt and
processing of orders, shipment of products to customers,
internal communications and maintenance of financial and other
records.
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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
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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There are risks associated with either the continuation or
termination of our agreement with Wyeth to
co-promote Altace®. |
Our revenues depend significantly upon the sale of
Altace®.
We have a Co-Promotion Agreement with Wyeth pursuant to which
each company markets
Altace®
and shares in the revenues generated by its sale. The future
success of this collaboration is uncertain. Factors that may
affect the success of our collaboration with Wyeth include the
following:
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Wyeth may pursue alternative technologies or develop alternative
products, either on its own or in collaboration with others,
that may compete with
Altace®
or which could affect Wyeths commitment to the
collaboration; |
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Wyeth may pursue higher-priority programs or change the focus of
its marketing programs, which could also affect its commitment
to the collaboration; and |
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Wyeth may choose to devote fewer resources to the marketing of
Altace®. |
Our Co-Promotion Agreement with Wyeth results in our having less
control over the promotion of
Altace®
than we would have in the absence of the Agreement. Further, we
believe that we presently realize less operating income from the
sale of
Altace®
than we would realize if the Agreement were terminated. Because
of these factors, among others, as well as contractual disputes
existing between Wyeth and us, we have sought, and may continue
to seek, the termination of the Agreement.
Should Wyeth reduce the resources dedicated to the marketing of
Altace®,
or should the
Co-Promotion Agreement
be terminated, then we may need to expand our marketing
capabilities, or enter into another collaborative arrangement,
to ensure that appropriate sales and marketing resources are
devoted to
Altace®.
Such efforts would require substantial time, effort and
resources, and we may not be able to recruit and retain
appropriate sales and marketing resources or enter into another
collaborative arrangement. Any significant reduction in the
sales and marketing resources devoted to
Altace®
could have a material adverse effect on sales of
Altace®
and 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
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able to attract and retain key personnel in sufficient numbers,
or on acceptable terms, or with the skills which are necessary
to support our growth and integration activities. 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 our common stock.
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Our stock price is volatile, which could result in
substantial losses for our investors. |
The trading price of our common stock is volatile. The stock
market in general and the market for the securities of emerging
pharmaceutical companies such as King, in particular, have
experienced extreme volatility. Many factors contribute to this
volatility, including
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variations in our results of operations; |
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perceived risks and uncertainties concerning our business; |
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announcements of earnings; |
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developments in the governmental investigations or securities
litigation; |
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the commencement of, or adverse developments in, any material
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. |
32
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 adversely 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 (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 (the FDC Act), or the Public
Health Service Act (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 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 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
33
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.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, which we refer to as CERCLA, the
EPA can impose liability for the entire cost of cleanup of
contaminated properties upon each or any of the current and
former site owners, site operators or parties who sent waste to
the site, regardless of fault or the legality of the original
disposal activity. In addition, many states, including
Tennessee, Michigan, Wisconsin, Florida and Missouri, have
statutes and regulatory authorities similar to CERCLA and to the
EPA. We have entered into hazardous waste hauling agreements
with licensed third parties to properly dispose of hazardous
wastes. We cannot assure you that we will not be found liable
under CERCLA or other applicable state statutes or regulations
for the costs of undertaking a cleanup at a site to which our
wastes were transported.
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 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 or cash
flows. However, we cannot assure you that the number and
significance of recalls will not increase in the future. Any
significant recalls could materially affect our sales and the
prescription trends for the products and damage
34
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 depends, 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 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
35
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 General, and as such they are likely to be
subject to scrutiny under these laws.
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 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
36
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, are 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 will continue to be based primarily on product
efficacy, safety, reliability, availability and price.
Competition for Acquisitions and In-License
Opportunities. We compete with other pharmaceutical
companies for product and product line acquisitions and
in-license opportunities. These competitors include Biovail
Corporation, Forest Laboratories, Inc., Medicis Pharmaceutical
Corporation, Shire Pharmaceuticals Group plc, Watson
Pharmaceuticals, Inc., Wyeth, Pfizer, Inc., Bristol Myers
Squibb, Sanofi Aventis, GlaxoSmithKline and other companies
which either in-license pharmaceutical product opportunities or
compounds, or acquire branded pharmaceutical products and
product lines, including those in development, from other
biotech, pharmaceutical or bio-pharma companies. We cannot
assure you that
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we will be successful in the acquisition, or in-license of
commercially attractive pharmaceutical opportunities, compounds,
products, companies or technologies, |
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additional competitors will not enter the market, |
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competition for acquisition and in-license of pharmaceutical
opportunities, compounds or products, including 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, or |
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we will be successful in bringing compounds, products in
development or other opportunities to commercial success. |
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.
37
Our product
Sonata®
competes with other insomnia treatments in a highly competitive
market.
Our product
Levoxyl®
competes in a competitive and highly genericized market with
other levothyroxine sodium products.
We anticipate competition from both bovine and recombinant human
thrombin for our product
Thrombin-JMI®
in the near future.
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 symposia, 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 timeliness and accuracy of wholesale inventory data provided
by our customers; |
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the adequacy of our liquidity and capital resources; |
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anticipated capital expenditures; |
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the development, approval and successful commercialization of
Remoxytm,
an investigational drug for the treatment of
moderate-to-severe
chronic pain; 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; MRE0094, an investigational drug
for the topical treatment of chronic diabetic foot ulcers; the
development of a new formulation of
Skelaxin®;
pre-clinical programs; and product life-cycle development
projects; |
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the development, approval and successful commercialization 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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products developed, acquired or in-licensed that may be
commercialized; |
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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 1B. |
Unresolved Staff Comments |
Not applicable.
The location and business segments served by our primary
facilities are as follows:
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Location |
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Business Segment(s) |
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Bristol, Tennessee
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Branded Pharmaceuticals |
Rochester, Michigan
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Branded Pharmaceuticals and Contract Manufacturing |
St. Louis, Missouri
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Meridian Medical Technologies |
St. Petersburg, Florida
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Branded Pharmaceuticals |
Middleton, Wisconsin
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Branded Pharmaceuticals |
39
We own each of these primary facilities, with the exception of
that portion of the facilities in St. Louis, Missouri that
we acquired upon our acquisition of Meridian, which is leased.
For information regarding production capacity and extent of
utilization, please see Item 1, Manufacturing.
The Bristol, Rochester, and St. Louis owned facilities are
pledged as collateral for our senior secured revolving credit
facility dated April 23, 2002.
Our corporate headquarters and centralized distribution center
are located in Bristol, Tennessee. We consider our properties to
be generally in good condition, well maintained, and generally
suitable and adequate to carry on our business.
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Item 3. |
Legal Proceedings |
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Settlement of Governmental Pricing Investigation |
On October 31, 2005, we entered into (i) a definitive
settlement agreement with the United States of America, acting
through the United States Department of Justice and the United
States Attorneys Office for the Eastern District of
Pennsylvania and on behalf of the Office of Inspector General of
the United States Department of Health and Human Services
(HHS/ OIG) and the Department of Veterans Affairs,
to resolve the governmental investigations related to our
underpayment of rebates owed to Medicaid and other governmental
pricing programs during the period from 1994 to 2002 (the
Federal Settlement Agreement), and (ii) similar
settlement agreements with 48 states and the District of
Columbia (collectively, the State Settlement
Agreements, and together with the Federal Settlement
Agreement, the Settlement Agreements). We have
agreed to a settlement with the remaining state on substantially
the same terms as the other state settlements, and we currently
expect to enter into a definitive settlement agreement with that
state before the end of the first quarter of 2006. Consummation
of the Federal Settlement Agreement and some State Settlement
Agreements is or was subject to court approval. On
February 24, 2006, the United States District Court for the
Eastern District of Pennsylvania (District Court)
approved the Federal Settlement Agreement. All interested
parties, including King, the individual purportedly acting as a
relator under the False Claims Act and the affected
states, have requested that the District Court approve the State
Settlement Agreements that require court approval.
Pursuant to the Settlement Agreements, we agreed to pay a total
of approximately $124.1 million (the Settlement
Amount) and interest on the Settlement Amount at the rate
of 3.75% from July 1, 2005 to the date of consummation of
the settlement. We have further agreed to pay, subject to
certain conditions, (i) legal fees relating to the
settlement in the amount of approximately $0.8 million, and
(ii) approximately $1.0 million in settlement costs.
The Settlement Amount includes approximately $50.6 million
for payment to 49 states and the District of Columbia. The
Settlement Amount includes approximately $63.7 million
representing the amount of underpayments to Medicaid and other
governmental pricing programs from 1994 to 2002 and
approximately $60.4 million to cover interest, penalties
and other costs.
On March 2, 2006, we paid approximately
$126.9 million, comprising the Settlement Amount and
accrued interest under our Settlement Agreements with the United
States and the 48 states and the District of Columbia. We
have agreed to pay approximately $0.4 million to the
remaining state. We currently expect to make this payment and
the other remaining payments by the end of the first quarter of
2006.
Certain decisions of the District Court relating to the
relators dispute with certain states over a potential
share award remain subject to appeal. Any share award would be
paid solely by the government and would not affect the amount we
are required to pay pursuant to the settlement. Consequently, we
believe the reversal of any such decision or decisions would not
have a material effect on us.
In addition to the Settlement Agreements, we have entered into a
five-year corporate integrity agreement with HHS/ OIG (the
Corporate Integrity Agreement) pursuant to which we
are required, among other things, to keep in place our current
compliance program, to provide periodic reports to HHS/ OIG and
to submit to audits relating to our Medicaid rebate calculations.
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We accrued in prior years a total of $130.4 million in
respect of our estimated underpayments to Medicaid and other
governmental pricing programs and estimated settlement costs
with all relevant governmental parties, which sum is classified
as restricted cash and an accrued expense on our balance sheet.
This sum is sufficient to cover the full cost of all sums owed
the federal and state governments pursuant to the Settlement
Agreements, together with related obligations to reimburse the
expenses of some of the parties.
The previously disclosed claim seeking damages from us because
of alleged retaliatory actions against the relator was dismissed
with prejudice on January 31, 2006.
The Settlement Agreements will not resolve any of the previously
disclosed civil suits that are pending against us and related
individuals and entities discussed in the section
Securities and ERISA Litigation below.
The foregoing description of the settlement, the Settlement
Agreements and the Corporate Integrity Agreement is qualified in
its entirety by the Companys Current Report on
Form 8-K filed
November 4, 2005, which is incorporated herein by reference.
As previously reported, the SEC has also been conducting an
investigation relating to our underpayments to governmental
programs, as well as into our previously disclosed errors
relating to reserves for product returns. While the SECs
investigation is continuing with respect to the product returns
issue, the Staff of the SEC has advised us that it has
determined not to recommend enforcement action against us with
respect to the aforementioned governmental pricing matter. The
Staff of the SEC notified us of this determination pursuant to
the final paragraph of Securities Act Release 5310. Although the
SEC could still consider charges against individuals in
connection with the governmental pricing matter, we do not
believe that any governmental unit with authority to assert
criminal charges is considering any charges of that kind.
We continue to cooperate with the SECs ongoing
investigation. Based on all information currently available to
us, we do not anticipate that the results of the SECs
ongoing investigation will have a material adverse effect on us,
including by virtue of any obligations to indemnify current or
former officers and directors.
|
|
|
Securities and ERISA 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, in connection with our underpayment of rebates owed to
Medicaid and other governmental pricing programs, and certain
transactions between us and the Benevolent Fund. 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.
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.
41
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 Incorporated, a predecessor to one of our wholly owned
subsidiaries, King Pharmaceuticals 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 in this action has commenced. The Court has
set a trial date of April 10, 2007.
We have estimated a probable loss contingency for the class
action lawsuit described above. We believe this loss contingency
will be paid on behalf of us by our insurance carriers.
Accordingly, as of December 31, 2005, we have recorded a
liability and a receivable for this amount, classified in
accrued expenses and prepaid and other current assets,
respectively, in our consolidated financial statement.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of our
current and former officers and directors, with respect to the
same events at issue in the federal securities litigation
described above. These cases have been consolidated, and on
October 3, 2003, plaintiffs filed a consolidated amended
complaint. On November 17, 2003, defendants filed a motion
to dismiss or stay the consolidated amended complaint. The court
denied the motion to dismiss, but granted a stay of proceedings.
On October 11, 2004, the court lifted the stay to permit
plaintiffs to file a further amended complaint adding class
action claims related to our then-anticipated merger with Mylan
Laboratories, Inc. On October 26, 2004, defendants filed a
partial answer to the further amended complaint, and moved to
dismiss the newly-added claims. Following the termination of the
Mylan merger agreement, plaintiffs voluntarily dismissed these
claims. Discovery with respect to the remaining claims in the
case has commenced. No trial date has been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
In August 2004, a separate class action lawsuit was filed in
Tennessee state court, asserting claims solely with respect to
our then-anticipated merger with Mylan Laboratories. Defendants
filed a motion to dismiss the case on November 30, 2004,
which remains pending. We believe that the claims in this case
are moot following termination of the Mylan merger agreement.
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 are unable currently to predict the outcome or to reasonably
estimate the range of potential loss, if any, except as noted
above, in the pending litigation. If we were not to prevail in
the pending litigation, or if any governmental sanctions are
imposed in excess of those described above, neither of which we
can predict or reasonably estimate at this time, our business,
financial condition, results of operations and cash
42
flows could be materially adversely affected. Responding to the
government investigations 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.
Cobalt Pharmaceuticals, Inc. (Cobalt) 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 Approved Drug Products with Therapeutic
Equivalence Evaluations, which is known as the Orange
Book: U.S. Patent No. 5,061,722, the (722
patent), a composition-of-matter patent 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 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 filed a
Paragraph IV certification alleging invalidity of the
722 patent, and Aventis and the Company 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 provided us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003. That
30 month stay expired in August 2005 and on October 24,
2005, the FDA granted final approval of Cobalts ANDA. 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. On February 27, 2006,
the Company, Aventis and Cobalt agreed that, subject to certain
conditions, within 38 days, all parties will submit a joint
stipulation dismissing without prejudice the litigation before
the U.S. District Court of Massachusetts.
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 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 civil actions for infringement of the
722 patent against Lupin in the U.S. District
Courts for the District of Maryland and the Eastern District of
Virginia. 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. On February 1, 2006, the
Maryland and Virginia cases were consolidated into a single
action in the Eastern District of Virginia. Trial is currently
scheduled to begin in that action on June 6, 2006.
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 December 31, 2005, we had net intangible
assets related to
Altace®
of $239.5 million.
|
|
|
Skelaxin®
Patent Challenge |
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(CorePharma) and Mutual Pharmaceutical Company
(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 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. We filed a patent
infringement suit against Eon Labs on January 2, 2003 in
the District Court for the Eastern District
43
of New York, and 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), as well as 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, our filing of the suit against CorePharma
provided 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 provided 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 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,
to require generic applicants to submit Paragraph IV
certifications for the 128 patent, and to prohibit the
removal of information corresponding to the use listed in the
FDAs 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 upon 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 our 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. As of December 31, 2005, we had net
intangible assets related to
Skelaxin®
of $170.4 million. 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.
Teva Pharmaceuticals USA, Inc. (Teva) 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 FDAs 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, our 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. As of December 31, 2005, we had net intangible
assets related to
Sonata®
of $12.9 million.
44
Adenoscan®
Patent Challenge
Sicor Pharmaceuticals, Inc. (Sicor), 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 our exclusive
licensee of certain rights under the 877 patent 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 and
its parents/affiliates Sicor, Inc., Teva 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 with an automatic stay
of FDA approval of Sicors 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.
Prefest®
Patent Challenge
In 2003, Barr Laboratories, Inc. (Barr) filed an
ANDA with the FDA seeking permission to market a generic version
of
Prefest®.
On October 15, 2003, we received notice of Barrs
Paragraph IV certification, which alleged noninfringement
and invalidity of two patents, the 995 patent and the
573 patent. On November 26, 2003, we filed a
complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. On
November 22, 2004, we sold all of our rights in
Prefest®
for approximately $15.0 million. As a result of this
transaction, the lawsuit was dismissed on January 11, 2005.
Thimerosal/ Vaccine
Related Litigation
We and Parkedale Pharmaceuticals, Inc., a wholly owned
subsidiary of ours, 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 attempted 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.
Our product liability insurance carrier has been given proper
notice of all of these matters and defense counsel is vigorously
defending our interests. We have filed motions to dismiss due,
among other things, to lack of product identity in the
plaintiffs complaints. In 2001, our motion to dismiss was
granted in a similar case on this basis. We intend to defend
these lawsuits vigorously but are unable currently to predict
the outcome or to reasonably estimate the range of potential
loss, if any.
|
|
|
Hormone Replacement Therapy |
We have been named as a defendant in seventeen 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, Minnesota, Florida, Maryland and
Mississippi. The plaintiffs allege that we 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. We intend to defend these lawsuits vigorously
but are unable currently to predict the outcome or to reasonably
estimate the range of potential loss, if any.
45
|
|
|
Average Wholesale Pricing Litigation |
In August 2004, we and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly owned subsidiary of ours, 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
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 Pharmaceutical
Industry 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. We intend to defend this lawsuit
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of loss, if any.
We also have been named as a defendant along with other
pharmaceutical manufacturers in thirty-four 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, Mississippi, and Alabama, some of which we are
seeking to have transferred to the United States District Court
for the District of Massachusetts and combined with the existing
multi-district litigation.
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. 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. We
are one of many defendants in no more than six lawsuits that
claim damages for personal injury arising from our production of
the anorexigenic drug phentermine under contract for
GlaxoSmithKline.
While we cannot predict the outcome of these suits, we believe
that the claims against us are without merit and we intend to
vigorously pursue all defenses available to us. We are being
indemnified in all of these suits by GlaxoSmithKline, for which
we manufactured the anorexigenic product, provided that neither
the lawsuits nor the associated liabilities are based upon our
independent negligence or intentional acts. We intend to submit
a claim for all unreimbursed costs to our product liability
insurance carrier. However, in the event that GlaxoSmithKline is
unable to satisfy or fulfill its obligations under the
indemnity, we would have to defend the lawsuits and be
responsible for damages, if any, that are awarded against it or
for amounts in excess of our product liability coverage. A
reasonable estimate of possible losses related to these suits
cannot be made.
In addition, King Research and Development is a defendant in
approximately 143 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 Research and Development, 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®,
Abanas branded phentermine product. The plaintiffs in
these cases claim injury as a result of ingesting a combination
of these weight-
46
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.
King Research and Development denies any liability incident to
the distribution of
Obenix®
or Jones generic phentermine product and intends to pursue
all defenses available to it. King Research and
Developments insurance carriers are currently defending
King Research and Development in these suits. The manufacturers
of fenfluramine and dexfenfluramine have settled many of these
cases. In the event that King Research and Developments
insurance coverage is 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.
While we cannot predict the outcome of these suits, management
believes that the claims against King Research and Development
are without merit and intends to vigorously pursue all defenses
available. We are unable to disclose an aggregate dollar amount
of damages claimed because many of these complaints are
multi-party suits and do not state specific damage amounts.
Rather, these claims typically state damages as may be
determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, we cannot reasonably estimate
possible losses related to the lawsuits.
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). We acquired the Rochester facility in February
1998. In July 2005, the Court lifted the Consent Decree and the
Rochester facility is no longer subject to the Consent Decree.
We are also involved in various routine legal proceedings
incident to the ordinary course of our business.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
47
PART II
|
|
Item 5. |
Market for Common Equity and Related Stockholder
Matters |
The following table sets forth the range of high and low sales
prices per share of our common stock for the periods indicated.
Our common stock is listed on the New York Stock Exchange, where
it trades under the symbol KG. There were
approximately 1,050 shareholders on February 27, 2006,
based on the number of record holders of the common stock.
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
| |
|
|
High | |
|
Low | |
|
|
| |
|
| |
First quarter
|
|
$ |
12.58 |
|
|
$ |
8.28 |
|
Second quarter
|
|
|
10.60 |
|
|
|
7.50 |
|
Third quarter
|
|
|
16.39 |
|
|
|
10.11 |
|
Fourth quarter
|
|
|
17.45 |
|
|
|
14.22 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
| |
|
|
High | |
|
Low | |
|
|
| |
|
| |
First quarter
|
|
$ |
20.62 |
|
|
$ |
15.24 |
|
Second quarter
|
|
|
18.68 |
|
|
|
11.30 |
|
Third quarter
|
|
|
14.00 |
|
|
|
10.32 |
|
Fourth quarter
|
|
|
12.87 |
|
|
|
10.01 |
|
On February 27, 2006, the closing price of our common stock
as reported on the New York Stock Exchange was $19.87.
We have never paid cash dividends on our common stock. The
payment of cash dividends is subject to the discretion of the
board of directors and will be dependent upon many factors,
including our earnings, our capital needs, and our general
financial condition. We currently anticipate that for the
foreseeable future, we will retain our earnings.
48
|
|
Item 6. |
Selected Financial Data |
The table below should be read in conjunction with the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
audited consolidated financial statements and related notes
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except per share data) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,694,753 |
|
|
$ |
1,225,890 |
|
|
$ |
1,424,424 |
|
|
$ |
1,029,649 |
|
|
$ |
802,380 |
|
Royalty revenue
|
|
|
78,128 |
|
|
|
78,474 |
|
|
|
68,365 |
|
|
|
58,375 |
|
|
|
46,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,772,881 |
|
|
|
1,304,364 |
|
|
|
1,492,789 |
|
|
|
1,088,024 |
|
|
|
849,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(3)
|
|
|
180,079 |
|
|
|
(41,264 |
) |
|
|
151,952 |
|
|
|
275,043 |
|
|
|
351,379 |
|
Interest income
|
|
|
18,175 |
|
|
|
5,974 |
|
|
|
6,849 |
|
|
|
22,395 |
|
|
|
10,975 |
|
Interest expense
|
|
|
(11,931 |
) |
|
|
(12,588 |
) |
|
|
(13,396 |
) |
|
|
(12,419 |
) |
|
|
(12,684 |
) |
Valuation (charge) benefit convertible notes
receivable
|
|
|
|
|
|
|
(2,887 |
) |
|
|
18,551 |
|
|
|
(35,629 |
) |
|
|
|
|
Loss on investment
|
|
|
(6,182 |
) |
|
|
(6,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt expense(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,903 |
) |
Other (expense) income, net
|
|
|
(2,026 |
) |
|
|
(749 |
) |
|
|
(629 |
) |
|
|
(884 |
) |
|
|
6,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes,
discontinued operations and cumulative effect of change in
accounting principle
|
|
|
178,115 |
|
|
|
(58,034 |
) |
|
|
163,327 |
|
|
|
248,506 |
|
|
|
333,080 |
|
Income tax expense (benefit)
|
|
|
61,485 |
|
|
|
(7,412 |
) |
|
|
65,884 |
|
|
|
78,033 |
|
|
|
123,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
116,630 |
|
|
|
(50,622 |
) |
|
|
97,443 |
|
|
|
170,473 |
|
|
|
209,251 |
|
Income (loss) from discontinued operations(4)
|
|
|
1,203 |
|
|
|
(109,666 |
) |
|
|
(5,489 |
) |
|
|
11,928 |
|
|
|
9,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
117,833 |
|
|
|
(160,288 |
) |
|
|
91,954 |
|
|
|
182,401 |
|
|
|
218,481 |
|
Cumulative effect of change in accounting principle(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
117,833 |
|
|
$ |
(160,288 |
) |
|
$ |
91,954 |
|
|
$ |
182,401 |
|
|
$ |
217,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative
effect of change in accounting principle
|
|
$ |
0.48 |
|
|
$ |
(0.21 |
) |
|
$ |
0.40 |
|
|
$ |
0.70 |
|
|
$ |
0.90 |
|
|
Income (loss) from discontinued operations
|
|
|
0.01 |
|
|
|
(0.45 |
) |
|
|
(0.02 |
) |
|
|
0.05 |
|
|
|
0.04 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
$ |
0.75 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative
effect of change in accounting principle
|
|
$ |
0.48 |
|
|
$ |
(0.21 |
) |
|
$ |
0.40 |
|
|
$ |
0.69 |
|
|
$ |
0.89 |
|
|
Income (loss) from discontinued operations
|
|
|
0.01 |
|
|
|
(0.45 |
) |
|
|
(0.02 |
) |
|
|
0.05 |
|
|
|
0.04 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
$ |
0.74 |
|
|
$ |
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
276,329 |
|
|
$ |
438,133 |
|
Total assets
|
|
|
2,965,242 |
|
|
|
2,924,156 |
|
Total debt
|
|
|
345,000 |
|
|
|
345,000 |
|
Shareholders equity
|
|
|
1,973,422 |
|
|
|
1,848,790 |
|
|
|
(1) |
Reflects the cumulative effect of a change in accounting
principle of $545 (net of taxes of $325) due to the adoption of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, during the first
quarter of 2001. |
|
(2) |
Reflects early extinguishment of debt expense in connection with
the repayment of some of our debt instruments during 2001. |
|
(3) |
Results for 2003 reflect a $15,212 reduction in the co-promotion
fees paid to our
Altace®
co-promotion partner as a result of charges for amounts due
under Medicaid and other governmental pricing programs for the
years 1998 to 2002. Specifically (a) we recovered on a
pre-tax basis $9,514 in fees we previously accrued during the
fourth quarter of 2002 and have reduced the accrual for these
fees by this amount in the fourth quarter of 2003 and
(b) fees under our Co-Promotion Agreement for
Altace®
in the fourth quarter of 2003 were reduced on a pre-tax basis by
an additional $5,698 as a result of the Medicaid accrual
adjustment recorded in that quarter. |
|
(4) |
Reflects the classification of
Nordette®
and
Prefest®
product lines as discontinued operations. See Note 27 to
our audited consolidated financial statements included elsewhere
in this report. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion should be read in conjunction with the
other parts of this report, including the audited consolidated
financial statements and related notes. Historical results and
percentage relationships set forth in the statement of income,
including trends that might appear, are not necessarily
indicative of future operations. Please see the Risk
Factors and Forward-Looking Statements
sections for a discussion of the uncertainties, risks and
assumptions associated with these statements.
OVERVIEW
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.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
and prudent product life-cycle management. We also work to
achieve organic growth by continuing to develop investigational
drugs that are in our pipeline.
Our strategy also focuses on growth through the acquisition of
novel branded pharmaceutical products in later stages of
development and technologies that have significant market
potential that complement our three key therapeutic areas of
focus. Utilizing our internal resources and a disciplined
business development process, we strive to be a leader and
partner of choice in bringing innovative,
clinically-differentiated therapies and technologies to market
in our key therapeutic areas. We may also seek company
acquisitions which add products or products in development,
technologies or sales and marketing capabilities to our key
therapeutic areas or that otherwise complement our operations.
50
Our business consists of five segments which include branded
pharmaceuticals, Meridian Medical Technologies, royalties,
contract manufacturing, and other. In accordance with our
strategy, our branded pharmaceutical products can be divided
into the following therapeutic areas:
|
|
|
|
|
Cardiovascular/metabolic (including
Altace®
and
Levoxyl®), |
|
|
|
Neuroscience (including
Sonata®
and
Skelaxin®), |
|
|
|
Hospital/acute care (including
Thrombin-JMI®), and |
|
|
|
Other. |
We believe each of our key therapeutic areas of focus has
significant market potential and our organization is aligned
accordingly.
Our Meridian Medical Technologies segment consists of our
auto-injector business, which includes
EpiPen®
and nerve gas antidotes which we provide to the
U.S. Military. Royalties relates to revenues we derive from
successfully developed products that we have licensed to third
parties. Our contract manufacturing segment manufactures
pharmaceutical products for third parties under contracts with a
number of pharmaceutical and biotechnology companies.
2005 Highlights
During 2005, we achieved many important accomplishments that we
believe will better position us for long-term growth. Among our
many accomplishments, we:
|
|
|
|
|
believe we normalized the level of wholesale inventories of our
branded pharmaceutical products; |
|
|
|
entered into definitive settlement agreements to resolve the
governmental inquiries related to our underpayments of rebates
owed to Medicaid and other governmental pricing programs during
the period from 1994 to 2002; |
|
|
|
enhanced the strength of our executive management team; and |
|
|
|
strengthened our research and development pipeline with the
addition of
Remoxytm
and up to three additional opioid products, and the continued
development of PT-141 and other investigational drugs in our
pipeline. |
We believe these accomplishments position us to continue
executing our strategy for long-term growth in 2006.
|
|
|
Wholesale Inventory Reductions |
During late 2003, we became aware of the need to improve our
visibility with respect to wholesale inventory levels of our
branded pharmaceutical products. As a result, in April 2004 we
successfully entered into inventory management agreements
(IMAs) with each of our three key wholesale
customers covering all of our branded products for the purpose
of obtaining data regarding and reducing the level of wholesale
inventories of our products. As we anticipated, entering into
the IMAs adversely affected net sales of some of our branded
pharmaceutical products, particularly during 2004, as wholesale
inventory levels of these products were aggressively reduced.
During the fourth quarter of 2004, we amended our IMAs with our
key wholesale customers with the objective of further reducing
their inventory of our products. As a result, the average
wholesale inventory level of our key products was further
reduced during the fourth quarter of 2004 and the first quarter
of 2005. This process was substantially complete for our key
products by the end of the first quarter of 2005.
Wholesale inventory data provided by our customers indicates
that wholesale inventory levels of our key branded products,
Altace®,
Skelaxin®,
Thrombin-JMI®,
Sonata®
and
Levoxyl®,
were each at one month or less of estimated end-user demand as
of December 31, 2005. The data on which we based our
original third quarter estimate of wholesale inventory levels
was incorrect primarily due to reporting errors by some of our
customers. Accordingly, we now believe that the wholesale
inventory levels of
Altace®
and
51
Skelaxin®,
as of the end of the third quarter of 2005, were slightly higher
than one month of end-user demand. We estimate that the
wholesale and retail inventories of our products as of
December 31, 2005 represents gross sales of approximately
$190.0 million to $210.0 million.
|
|
|
Settlement of Governmental Pricing Investigation |
On October 31, 2005, we entered into definitive settlement
agreements with the United States of America and with
48 states and the District of Columbia to resolve the
governmental investigations related to the underpayment of
rebates owed to Medicaid and other governmental pricing programs
during the period from 1994 to 2002. We have agreed to a
settlement with the remaining state on substantially the same
terms as the other state settlements, and we expect to enter
into a definitive settlement agreement with that state before
the end of the first quarter of 2006. On March 2, 2006, we
paid approximately $126.9 million, comprising the
settlement amount and accrued interest under our settlement
agreements with the United States and the 48 states and the
District of Columbia. We have further agreed to pay
approximately $0.4 million to the remaining state and, subject
to certain conditions, certain legal fees and settlement costs
in the amount of approximately $1.8 million. We currently
expect to pay these additional amounts by the end of the first
quarter of 2006. In addition, we have entered into a five-year
corporate integrity agreement with the Office of Inspector
General of the Department of Health and Human Services pursuant
to which we are required, among other things, to keep in place
our current compliance program, to provide periodic reports and
to submit to audits relating to our Medicaid rebate calculations.
Consummation of the federal settlement agreement and some state
settlement agreements is or was subject to court approval. On
February 24, 2006, the United States District Court for the
Eastern District of Pennsylvania (District Court)
approved the federal settlement agreement. All interested
parties, including us, the individual purportedly acting as a
relator under the False Claims Act and the affected
states, have requested that the District Court approve the state
settlement agreements that require court approval.
The previously disclosed claim seeking damages from us because
of alleged retaliatory actions against the relator was dismissed
with prejudice on January 31, 2006.
The settlement agreements described above will not resolve any
of the previously disclosed civil suits that are pending against
us and related individuals and entities discussed under the
heading Securities and ERISA Litigation in the
section below entitled Liquidity and Capital
Resources. Also, the SEC investigation of our previously
disclosed errors relating to reserves for product returns is
continuing. For additional information and a discussion
regarding the governmental investigations, please see
Settlement of Governmental Pricing Investigation and
SEC Investigation in the section below entitled
Liquidity and Capital Resources.
|
|
|
Executive Management Team Additions |
We continued to enhance our executive management team in 2005
with several notable additions, including Joseph Squicciarino,
our new Chief Financial Officer, who has over twenty years of
financial experience in the pharmaceutical industry. Another
important addition is Eric J. Bruce, our new Chief Technical
Operations Officer, who assumes responsibility for our
manufacturing, logistics, distribution and quality
organizations. Mr. Bruce has over 25 years of
manufacturing experience.
On November 10, 2005, we entered into a strategic alliance
with Pain Therapeutics, Inc. to develop and commercialize
Remoxytm
and potentially up to three other abuse-resistant opioid
painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe-chronic
pain and represents the first of what is expected to be an
entirely new class of proprietary drugs, abuse-resistant opioid
painkillers.
Under the terms of the agreement, we made an up-front payment of
$150.0 million in cash during the fourth quarter of 2005.
Pain Therapeutics could also receive additional milestone
payments of up to
52
$150.0 million in cash based on the successful clinical and
regulatory development of
Remoxytm
and other abuse-resistant opioid products. This amount includes
a $15.0 million cash payment upon acceptance of a
regulatory filing for
Remoxytm
and an additional $15.0 million upon its approval. We are
responsible for all research and development expenses related to
this alliance, which could total $100.0 million. We are
also responsible for the payment of third-party royalty
obligations of Pain Therapeutics related to products developed
under this collaboration.
Remoxytm,
which is currently in Phase III clinical trials, is being
developed as an abuse-resistant version of long-acting
oxycodone, which is also known as
Oxycontin®.
The
Remoxytm
formulation consists of a sticky, high-viscosity mass that is
not prone to injection or snorting. It is intended to meet the
needs of physicians who appropriately prescribe opioid
painkillers and who seek to minimize risks of drug diversion,
abuse or accidental patient misuse. Published data show that
freezing, crushing, or submerging
Remoxytm
in high-proof alcohol for hours at a time releases just a
fraction of oxycodone compared to currently available
formulations of oxycodone at time points when abusers presumably
expect to be able to abuse its active ingredient.
With the addition of
Remoxytm,
our current research and development pipeline includes three
products in Phase III and two products in late
Phase II. In addition to
Remoxytm,
our Phase III products include binodenoson, a pharmacologic
cardiac stress imaging agent intended to provide a reduced side
effects profile compared to the currently approved product
Adenoscan®.
Also in Phase III is
Vanquixtm,
our diazepam-filled auto-injector that is currently under
development as the only therapy of its kind for the treatment of
acute, repetitive epileptic seizures.
Our Phase II compounds are led by PT-141, under our
collaborative agreement with Palatin Technologies. PT-141 is the
first compound in a new drug class called melanocortin receptor
agonists under development to treat sexual dysfunction in both
men and women. Data obtained in trials, completed to date,
indicates that PT-141 is effective in male erectile dysfunction
(ED) and provides additive benefit to PDE-5
inhibitors. This new chemical entity is being evaluated in
Phase II clinical trials studying the efficacy and safety
profile of varying doses of this novel compound in men
experiencing ED and women experiencing female sexual dysfunction.
Also in Phase II is MRE-0094, an adenosine A2a receptor
agonist for the topical treatment of chronic, neuropathic,
diabetic foot ulcers. In the second half of 2006, we also expect
to begin the Phase II program for T-62, an adenosine A1
allosteric enhancer that we are developing for the treatment of
neuropathic pain.
On December 6, 2005, we entered into a cross-license
agreement with Mutual Pharmaceutical Company, Inc. Under the
terms of the agreement, each of the parties granted the other a
worldwide license to certain intellectual property, including
patent rights and know-how, relating to metaxalone. The
intellectual property licensed to us relates to the potential
for improved dosing and administration of metaxalone. Pursuant
to the agreement, we paid Mutual an upfront payment of
$35.0 million and will pay Mutual royalties on net sales of
products containing metaxalone beginning on January 1,
2006. Our current formulation of metaxalone is
Skelaxin®.
The royalty rate may increase depending on the achievement of
certain regulatory and commercial milestones of metaxalone
products.
On September 8, 2005, we entered into a strategic
collaboration with Inyx, Inc. relating to
Intal®
and
Tilade®,
which includes the continued development of a new formulation of
Intal®
utilizing hydrofluoroalkane (HFA), an
environmentally friendly propellant. These products are our
currently marketed inhaled anti-inflammatory agents for the
management of asthma. Pursuant to the agreements, we and Inyx
will co-market
Intal®
and
Tilade®
and each have a share of net revenues. We will continue to
market to hospitals and primary-care physicians, while Inyx will
pursue direct sales to the specialist markets. Inyx also plans
to supervise the distribution of
Intal®
HFA in Canada.
53
OPERATING RESULTS
The following table summarizes total revenues and cost of
revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
1,542,124 |
|
|
$ |
1,076,517 |
|
|
$ |
1,272,350 |
|
|
Meridian Medical Technologies
|
|
|
129,261 |
|
|
|
123,329 |
|
|
|
124,157 |
|
|
Royalties
|
|
|
78,128 |
|
|
|
78,474 |
|
|
|
68,365 |
|
|
Contract manufacturing
|
|
|
22,167 |
|
|
|
26,045 |
|
|
|
27,289 |
|
|
Other
|
|
|
1,201 |
|
|
|
(1 |
) |
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,772,881 |
|
|
$ |
1,304,364 |
|
|
$ |
1,492,789 |
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
222,924 |
|
|
$ |
251,568 |
|
|
$ |
280,580 |
|
|
Meridian Medical Technologies
|
|
|
62,958 |
|
|
|
59,296 |
|
|
|
66,203 |
|
|
Royalties
|
|
|
9,003 |
|
|
|
10,878 |
|
|
|
11,243 |
|
|
Contract manufacturing
|
|
|
27,055 |
|
|
|
31,207 |
|
|
|
27,204 |
|
|
Other cost of revenues
|
|
|
1,045 |
|
|
|
(11 |
) |
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
322,985 |
|
|
$ |
352,938 |
|
|
$ |
385,841 |
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
1,319,200 |
|
|
$ |
824,949 |
|
|
$ |
991,770 |
|
|
Meridian Medical Technologies
|
|
|
66,303 |
|
|
|
64,033 |
|
|
|
57,954 |
|
|
Royalties
|
|
|
69,125 |
|
|
|
67,596 |
|
|
|
57,122 |
|
|
Contract manufacturing
|
|
|
(4,888 |
) |
|
|
(5,162 |
) |
|
|
85 |
|
|
Other
|
|
|
156 |
|
|
|
10 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$ |
1,449,896 |
|
|
$ |
951,426 |
|
|
$ |
1,106,948 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our gross to net sales deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Gross Sales
|
|
$ |
2,240,852 |
|
|
$ |
2,017,296 |
|
|
$ |
2,015,710 |
|
Returns
|
|
|
5,012 |
|
|
|
183,066 |
|
|
|
103,525 |
|
Chargebacks
|
|
|
99,057 |
|
|
|
114,995 |
|
|
|
106,964 |
|
Commercial Rebates
|
|
|
192,203 |
|
|
|
203,405 |
|
|
|
172,720 |
|
Medicaid Rebates
|
|
|
78,753 |
|
|
|
135,545 |
|
|
|
106,614 |
|
Trade Discounts/Other
|
|
|
91,090 |
|
|
|
62,739 |
|
|
|
19,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,774,737 |
|
|
$ |
1,317,546 |
|
|
$ |
1,505,901 |
|
Discontinued Operations
|
|
|
1,856 |
|
|
|
13,182 |
|
|
|
13,112 |
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
1,772,881 |
|
|
$ |
1,304,364 |
|
|
$ |
1,492,789 |
|
|
|
|
|
|
|
|
|
|
|
Gross sales were higher in 2005 compared to 2004 primarily due
to the effect of higher unit sales as a result of the effect of
a higher level of wholesale inventory reduction of some of our
branded pharmaceutical products during 2004, and price
increases, particularly with respect to
Thrombin-JMI®.
Please see the information under the heading Wholesale
Inventory Reductions above.
54
Returns expense was lower in 2005 than in 2004 primarily due to
the decrease in actual returns primarily resulting from the
effects of a higher level of wholesale inventory reduction of
some of our branded pharmaceutical products in 2004, and the
effect of a reduction in reserves for returns. For additional
information on the change in estimate, please see below.
Medicaid rebate expense was lower in 2005 than in 2004 primarily
due to changes in estimates and changes in reserves related to
wholesale inventory levels. For additional information on the
change in estimate, please see below.
Gross sales remained fairly consistent in 2004 compared to 2003
despite price increases and a full year of sales of
Skelaxin®
and
Sonata®,
products purchased in June of 2003, primarily due to lower unit
sales as a result of the effect of a higher level of wholesale
inventory reduction of some of our branded pharmaceutical
products during 2004. Please see the information under the
heading Wholesale Inventory Reductions above.
Returns expense was higher in 2004 than in 2003 primarily due to
an increase in actual returns as a result of the effects of a
higher level of wholesale inventory reduction in 2004 and the
entry of generic competition for
Levoxyl®.
Commercial rebate expense was higher in 2004 than in 2003
primarily due to increased utilization of
Altace®
under managed care contracts and a full year of commercial
rebates on
Skelaxin®
and
Sonata®,
products acquired in June 2003.
The following tables provide the activity and ending balances
for our significant gross to net categories:
|
|
|
Accrual for Rebates (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance at January 1, net of prepaid amounts
|
|
$ |
172,161 |
|
|
$ |
213,893 |
|
Current provision related to sales made in current period
|
|
|
270,605 |
|
|
|
291,365 |
|
Current provision related to sales made in prior periods
|
|
|
(24,008 |
) |
|
|
20,305 |
|
Actual rebates
|
|
|
(298,844 |
) |
|
|
(353,402 |
) |
|
|
|
|
|
|
|
Ending balance, net of prepaid amounts
|
|
$ |
119,914 |
|
|
$ |
172,161 |
|
|
|
|
|
|
|
|
|
|
|
Accrual for Returns (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
122,863 |
|
|
$ |
82,477 |
|
Current provision
|
|
|
5,012 |
|
|
|
183,066 |
|
Actual returns
|
|
|
(76,973 |
) |
|
|
(142,680 |
) |
|
|
|
|
|
|
|
Ending balance
|
|
$ |
50,902 |
|
|
$ |
122,863 |
|
|
|
|
|
|
|
|
|
|
|
Accrual for Chargebacks (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
27,953 |
|
|
$ |
25,349 |
|
Current provision
|
|
|
99,057 |
|
|
|
114,995 |
|
Actual chargebacks
|
|
|
(113,857 |
) |
|
|
(112,391 |
) |
|
|
|
|
|
|
|
Ending balance
|
|
$ |
13,153 |
|
|
$ |
27,953 |
|
|
|
|
|
|
|
|
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
55
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, we also consider 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
$20.0 million in our reserve for returns and a
corresponding increase in net sales from branded
pharmaceuticals, excluding the adjustment to sales classified as
discontinued operations. In the second quarter of 2005, an
additional reduction in wholesale inventories resulted in a
decrease of approximately $5.0 million in our reserve for
returns and a corresponding increase in net sales from branded
pharmaceuticals, excluding the adjustment to sales classified as
discontinued operations. The 2005 current provision
amounts in the table Accrual for Returns, above,
have therefore been reduced by these amounts.
During the third quarter of 2005, our actual returns of branded
pharmaceutical products continued to decrease significantly on a
quarterly basis compared to actual returns during the quarterly
periods in 2004 and the first quarter of 2005. Additionally,
based on data received pursuant to our inventory management
agreements with our key wholesale customers, we continued to
experience normalized wholesale inventory levels of our branded
pharmaceutical products during the third quarter of 2005.
Accordingly, we believe that the rate of returns experienced
during the second and third quarters of 2005 is more indicative
of what we should expect in future quarters and have adjusted
our returns reserve accordingly. This change in estimate
resulted in a decrease of approximately $15.0 million in
the returns reserve in the third quarter and a corresponding
increase in net sales from branded pharmaceutical products,
excluding the adjustment to sales classified as discontinued
operations. The 2005 current provision amount in the
Accrual for Returns above, has therefore been
reduced by this amount. As a result of this increase in net
sales, the co-promotion expense related to net sales of
Altace®
in the third quarter of 2005 increased by approximately
$5.0 million. The effect of the change in estimate on third
quarter 2005 operating income was, therefore, approximately
$10.0 million.
As a result of our previously disclosed determination that we
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, we developed a refined
calculation to compute the Average Manufacturers Price
(AMP) and Best Price in compliance with federal laws
and regulations. For a discussion regarding the underpayment to
Medicaid and other government pricing programs from 1998 through
2002, please see Settlement of Governmental Pricing
Investigation in Item 3, Legal
Proceedings. During the third quarter of 2005, we began
reporting to the Centers for Medicare and Medicaid Services
using our refined calculation for computing AMP and Best Price.
In addition, during the third quarter of 2005, we recalculated
rebates due with respect to prior quarters utilizing the refined
AMP and Best Price calculations. As a result of this updated
information, during the third quarter of 2005, we decreased our
reserve for estimated Medicaid and other government pricing
program obligations and increased net sales from branded
pharmaceutical products by approximately $21.0 million,
approximately $8.0 million of which related to years prior
to 2005. This does not include the adjustment to sales
classified as discontinued operations. As a result of the
increase in net sales, the co-promotion expense related to net
sales of
Altace®
increased by approximately $6.0 million, approximately
$4.0 million of which related to years prior to 2005. The
effect of the change in estimate on operating income was,
therefore, approximately $15.0 million, approximately
$4.0 million of which related to years prior to 2005.
56
Branded Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Branded pharmaceutical revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
554,353 |
|
|
$ |
347,292 |
|
|
$ |
536,932 |
|
|
$ |
207,061 |
|
|
|
59.6% |
|
|
$ |
(189,640 |
) |
|
|
(35.3 |
)% |
|
Skelaxin®
|
|
|
344,605 |
|
|
|
238,563 |
|
|
|
175,235 |
|
|
|
106,042 |
|
|
|
44.5 |
|
|
|
63,328 |
|
|
|
36.1 |
|
|
Thrombin-JMI®
|
|
|
220,617 |
|
|
|
174,570 |
|
|
|
140,403 |
|
|
|
46,047 |
|
|
|
26.4 |
|
|
|
34,167 |
|
|
|
24.3 |
|
|
Levoxyl®
|
|
|
139,513 |
|
|
|
104,749 |
|
|
|
125,084 |
|
|
|
34,764 |
|
|
|
33.2 |
|
|
|
(20,335 |
) |
|
|
(16.3 |
) |
|
Sonata®
|
|
|
83,162 |
|
|
|
60,365 |
|
|
|
71,579 |
|
|
|
22,797 |
|
|
|
37.8 |
|
|
|
(11,214 |
) |
|
|
(15.7 |
) |
|
Other
|
|
|
199,874 |
|
|
|
150,978 |
|
|
|
223,117 |
|
|
|
48,896 |
|
|
|
32.4 |
|
|
|
(72,139 |
) |
|
|
(32.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
1,542,124 |
|
|
$ |
1,076,517 |
|
|
$ |
1,272,350 |
|
|
$ |
465,607 |
|
|
|
43.3% |
|
|
$ |
(195,833 |
) |
|
|
(15.4 |
)% |
Cost of Revenues
|
|
|
222,924 |
|
|
|
251,568 |
|
|
|
280,580 |
|
|
|
(28,644 |
) |
|
|
(11.4 |
) |
|
|
(29,012 |
) |
|
|
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
1,319,200 |
|
|
$ |
824,949 |
|
|
$ |
991,770 |
|
|
$ |
494,251 |
|
|
|
59.9% |
|
|
$ |
(166,821 |
) |
|
|
(16.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from branded pharmaceutical products were higher in
2005 than in 2004 primarily due to the effect of higher unit
sales and a lower rate of reserve for returns of some of these
products in 2005 as a result of the effect of a higher level of
wholesale inventory reductions of some of our branded
pharmaceutical products during 2004, the effect of a reduction
in reserves for returns and rebates and price increases,
particularly with respect to
Thrombin-JMI®.
For discussions regarding the effects of wholesale inventory
reductions, please see the information under the heading
Wholesale Inventory Reductions above. Based on
inventory data provided to us by our key customers, we believe
that wholesale inventory levels of our key products,
Altace®,
Skelaxin®,
Thrombin-JMI®,
Levoxyl®,
and
Sonata®,
as of December 31, 2005, are at normalized levels of less
than one month of end-user demand for these products. We do not
believe net sales of branded pharmaceutical products will
continue to grow at the rate experienced in 2005, due to the
factors effecting sales growth described above. For a discussion
regarding the potential risk of generic competition for
Altace®,
Skelaxin®,
and
Sonata®,
please see
Altace®
Patent Challenge,
Skelaxin®
Patent Challenge, and
Sonata®
Patent Challenge, in Item 3, Legal
Proceedings.
Sales of Key Products
Net sales of
Altace®
were higher in 2005 than in 2004 primarily due to higher unit
sales and a lower rate of reserve for returns of the product in
2005 as a result of the effects of a higher level of wholesale
inventory reductions of
Altace®
in 2004, a reduction in the reserves for returns and rebates of
Altace®
in 2005, and price increases. We do not believe
Altace®
net sales will continue to grow at the rate experienced in 2005,
due to the factors effecting sales growth described above. Total
prescriptions for
Altace®
increased approximately 1% in 2005 from 2004 according to IMS
America, Ltd. (IMS) monthly prescription data.
During the last half of 2005, prescriptions for
Altace®
were flat to declining. We anticipate this trend to continue in
2006. For a discussion regarding the risk of potential generic
competition for
Altace®,
please see
Altace®
Patent Challenge, in Item 3, Legal
Proceedings.
Net sales of
Altace®
were lower in 2004 than in 2003 primarily due to lower unit
sales and a higher rate of reserves for returns of the product
as a result of the effects of a higher level of wholesale
inventory reductions in 2004. Total prescriptions for
Altace®
increased approximately 9% in 2004 from 2003 according to IMS
monthly prescription data.
57
For discussions regarding the effects of wholesale inventory
reductions, please see the information under the heading
Wholesale Inventory Reductions above.
Net sales of
Thrombin-JMI®
increased in 2005 compared to 2004 due to the effect of price
increases and increased unit sales. The increase in net sales of
Thrombin-JMI®
in 2004 from 2003 was due to price increases as total unit sales
of
Thrombin-JMI®
sold decreased. The rate at which net sales of
Thrombin-JMI®
increased in 2005 may not continue in 2006 as it will not
benefit from price increases at the rate experienced in 2005.
Net sales of
Skelaxin®
increased in 2005 from 2004 primarily due to higher unit sales
as a result of the effects of a higher level of wholesale
inventory reductions of
Skelaxin®
in 2004. Net sales of
Skelaxin®
in 2005 also benefited from a reduction in reserves for returns
and rebates of
Skelaxin®
and modest price increases. We do not believe
Skelaxin®
net sales will continue to grow at the rate experienced in 2005,
due to the factors effecting net sales growth described above.
For discussions regarding the effects of wholesale inventory
reductions, please see under the headings Wholesale
Inventory Reductions above. Total prescriptions for
Skelaxin declined approximately 10% in 2005 from 2004 according
to IMS monthly prescription data. The declining prescriptions
trend may not continue in 2006 due to reinvigorated promotion of
the product.
Net sales of
Skelaxin®
were higher in 2004 compared to 2003 primarily because we did
not acquire the product until June 2003. Total prescriptions for
Skelaxin declined approximately 10% in 2004 from 2003 according
to IMS monthly prescription data.
As previously disclosed, the
Skelaxin®
patents are the subject of multiple challenges. Under the
current circumstances, the continued exclusivity of
Skelaxin®
is unpredictable and we cannot assure that the product will
remain exclusive for any length of time. For a discussion
regarding the risk of potential generic competition for
Skelaxin®,
please see under the heading
Skelaxin®
Patent Challenge in Item 3, Legal
Proceedings.
Net sales of
Sonata®
were higher in 2005 than in 2004 primarily due to higher unit
sales as a result of the effects of a higher level of wholesale
inventory reductions of
Sonata®
in 2004. Net sales of
Sonata®
in 2005 also benefited from modest price increases. For
discussions regarding the effects of wholesale inventory
reductions, please see under the headings Wholesale
Inventory Reductions above. Total prescriptions for
Sonata®
decreased approximately 12% in 2005 from 2004 according to IMS
monthly prescription data. The decrease in prescriptions during
2005 was primarily due to increased competition during 2005. We
believe net sales of the product in 2006 will decrease as other
potential competitive insomnia products may enter the market
during 2006. For a discussion regarding the risk of potential
generic competition for
Sonata®,
please see
Sonata®
Patent Challenge in Item 3, Legal
Proceedings.
Net sales of
Sonata®
were lower in 2004 than in 2003 primarily due to lower unit
sales as a result of the effects of a higher level of wholesale
inventory reductions of
Sonata®
in 2004. We acquired
Sonata®
in June of 2003. Total prescriptions for
Sonata®
decreased approximately 7% in 2004 from 2003 according to IMS
monthly prescription data.
In 2004, the FDA approved certain other levothyroxine sodium
products as bioequivalent and therapeutically equivalent to
Levoxyl®.
Since this time,
Levoxyl®
has competed in a highly genericized market.
58
Net sales of
Levoxyl®
were higher in 2005 than in 2004, notwithstanding lower unit
sales due to generic competition, primarily due to a lower rate
of actual returns of the products and a reduction in the amount
of commercial rebates. Total prescriptions for
Levoxyl®
decreased approximately 33% in 2005 from 2004 according to IMS
monthly prescription data. Due to the continued erosion in total
prescriptions for
Levoxyl®
as a result of the entry of generic competition for the product
in 2004, we believe that net sales of this product in 2006
should decrease significantly compared to 2005.
Net sales of
Levoxyl®
were lower in 2004 than in 2003 primarily due to lower unit
sales and a higher rate of actual returns primarily due to the
generic competition which entered the market in 2004. Total
prescriptions for
Levoxyl®
decreased approximately 11% in 2004 from 2003 according to IMS
monthly prescription data.
Other
Net sales of other branded pharmaceutical products were higher
in 2005 than in 2004 primarily due to the effects of a higher
level of wholesale inventory reductions of other branded
pharmaceutical products in 2004. Net sales of other branded
pharmaceutical products in 2005 benefited from a reduction in
reserves for returns and rebates for these products and modest
price increases. Most of these products are not promoted through
our sales force and prescriptions on many of these products are
declining. We do not believe net sales of other branded
pharmaceutical products will continue to grow at the rate
experienced in 2005, due to the factors effecting sales growth
described above.
Net sales of other branded pharmaceutical products were lower in
2004 than in 2003 primarily due to the effects of a higher level
of wholesale inventory reductions of other branded
pharmaceutical products in 2004.
For discussions regarding the effects of wholesale inventory
reductions, please see the information under the heading
Wholesale Inventory Reductions above.
Cost of Revenues
Cost of revenues from branded pharmaceutical products was lower
in 2005 compared to 2004 primarily due to the following:
|
|
|
|
|
a charge during 2004 of approximately $46.0 million for the
write-off of excess inventory which was partially attributable
to reduced unit sales of products during 2004 as a result of
wholesale inventory reductions; |
|
|
|
differences in special items which benefited 2005 compared to
2004 as discussed below. |
These two items were partially offset by the cost of revenues
associated with higher unit sales of branded prescription
products in 2005.
Cost of revenues from branded pharmaceutical products was lower
in 2004 compared to 2003 primarily due to a reduction in the
amount of special items affecting cost of revenues and lower
unit sales of our branded pharmaceutical products as a result of
the wholesale inventory reductions discussed above. For
additional information and a description of the effect of
wholesale channel inventory on net sales, please see the section
above entitled Wholesale Inventory Reductions.
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 an analysis
of our ongoing, underlying business and an analysis of our
financial results when comparing those results to that of a
previous or subsequent like period.
59
However, it should be noted that the determination of whether to
classify an item as a special charge involves judgments by us.
Special items affecting cost of revenues from branded
pharmaceuticals during 2005, 2004 and 2003 included the
following:
|
|
|
|
|
As a result of declining
Lorabid®
prescriptions in 2003, we determined that we would not sell all
of the
Lorabid®
inventory that we were required to purchase under our supply
agreement with Eli Lilly. Accordingly, we recorded a
$34.0 million charge during 2003 primarily related to our
purchase commitments for
Lorabid®
that were in excess of expected demand. We recorded a similar
charge in 2004 in the amount of $8.9 million for our
purchase commitments for
Lorabid®
and some other small products for which commitments exceeded
expected demand. With the termination of some of these purchase
commitment contracts in 2005, we had a benefit of approximately
$6.1 million which reduced our cost of revenues from
branded pharmaceutical product. |
|
|
|
We incurred charges in the amount of $4.6 million in 2004
and $4.3 million in 2003 primarily related to the voluntary
recalls of certain lots of
Levoxyl®.
Product returned as a result of this voluntary recall was less
than originally estimated. Accordingly, cost of revenues from
branded pharmaceutical products in 2005 was reduced by
approximately $2.5 million. |
We anticipate cost of revenues will increase in 2006 compared to
2005 due to additional royalties we will pay on
Skelaxin®
beginning on January 1, 2006.
|
|
|
Meridian Medical Technologies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005-2004 | |
|
2004-2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Meridian Medical Technologies revenue
|
|
$ |
129,261 |
|
|
$ |
123,329 |
|
|
$ |
124,157 |
|
|
$ |
5,932 |
|
|
|
4.8% |
|
|
$ |
(828 |
) |
|
|
(0.7 |
)% |
|
Cost of Revenues
|
|
|
62,958 |
|
|
|
59,296 |
|
|
|
66,203 |
|
|
|
3,662 |
|
|
|
6.2 |
|
|
|
(6,907 |
) |
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
66,303 |
|
|
$ |
64,033 |
|
|
$ |
57,954 |
|
|
$ |
2,270 |
|
|
|
3.5% |
|
|
$ |
6,079 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from Meridian Medical Technologies in 2003
includes a special item that resulted in a charge of
$2.1 million relating to the
step-up in the cost of
Meridians inventory at the time of our acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005-2004 | |
|
2004-2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$ |
78,128 |
|
|
$ |
78,474 |
|
|
$ |
68,365 |
|
|
$ |
(346 |
) |
|
|
(0.4 |
)% |
|
$ |
10,109 |
|
|
|
14.8% |
|
|
Cost of Revenues
|
|
|
9,003 |
|
|
|
10,878 |
|
|
|
11,243 |
|
|
|
(1,875 |
) |
|
|
(17.2 |
) |
|
|
(365 |
) |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
69,125 |
|
|
$ |
67,596 |
|
|
$ |
57,122 |
|
|
$ |
1,529 |
|
|
|
2.3 |
% |
|
$ |
10,474 |
|
|
|
18.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from royalties are derived primarily from payments we
receive based on sales of
Adenoscan®.
We are not responsible for the marketing of these products and,
thus, are not able to predict whether revenue from royalties
will increase or decrease in 2006. For a discussion regarding
the potential risk of generic competition for
Adenoscan®,
please see
Adenoscan®
Patent Challenge in Item 3, Legal
Proceedings.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005-2004 | |
|
2004-2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$ |
22,167 |
|
|
$ |
26,045 |
|
|
$ |
27,289 |
|
|
$ |
(3,878 |
) |
|
|
(14.9 |
)% |
|
$ |
(1,244 |
) |
|
|
(4.6 |
)% |
|
Cost of Revenues
|
|
|
27,055 |
|
|
|
31,207 |
|
|
|
27,204 |
|
|
|
(4,152 |
) |
|
|
(13.3 |
) |
|
|
4,003 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
(4,888 |
) |
|
$ |
(5,162 |
) |
|
$ |
85 |
|
|
$ |
274 |
|
|
|
5.3 |
% |
|
$ |
(5,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contract manufacturing decreased in 2005 due to a
lower volume of units manufactured for third parties. This
decline may continue in future periods.
Cost of revenues associated with contract manufacturing
decreased in 2005 due to decreased unit production or products
we manufacture for third parties. In 2004, cost of revenues
increased due to higher costs partially offset by decreased unit
production of products we manufacture for third parties.
|
|
|
Operating Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005-2004 | |
|
2004-2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Total gross profit
|
|
$ |
1,449,896 |
|
|
$ |
951,426 |
|
|
$ |
1,106,948 |
|
|
$ |
498,470 |
|
|
|
52.4% |
|
|
$ |
(155,522 |
) |
|
|
(14.0 |
)% |
Selling, general and administrative
|
|
|
636,483 |
|
|
|
595,441 |
|
|
|
490,582 |
|
|
|
41,042 |
|
|
|
6.9 |
|
|
|
104,859 |
|
|
|
21.4 |
|
Research and development
|
|
|
262,726 |
|
|
|
84,239 |
|
|
|
238,078 |
|
|
|
178,487 |
|
|
|
211.9 |
|
|
|
(153,839 |
) |
|
|
(64.6 |
) |
Depreciation and amortization
|
|
|
147,049 |
|
|
|
162,115 |
|
|
|
113,745 |
|
|
|
(15,066 |
) |
|
|
(9.3 |
) |
|
|
48,370 |
|
|
|
42.5 |
|
Intangible asset impairment
|
|
|
221,054 |
|
|
|
149,592 |
|
|
|
124,616 |
|
|
|
71,462 |
|
|
|
47.8 |
|
|
|
24,976 |
|
|
|
20.0 |
|
Merger, restructuring, and other nonrecurring charges
|
|
|
4,180 |
|
|
|
10,827 |
|
|
|
|
|
|
|
(6,647 |
) |
|
|
(61.4 |
) |
|
|
10,827 |
|
|
|
100.0 |
|
Gain on sale of products
|
|
|
(1,675 |
) |
|
|
(9,524 |
) |
|
|
(12,025 |
) |
|
|
7,849 |
|
|
|
82.4 |
|
|
|
2,501 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
180,079 |
|
|
$ |
(41,264 |
) |
|
$ |
151,952 |
|
|
$ |
221,343 |
|
|
|
|
|
|
$ |
(193,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
|
|
|
|
| |
|
|
For the Years Ended December 31, | |
|
2005-2004 | |
|
2004-2003 | |
|
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$ |
409,451 |
|
|
$ |
409,775 |
|
|
$ |
292,084 |
|
|
$ |
(324 |
) |
|
|
(0.1 |
)% |
|
$ |
117,691 |
|
|
|
40.3 |
% |
Medicaid related charge
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
(65,000 |
) |
|
|
(100.0 |
) |
|
|
65,000 |
|
|
|
100.0 |
|
Mylan transaction costs
|
|
|
3,898 |
|
|
|
9,062 |
|
|
|
|
|
|
|
(5,164 |
) |
|
|
(57.0 |
) |
|
|
9,062 |
|
|
|
100.0 |
|
Co-promotion fees
|
|
|
223,134 |
|
|
|
111,604 |
|
|
|
198,498 |
|
|
|
111,530 |
|
|
|
99.9 |
|
|
|
(86,894 |
) |
|
|
(43.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$ |
636,483 |
|
|
$ |
595,441 |
|
|
$ |
490,582 |
|
|
$ |
41,042 |
|
|
|
6.9 |
% |
|
$ |
104,859 |
|
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses increased in
2005 compared to 2004 primarily due to an increase in
co-promotion fees we paid to Wyeth under our Co-Promotion
Agreement as a result of higher net sales of
Altace®
during 2005 as compared to 2004, which were partially offset by
a lower net charge for special items affecting this category of
expense in 2005 compared to 2004. For a discussion regarding the
increase in net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
61
In 2004, total selling, general and administrative expenses
increased from 2003 primarily due to operating expenses
associated with the expansion of our sales and marketing
organization, increased expenses associated with special items,
and increased marketing expenses associated with marketing
campaigns for some of our products, which together were
substantially offset by decreases in co-promotion fees we paid
to Wyeth under our Co-Promotion Agreement as a result of lower
sales of
Altace®
during 2004, as compared to 2003.
Selling, general and administrative expense includes the
following special items:
|
|
|
|
|
Charges of $19.8 million, $24.8 million, and
$28.9 million during 2005, 2004 and 2003, respectively,
primarily due to professional fees related to the now completed
investigation of our company by the HHS/ OIG, and the partially
completed investigation by the SEC. For additional information,
please see Settlement of Governmental Pricing
Investigation, SEC Investigation and
Securities and ERISA Litigation in Item 3,
Legal Proceedings. |
|
|
|
Charges in the amount of $3.9 million and $9.1 million
in 2005 and 2004, respectively, for professional fees and
expenses related to the terminated merger agreement with Mylan
Laboratories, Inc. |
|
|
|
A charge of $65.0 million related to Medicaid 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 charge that we accrued in 2003 for estimated
underpayments to Medicaid and other government pricing programs.
We believe that this accrual totaling $130.4 million is
adequate and sufficient to cover the full cost of all sums owed
the federal and state governments pursuant to the settlement
agreements. For additional information, please see
Settlement of Governmental Pricing Investigation in
Item 3, Legal Proceedings. |
As a percentage of total revenues, total selling, general, and
administrative expenses decreased to 35.9% in 2005 compared to
45.6% in 2004. Selling, general and administrative expense, as a
percentage of total revenues, was higher in 2004 than in 2005
primarily due to lower total 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 affecting this category of
expense in 2004 compared to 2005 as discussed above.
As a percentage of total revenues, total selling, general, and
administrative expense increased to 45.6% in 2004 from 32.9% in
2003. The increased percentage in 2004 was primarily due to
lower total revenues in 2004 for the reasons discussed above and
an increase in special items affecting this category of expense
in 2004 compared to 2003 discussed above.
Research and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
Change | |
|
|
December 31, | |
|
| |
|
|
| |
|
2005-2004 | |
|
2004-2003 | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
$ | |
|
$ | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
|
|
|
|
Research and development
|
|
$ |
74,015 |
|
|
$ |
67,939 |
|
|
$ |
44,078 |
|
|
$ |
6,076 |
|
|
$ |
23,861 |
|
Research and development in process upon acquisition
|
|
|
188,711 |
|
|
|
16,300 |
|
|
|
194,000 |
|
|
|
172,411 |
|
|
|
(177,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$ |
262,726 |
|
|
$ |
84,239 |
|
|
$ |
238,078 |
|
|
$ |
178,487 |
|
|
$ |
(153,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development represents expenses associated with the
ongoing development of investigational drugs and product
life-cycle management projects in our research and development
pipeline. These expenses have continued to increase over time as
our development programs have progressed to later stages of
clinical development, which later stages are much more expensive
than earlier stages, and as we have continued to add late-stage
products in development to our portfolio. Our business model
continues to focus on adding to our research and development
pipeline through the acquisition of novel branded pharmaceutical
products and technologies in later stages of development.
Accordingly, we anticipate that this category of expense will
continue to increase in 2006.
62
Research and development-in process upon acquisition represents
the actual cost of acquiring rights to novel branded
pharmaceutical projects in development from third parties, which
costs we expense at the time of acquisition. We classify these
costs as special items and in 2005, 2004, and 2003 included the
following:
|
|
|
|
|
A charge equaling $153.7 million during 2005 for our
acquisition of in-process research and development associated
with our strategic alliance with Pain Therapeutics to develop
and commercialize
RemoxyTM
and other abuse-resistant opiod painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe
chronic pain. We are responsible for all research and
development expenses related to this alliance, which could total
$100.0 million. The value of the in-process research and
development project was expensed on the date of acquisition as
it had not received regulatory approval and had no alternative
future use.
Remoxytm
is in a Phase III clinical trial. If this Phase III
clinical trial is successful, we currently anticipate obtaining
FDA approval in 2008 or 2009. We believe there is a reasonable
probability of completing the project successfully. However, the
success of the project depends on the outcome of the
Phase III clinical trial and the ability to successfully
manufacture the product. If the project is not successfully
completed, it could have a material effect on our cash flows and
results of operations. |
|
|
|
A charge of $35.0 million during 2005 for our acquisition
of in-process research and development due to our
co-exclusive license
agreement with Mutual Pharmaceutical Company whereby we obtained
a license to certain intellectual property relating to
metaxalone. The intellectual property licensed to us relates to
the potential for improved dosing and administration of
metaxalone. The value of the in-process research and development
project was expensed on the date of acquisition as it had not
received regulatory approval. We are in the process of
evaluating a potential new formulation of
Skelaxin®.
The success of the project will depend on additional in vitro
and in vivo work in a clinical setting. The costs and the
time-line of the potential project are being evaluated. The
in-process research and development is part of the branded
pharmaceutical segment. |
|
|
|
A charge of $16.3 million during 2004 for our acquisition
of in-process research and development associated with our entry
into a strategic alliance with Palatin to develop and
commercialize PT-141.
|
|
|
|
A charge of $194.0 million during 2003 for in-process
research and development associated with our acquisition of
Sonata®
and
Skelaxin®. |
Depreciation and Amortization Expense
Depreciation and amortization expense decreased in 2005 from
2004 primarily due to completing our amortization of the
purchase price associated with our
Skelaxin®
patent in the second quarter of 2005. For additional information
regarding amortization, including estimated future amortization
expense, please see Note 11 to our audited consolidated
financial statements.
Depreciation and amortization expense increased in 2004 from
2003 primarily due to the amortization of the intangible assets
associated with our acquisitions of
Sonata®
and
Skelaxin®
on June 12, 2003.
Other Operating Expenses
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses
resulting in a net charge totaling $223.6 million during
2005 compared to a net charge totaling $150.9 million
during 2004 and $112.6 million in 2003. These other special
items included the following:
|
|
|
|
|
An intangible asset impairment charge in 2005 of
$221.1 million, which is primarily related to greater than
expected decline in prescriptions for
Sonata®
and anticipated decline in prescriptions in
Corzide®.
An intangible asset impairment charge in 2004 of
$149.6 million, which primarily related to our decision to
discontinue the
Sonata®
MR development program, and a greater than expected |
63
|
|
|
|
|
decline in prescriptions for
Florinef®
and
Tapazole®
due to availability of generics for these products. An
intangible asset impairment charge of $124.6 million in
2003 primarily reflecting the reduction in the fair value of the
Florinef®
intangible assets upon the FDAs approval of a second
generic on January 21, 2003. The additional intangible
asset impairment charge pertaining to
Florinef®
recorded in 2004 reflects a further reduction in the fair value
of the intangible assets associated with this product due to a
decline in prescriptions that exceeded our original estimate.
These special items were recorded in order to adjust the
carrying value of the intangible assets on our balance sheet
associated with these products so as to reflect the estimated
fair value of these assets at the relevant time. |
|
|
|
Restructuring charges in the amount of $2.3 million in 2005
due to a decision to reduce our workforce in order to improve
efficiencies in our operations. Restructuring charges in the
amount of $1.9 million and $10.8 million in 2005 and
2004, respectively, primarily as a result of separation
agreements with several of our executives, the relocation of our
sales and marketing operations from Bristol, Tennessee to
Princeton, New Jersey and our decision to discontinue some
relatively insignificant products associated with Meridian
Medical Technologies business. |
|
|
|
Income of $1.7 million and $9.5 million in 2005 and
2004, respectively, primarily due to a gain on our divestiture
of our
Anusol-HC®
and
Proctocort®
product lines and a gain on the termination of our co-promotion
and license agreements with Novavax Inc. regarding
Estrasorbtm
and the repurchase by Novavax of all of its convertible notes
which we held. |
|
|
|
During 2003, we had income of $12.0 million due to a gain
on the sale of our animal health products and certain non-income
producing intangible assets. |
Demand for some of our non-key products, including but not
limited to
Intal®,
Tilade®
and
Synercid®,
declined over the past year at a rate which triggered a review
of the intangible assets associated with these products. As of
December 31, 2005, the net intangible assets associated
with these three products totaled approximately
$196.7 million. We believe that these intangible assets are
not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, if demand for the
products associated with these intangible assets declines below
current expectations, we may have to reduce the estimated
remaining useful life and/or write off a portion or all of these
intangible assets.
In addition, certain generic companies have challenged patents
on
Altace®,
Skelaxin®,
and
Sonata®.
For additional information, please see the sections entitled
Altace®
Patent Challenge,
Skelaxin®
Patent Challenge, and Sonata Patent Challenge
in Item 3 Legal Proceedings. If a generic
version of
Altace®,
Skelaxin®
or
Sonata®
enters the market, we may have to write-off a portion or all of
the intangible assets associated with these products.
Our Rochester, Michigan facility manufactures products for us
and various third-parties. As of December 31, 2005, the net
carrying value of the property, plant and equipment at the
Rochester facility, excluding that associated with the
production of
Bicillin®,
was $66.0 million. Overall production volume at this
facility has been declining. We are currently transferring to
this facility the manufacture of certain products that are
currently manufactured by us at other facilities or for us by
third parties. These transfers should increase production and
cash flow at the Rochester facility. We currently believe 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 we are
not successful in transferring additional production to the
Rochester facility, we may have to write-off a portion of the
property, plant, equipment associated with this facility.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Interest income
|
|
$ |
18,175 |
|
|
$ |
5,974 |
|
|
$ |
6,849 |
|
Interest expense
|
|
|
(11,931 |
) |
|
|
(12,588 |
) |
|
|
(13,396 |
) |
Valuation charge convertible notes receivable
|
|
|
|
|
|
|
(2,887 |
) |
|
|
18,551 |
|
(Loss) gain on investment
|
|
|
(6,182 |
) |
|
|
(6,520 |
) |
|
|
|
|
Other, net
|
|
|
(2,026 |
) |
|
|
(749 |
) |
|
|
(629 |
) |
Income tax expense (benefit)
|
|
|
61,485 |
|
|
|
(7,412 |
) |
|
|
65,884 |
|
Discontinued operations
|
|
|
1,203 |
|
|
|
(109,666 |
) |
|
|
(5,489 |
) |
Other Income (Expense)
Interest income increased during 2005 compared to 2004 primarily
due to an increase in interest rates and a higher total balance
of cash, cash equivalents and investments in debt securities in
2005.
Special items affecting other income (expense) included the
following:
|
|
|
|
|
Charges of $6.2 million and $6.5 million in 2005 and
2004, respectively, related to our investment in Novavax. During
2005 and 2004, we incurred charges to write down our investment
in Novavax to fair value. During the third quarter of 2005, we
sold our investment in Novavax. |
|
|
|
A charge of $2.9 million during 2004 and income of
$18.6 million in 2003 to reflect a change in the valuation
allowance for the convertible notes receivable from Novavax.
Novavax repurchased the convertible notes from us in July 2004. |
Income Tax Expense (Benefit)
During 2005, our effective income tax rate for continuing
operations was 34.5%. This rate differs from the federal
statutory rate of 35% primarily due to tax benefits related to
charitable contributions of inventory and tax-exempt interest
income partially offset by state taxes. We anticipate our
effective tax rate in 2006 to approximate the federal statutory
rate.
During 2004, we had an effective income tax benefit rate of
12.8%, which is lower than the federal statutory rate due to the
expected nondeductible Medicaid related charges, state taxes,
and the establishment of a valuation allowance against state
deferred tax assets related to asset impairments.
In 2003, we had an effective income tax rate of 40.3% which is
greater than the federal statutory rate primarily due to state
income taxes and non-deductible in-process research and
development charges incurred in connection with our acquisition
of Meridian Medical Technologies.
Discontinued Operations
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. Accordingly, all net
sales, cost of revenues, selling, general and administrative
costs, amortization and other operating costs associated with
Prefest®
and
Nordette®
are included in discontinued operations in 2005, 2004 and 2003.
65
Off Balance Sheet Arrangements, Contractual Obligations and
Commercial Commitments
We do not have any off balance sheet arrangements, except for
operating leases in the normal course of business as described
in Note 12 to our audited consolidated financial statements
included in this report and as reflected in the table below.
The following table summarizes contractual obligations and
commitments as of December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
One to | |
|
Four to | |
|
More Than | |
|
|
Total | |
|
One Year | |
|
Three Years | |
|
Five Years | |
|
Five Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
345,000 |
|
|
$ |
345,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating leases
|
|
|
86,628 |
|
|
|
19,170 |
|
|
|
34,519 |
|
|
|
29,625 |
|
|
|
3,314 |
|
Unconditional purchase obligations
|
|
|
356,492 |
|
|
|
151,495 |
|
|
|
204,751 |
|
|
|
225 |
|
|
|
21 |
|
Interest on current portion of long-term debt
|
|
|
8,275 |
|
|
|
8,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
796,395 |
|
|
$ |
523,940 |
|
|
$ |
239,270 |
|
|
$ |
29,850 |
|
|
$ |
3,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our unconditional purchase obligations are primarily related to
minimum purchase requirements under contracts with suppliers to
purchase raw materials and finished goods related to our branded
pharmaceutical products. The above table does not reflect any
potential milestone payments in connection with research and
development projects or acquisitions.
We have a supply agreement with a third party to produce
ramipril, the active ingredient in
Altace®.
This supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires us to purchase
certain minimum levels of ramipril as long as we maintain market
exclusivity on
Altace®
in the United States, and thereafter the parties must negotiate
in good faith the annual minimum purchase quantities. If sales
of
Altace®
do not increase, if we are unable to maintain market exclusivity
for
Altace®
in accordance with our current expectations, if our product life
cycle management is not successful, or if the supply agreement
or the annual minimum purchase commitments do not terminate at
an optimal time for us, we may incur losses in connection with
the purchase commitments under the supply agreement. In the
event we incur losses in connection with the purchase
commitments under the supply agreement, there may be a material
adverse effect upon our results of operations and cash flows.
We have commitments to purchase metaxalone, the active
ingredient in
Skelaxin®,
from two suppliers in the form of purchase orders. These
outstanding purchase orders are reflected in the unconditional
purchase obligations above. If sales of
Skelaxin®
do not continue as currently anticipated, we may incur losses in
connection with the purchase commitments. In the event we incur
losses in connection with the purchase commitments under these
purchase orders, there may be a material adverse effect upon our
results of operations and cash flows.
Liquidity and Capital Resources
We believe that existing balances of cash, cash equivalents,
investments in debt securities and marketable securities, cash
generated from operations, our existing revolving credit
facility and funds potentially available to us under our
universal shelf registration are sufficient to finance our
current operations and working capital requirements on both a
short term and long term basis. However, we cannot predict the
amount or timing of our need for additional funds, 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.
66
In March 2006, we acquired substantially all of the assets of
Allerex Laboratory LTD for $25.0 million, less an
adjustment in the purchase price resulting in an initial payment
of $23.4 million, plus an earn-out based on sales of
EpiPen®
in Canada. The primary asset purchased from Allerex was the
exclusive right to market and sell
EpiPen®
throughout Canada. We further negotiated with Dey, L.P., an
extension of those exclusive rights to market and sell
EpiPen®
in Canada through 2015.
In February 2006, we entered into a collaboration with
Arrow International Limited and certain of its affiliates
(collectively, Arrow) to commercialize novel
formulations of ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted us
rights to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. Under certain
conditions, Arrow will be responsible for the manufacture and
supply of new formulations of ramipril for us. Additionally, we
have granted Cobalt Pharmaceuticals, Inc. a non-exclusive right
to enter into the U.S. ramipril market with a generic form of
the currently marketed
Altace®
product, which would be supplied by us. Cobalt is an affiliate
of Arrow, but is not a party to the collaboration.
Pursuant to the agreements, we made an upfront payment to Arrow
of $35.0 million. Arrow will also receive payments from us
of $50.0 million based on the timing of certain events and
could receive an additional $25.0 million based on the
occurrence of certain conditions. Additionally, Arrow will earn
fees for the manufacture and supply of new formulations of
ramipril.
In December 2005, we entered into a cross-license agreement with
Mutual Pharmaceutical Company, Inc. (Mutual). Under
the terms of the agreement, each of the parties has granted the
other a worldwide license to certain intellectual property,
including patent rights and know-how, relating to metaxalone. We
will pay royalties on net sales of products containing
metaxalone beginning January 1, 2006. This royalty may
increase depending on the achievement of certain regulatory and
commercial milestones. The royalty we pay to Mutual is in
addition to the royalty we pay to Elan on our current
formulation of metaxalone, which we refer to as
Skelaxin®
which is a part of our branded pharmaceutical segment.
During the fourth quarter of 2005, the Company entered into a
strategic alliance with Pain Therapeutics to develop and
commercialize
Remoxytm
and other abuse-resistant opioid painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe
chronic pain. Under the strategic alliance, we may pay
additional milestone payments of up to $150.0 million in
cash based on the successful clinical and regulatory development
of
Remoxytm
and other abuse-resistant opioid products. This includes a
$15.0 million cash payment upon acceptance of a regulatory
filing for
Remoxytm
and an additional $15.0 million upon its approval. We are
responsible for all research and development expenses related to
this alliance, which could total $100.0 million over four
years. After regulatory approval and commercialization of
Remoxytm
or other products developed through this alliance, we will pay a
royalty of 15% of the cumulative net sales up to
$1.0 billion and 20% of the cumulative net sales over
$1.0 billion.
In August 2004, we entered into a collaborative agreement with
Palatin 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 regulatory approval targets,
$10.0 million of which was paid during 2005. Following
regulatory approval and commercialization of PT-141, we may also
pay potential net sales milestone payments to Palatin of up to
$130.0 million.
Elan was working to develop a modified release formulation of
Sonata®,
which we refer to as
Sonata®
MR, pursuant to an agreement we had with them which we refer to
as the
Sonata®
MR Development Agreement. In early 2005, we advised Elan that we
considered the
Sonata®
MR Development Agreement terminated. On August 26, 2005,
Elan filed a request for mediation pursuant to the terms of the
Sonata®
MR Development Agreement. We participated in mediation with
Elan in early 2006, which did not result in an agreed
resolution. The
Sonata®
MR Development Agreement requires us to pay up to an additional
$60.0 million if Elan achieves 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
67
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.
As additional consideration for
Synercid®,
an injectable antibiotic acquired on December 30, 2002, we
agreed to potential milestone payments. 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.
|
|
|
Settlement of Governmental Pricing Investigation |
On October 31, 2005, we entered into (i) a definitive
settlement agreement with the United States of America, acting
through the United States Department of Justice and the United
States Attorneys Office for the Eastern District of
Pennsylvania and on behalf of the Office of Inspector General of
the United States Department of Health and Human Services
(HHS/ OIG) and the Department of Veterans Affairs,
to resolve the governmental investigations related to our
underpayment of rebates owed to Medicaid and other governmental
pricing programs during the period from 1994 to 2002 (the
Federal Settlement Agreement), and (ii) similar
settlement agreements with 48 states and the District of
Columbia (collectively, the State Settlement
Agreements, and together with the Federal Settlement
Agreement, the Settlement Agreements). We have
agreed to a settlement with the remaining state on substantially
the same terms as the other state settlements, and we currently
expect to enter into a definitive settlement agreement with that
state before the end of the first quarter of 2006. Consummation
of the Federal Settlement Agreement and some State Settlement
Agreements is or was subject to court approval. On
February 24, 2006, the United States District Court for the
Eastern District of Pennsylvania (District Court)
approved the Federal Settlement Agreement. All interested
parties, including King, the individual purportedly acting as a
relator under the False Claims Act and the affected
states, have requested that the District Court approve the State
Settlement Agreements that require court approval.
Pursuant to the Settlement Agreements, we agreed to pay a total
of approximately $124.1 million (the Settlement
Amount) and interest on the Settlement Amount at the rate
of 3.75% from July 1, 2005 to the date of consummation of
the settlement. We have further agreed to pay, subject to
certain conditions, (i) legal fees relating to the
settlement in the amount of approximately $0.8 million, and
(ii) approximately $1.0 million in settlement costs.
The Settlement Amount includes approximately $50.6 million
of the Settlement Amount for payment to 49 states and the
District of Columbia. The Settlement Amount includes
approximately $63.7 million representing the amount of
underpayments to Medicaid and other governmental pricing
programs from 1994 to 2002 and approximately $60.4 million
to cover interest, penalties and other costs. We currently
expect to pay the Settlement Amount and the other amounts
described above.
On March 2, 2006, we paid approximately
$126.9 million, comprising the Settlement Amount and
accrued interest under our Settlement Agreements with the United
States and the 48 states and the District of Columbia. We
have agreed to pay approximately $0.4 million to the
remaining state. We currently expect to make this payment and
the other remaining payments by the end of the first quarter of
2006.
Certain decisions of the District Court relating to the
relators dispute with certain states over a potential
share award remain subject to appeal. Any share award would be
paid solely by the government and would not affect the amount we
are required to pay pursuant to the settlement. Consequently, we
believe the reversal of any such decision or decisions would not
have a material effect on us.
In addition to the Settlement Agreements, we have entered into a
five-year corporate integrity agreement with HHS/ OIG (the
Corporate Integrity Agreement) pursuant to which we
are required, among other things, to keep in place our current
compliance program, to provide periodic reports to HHS/ OIG and
to submit to audits relating to our Medicaid rebate calculations.
68
We accrued in prior years a total of $130.4 million in
respect of our estimated underpayments to Medicaid and other
governmental pricing programs and estimated settlement costs
with all relevant governmental parties, which sum is classified
as restricted cash and an accrued expense on our balance sheet.
This sum is sufficient to cover the full cost of all sums owed
the federal and state governments pursuant to the Settlement
Agreements, together with related obligations to reimburse the
expenses of some of the parties.
The previously disclosed claim seeking damages from us because
of alleged retaliatory actions against the relator was dismissed
with prejudice on January 31, 2006.
The Settlement Agreements will not resolve any of the previously
disclosed civil suits that are pending against us and related
individuals and entities discussed in the section
Securities and ERISA Litigation below.
The foregoing description of the settlement, the Settlement
Agreements and the Corporate Integrity Agreement is qualified in
its entirety by the Companys Current Report on
Form 8-K filed
November 4, 2005, which is incorporated herein by reference.
As previously reported, the SEC has also been conducting an
investigation relating to our underpayments to governmental
programs, as well as into our previously disclosed errors
relating to reserves for product returns. While the SECs
investigation is continuing with respect to the product returns
issue, the Staff of the SEC has advised us that it has
determined not to recommend enforcement action against us with
respect to the aforementioned governmental pricing matter. The
Staff of the SEC notified King of this determination pursuant to
the final paragraph of Securities Act Release 5310. Although the
SEC could still consider charges against individuals in
connection with the governmental pricing matter, we do not
believe that any governmental unit with authority to assert
criminal charges is considering any charges of that kind.
We continue to cooperate with the SECs ongoing
investigation. Based on all information currently available to
us, we do not anticipate that the results of the SECs
ongoing investigation will have a material adverse effect on
King, including by virtue of any obligations to indemnify
current or former officers and directors.
|
|
|
Securities and ERISA 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 Kings
securities against the Company, its directors, former directors,
executive officers, former executive officers, Kings
subsidiary, and a former director of the subsidiary in the
United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934, in connection with
our underpayment of rebates owed to Medicaid and other
governmental pricing programs, and certain transactions between
us and the Benevolent Fund. These 22 complaints have been
consolidated in the United States District Court for the Eastern
District of Tennessee. In addition, holders of Kings
securities filed two class action complaints alleging violations
of the Securities Act of 1933 in Tennessee state court. King
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
69
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 in this action has commenced. The
Court has set a trial date of April 10, 2007.
We have estimated a probable loss contingency for the class
action lawsuit described above. We believe this loss contingency
will be paid on behalf of us by our insurance carriers.
Accordingly, as of December 3, 2005, we have recorded a
liability and a receivable for this amount, classified in
accrued expenses and prepaid and other current assets,
respectively, in our consolidated financial statement.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of our
current and former officers and directors, with respect to the
same events at issue in the federal securities litigation
described above. These cases have been consolidated, and on
October 3, 2003, plaintiffs filed a consolidated amended
complaint. On November 17, 2003, defendants filed a motion
to dismiss or stay the consolidated amended complaint. The court
denied the motion to dismiss, but granted a stay of proceedings.
On October 11, 2004, the court lifted the stay to permit
plaintiffs to file a further amended complaint adding class
action claims related to our then-anticipated merger with Mylan
Laboratories, Inc. On October 26, 2004, defendants filed a
partial answer to the further amended complaint, and moved to
dismiss the newly-added claims. Following the termination of the
Mylan merger agreement, plaintiffs voluntarily dismissed these
claims. Discovery with respect to the remaining claims in the
case has commenced. No trial date has been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
In August 2004, a separate class action lawsuit was filed in
Tennessee state court, asserting claims solely with respect to
our then-anticipated merger with Mylan Laboratories. Defendants
filed a motion to dismiss the case on November 30, 2004,
which remains pending. We believe that the claims in this case
are moot following termination of the Mylan merger agreement.
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 King
and certain of its executive officers, former executive
officers, directors, former directors and an employee of King
violated fiduciary duties that they allegedly owed Kings
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 are unable currently to predict the outcome or to reasonably
estimate the range of potential loss, if any, except as noted
above, in the pending litigation. If we were not to prevail in
the pending litigation,
70
or if any governmental sanctions are imposed in excess of those
described above, 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 government investigations
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.
Patent Challenges
Certain generic companies have challenged patents on
Altace®,
Skelaxin®,
Sonata®
and
Adenoscan®.
For additional information, please see
Altace®
Patent Challenge,
Skelaxin®
Patent Challenge,
Sonata®
Patent Challenge, and
Adenoscan®
Patent Challenge in Item 3, Legal
Proceedings. If a generic version of
Altace®,
Skelaxin®,
Sonata®
or
Adenoscan®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
519,510 |
|
|
$ |
260,907 |
|
|
$ |
435,686 |
|
Our net cash provided by operations was higher in 2005 than in
2004 primarily due to an increase in the gross profit margin,
driven by an increase in net sales of branded pharmaceutical
products. This was partially offset by an increase in the
co-promotion fees and working capital changes outlined below.
Our net cash provided by operations was lower in 2004 than in
2003 primarily due to a decrease in the gross profit margin,
driven by a decrease in net sales of branded pharmaceutical
products, and higher selling, general and administrative
expenses. The overall decrease was partially offset by a
decrease in the co-promotion fees and working capital changes
outlined below.
Please see the section entitled Operating Results
for a discussion of net sales, selling, general and
administrative expenses and co-promotion fees.
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the periods ending 2005,
2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Accounts receivable, net of allowance
|
|
$ |
(43,407 |
) |
|
$ |
57,978 |
|
|
$ |
(84,186 |
) |
Inventories
|
|
|
46,349 |
|
|
|
(15,205 |
) |
|
|
(52,855 |
) |
Prepaid expenses and other current assets
|
|
|
(47,544 |
) |
|
|
(16,161 |
) |
|
|
27,307 |
|
Accounts payable
|
|
|
(7,713 |
) |
|
|
9,197 |
|
|
|
33,958 |
|
Accrued expenses and other liabilities
|
|
|
(52,544 |
) |
|
|
43,566 |
|
|
|
92,798 |
|
Income taxes payable
|
|
|
22,161 |
|
|
|
(78,708 |
) |
|
|
60,554 |
|
Deferred revenue
|
|
|
(9,092 |
) |
|
|
(9,091 |
) |
|
|
(9,092 |
) |
Other assets
|
|
|
(4,471 |
) |
|
|
(3,483 |
) |
|
|
(2,978 |
) |
Deferred taxes
|
|
|
(68,047 |
) |
|
|
(17,083 |
) |
|
|
(139,598 |
) |
|
|
|
|
|
|
|
|
|
|
Total changes from operating assets and liabilities and deferred
taxes
|
|
$ |
(164,308 |
) |
|
$ |
(28,990 |
) |
|
$ |
(74,092 |
) |
We anticipate lower net cash provided by operating activities in
2006 than that experienced in 2005 primarily due to increased
taxes, increased investment in research and development and
increased royalty commitments.
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net cash (used in) investing activities
|
|
$ |
(683,007 |
) |
|
$ |
(154,071 |
) |
|
$ |
(459,444 |
) |
Investing activities in 2005 were driven by payments totaling
$198.7 million for our collaboration agreements with Pain
Therapeutics and Palatin and our cross-license agreement with
Mutual. Capital expenditures during 2005 totaled
$53.3 million which included property, plant 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. Additionally in 2005, we transferred
$73.6 million to restricted cash primarily related to the
now completed investigation of our Company by the HHS/OIG. We
increased our investments in debt securities by
$345.2 million.
Investing activities in 2004 were driven by payments totaling
$78.2 million for our collaboration agreement with Palatin
and, milestone payments associated with the acquisitions of
primary care business of Elan and
Synercid®.
Capital expenditures during 2004 totaled $55.1 million
which included property, plant 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. Additionally in
2004, we increased our investments in debt securities by
$46.5 million which was partially offset by proceeds of
$27.5 million principally from the sale of product rights.
Investing activities in 2003 were driven by acquisition costs
totaling $1.0 billion for our purchase of Meridian and the
primary care business of Elan. Capital expenditures during 2003
totaled $51.2 million which included property and equipment
purchases, new information technology system implementation
costs and building improvements for facility upgrades and
increased capacity. Additionally in 2003, we transferred
$67.7 million to restricted cash which was more than offset
by proceeds of $668.7 primarily due to sales of investments in
debt securities and marketable securities.
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2006 of
approximately $50.0 million, which will be funded with cash
from operations. The principal capital expenditures are
anticipated to include property and equipment purchases,
building improvements for facility upgrades, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net cash provided by financing activities
|
|
$ |
857 |
|
|
$ |
4,580 |
|
|
$ |
2,543 |
|
Our cash flows from financing activities for all periods are
primarily related to the exercise of employee stock options.
|
|
|
Certain Indebtedness and Other Matters |
As of December 31, 2005, we had outstanding
$345.0 million of
23/4% Convertible
Debentures due November 15, 2021. These debt securities
were issued 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. As of
December 31, 2005, we have classified the debentures as a
current liability due to the right the holders have to require
us to repurchase the debentures on November 15, 2006.
Alternatively, we may elect to repurchase some or all of the
debentures, by negotiation with debenture holders, a buy-back
program, or a tender offer, prior to
72
November 15, 2006. The debentures accrue interest at an
initial rate of
23/4%
which will be reset (but not below
23/4%
or above
41/4%)
on May 15, 2006.
We also had available as of December 31, 2005 up to
$399.0 million under a five-year senior secured revolving
credit facility that we established in April 2002. The facility
is collateralized in general by all of our 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 December 31, 2005, we were in
compliance with these covenants. As of December 31, 2005,
we had $1.0 million outstanding for letters of credit 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 December 31, 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 a
Form S-1.
We have experienced only moderate raw material and labor price
increases in recent years. While we have passed some price
increases along to our customers, we have primarily benefited
from sales growth negating most inflationary pressures.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and 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
73
tangible assets and loss accruals for excess inventory and fixed
purchase commitments under our supply contracts. Forecasted
future cash flows in particular require considerable judgment
and are subject to inherent imprecision. In the case of
impairment testing, changes in estimates of future cash flows
could result in a material impairment charge and, whether they
result in an immediate impairment charge, could result
prospectively in a reduction in the estimated remaining useful
life of tangible or intangible assets, which could be material
to the financial statements.
Other significant estimates include accruals for Medicaid and
other rebates, returns and chargebacks, allowances for doubtful
accounts and estimates used in applying the revenue recognition
policy 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.
The significant accounting estimates that we believe are
important to aid in fully understanding our reported financial
results include the following:
|
|
|
|
|
Intangible assets, goodwill, and other long-lived assets.
When we acquire product rights in conjunction with either
business or asset acquisitions, we allocate an appropriate
portion of the purchase price to intangible assets, goodwill and
other long-lived assets. The purchase price is allocated to
product rights and trademarks, patents, acquired research and
development, if any, and other intangibles using the assistance
of valuation 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 when the product faces potential generic
competition, as the amortization on the patent is eliminated.
Because we have no discernible evidence to show a decline in
cash flows for trademarks and product rights, or for patents, we
use the straight-line method of amortization for both
intangibles. |
|
|
|
We review our property, plant and equipment and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. We review our goodwill for possible impairment
annually, or whenever events or circumstances indicate that the
carrying amount may not be recoverable. In any event, we
evaluate the remaining useful lives of our intangible assets
each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. This evaluation is performed through our quarterly
evaluation of intangibles for impairment. Further, on an annual
basis, we review the life of each intangible asset and make
adjustments as deemed appropriate. In evaluating goodwill for
impairment, we estimate the fair value of our individual
business reporting units on a discounted cash flow basis.
Assumptions and estimates used in the evaluation of impairment
may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. Such assumptions
include projections of future cash flows and, in some cases, the
current fair value of the asset. In addition, our depreciation
and amortization policies reflect judgments on the estimated
useful lives of assets. |
|
|
We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture or supply of materials,
the publication of negative results of studies or clinical
trials, new legislation or regulatory proposals. |
74
The gross carrying amount and accumulated amortization as of
December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Net Book | |
|
|
Cost | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
276,150 |
|
|
$ |
70,214 |
|
|
$ |
205,936 |
|
|
Other Cardiovascular/metabolic
|
|
|
80,770 |
|
|
|
38,130 |
|
|
|
42,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
356,920 |
|
|
|
108,344 |
|
|
|
248,576 |
|
|
Intal®
|
|
|
106,192 |
|
|
|
14,864 |
|
|
|
91,328 |
|
|
Other Hospital/acute care
|
|
|
191,393 |
|
|
|
44,701 |
|
|
|
146,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
297,585 |
|
|
|
59,565 |
|
|
|
238,020 |
|
|
Skelaxin®
|
|
|
203,015 |
|
|
|
32,631 |
|
|
|
170,384 |
|
|
Sonata®
|
|
|
23,146 |
|
|
|
23,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
226,161 |
|
|
|
55,777 |
|
|
|
170,384 |
|
|
|
Other
|
|
|
144,675 |
|
|
|
53,833 |
|
|
|
90,842 |
|
|
|
|
Total Branded
|
|
|
1,025,341 |
|
|
|
277,519 |
|
|
|
747,822 |
|
Meridian Medical Technologies
|
|
|
146,217 |
|
|
|
17,200 |
|
|
|
129,017 |
|
Royalties
|
|
|
2,470 |
|
|
|
2,082 |
|
|
|
388 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
1,174,028 |
|
|
$ |
296,801 |
|
|
$ |
877,227 |
|
|
|
|
|
|
|
|
|
|
|
The amounts for impairments and amortization expense and the
amortization period used for the twelve months ended
December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
Year Ended | |
|
|
December 31, 2005 | |
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
| |
|
|
|
|
Amortization | |
|
Life | |
|
|
|
Amortization | |
|
|
Impairments | |
|
Expense | |
|
(Years) | |
|
Impairments | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
(In thousands) | |
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
|
|
|
$ |
13,352 |
|
|
|
21 |
|
|
$ |
|
|
|
$ |
10,135 |
|
|
Other Cardiovascular/metabolic
|
|
|
43,243 |
|
|
|
7,672 |
|
|
|
|
|
|
|
21,193 |
|
|
|
6,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
43,243 |
|
|
|
21,024 |
|
|
|
|
|
|
|
21,193 |
|
|
|
16,722 |
|
|
Intal®
|
|
|
|
|
|
|
6,047 |
|
|
|
15 |
|
|
|
|
|
|
|
4,558 |
|
|
Other Hospital/acute care
|
|
|
5,970 |
|
|
|
9,414 |
|
|
|
|
|
|
|
11,672 |
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
5,970 |
|
|
|
15,461 |
|
|
|
|
|
|
|
11,672 |
|
|
|
12,374 |
|
|
Skelaxin®
|
|
|
|
|
|
|
15,548 |
|
|
|
13.5 |
|
|
|
|
|
|
|
11,558 |
|
|
Sonata®
|
|
|
157,975 |
|
|
|
9,117 |
|
|
|
2.5 |
|
|
|
82,081 |
|
|
|
12,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
157,975 |
|
|
|
24,665 |
|
|
|
|
|
|
|
82,081 |
|
|
|
24,193 |
|
|
|
Other
|
|
|
|
|
|
|
7,823 |
|
|
|
|
|
|
|
29,980 |
|
|
|
8,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
207,188 |
|
|
|
68,973 |
|
|
|
|
|
|
|
144,926 |
|
|
|
62,004 |
|
Meridian Medical Technologies
|
|
|
|
|
|
|
5,165 |
|
|
|
|
|
|
|
3,120 |
|
|
|
5,885 |
|
Royalties
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
207,188 |
|
|
$ |
74,180 |
|
|
|
|
|
|
$ |
148,046 |
|
|
$ |
67,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
The remaining patent amortization period compared to the
remaining amortization period for trademarks and product rights
associated with significant products is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Remaining Life at December 31, 2005 | |
|
|
| |
|
|
|
|
Trademark & | |
|
|
Patent | |
|
Product Rights | |
|
|
| |
|
| |
Altace®
|
|
|
3 years 4 months |
|
|
|
14 years |
|
Skelaxin®
|
|
|
|
|
|
|
11 years |
|
Sonata®
|
|
|
1 year |
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
12 years |
|
|
|
|
|
|
Inventories. Our inventories are valued at the lower of
cost or market value. We evaluate our entire inventory for short
dated or slow moving product and inventory commitments under
supply agreements based on projections of future demand and
market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we make
a provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time
such losses are evident rather than at the time goods are
actually sold. We maintain supply agreements with some of our
vendors which contain minimum purchase requirements. We estimate
future inventory requirements based on current facts and trends.
Should our minimum purchase requirements under supply agreements
or if our estimated future inventory requirements exceed actual
inventory quantities that we will be able to sell to our
customers, we record a charge in costs of revenues. |
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Accruals for rebates, returns, and chargebacks. We
establish accruals for returns, chargebacks and Medicaid and
commercial rebates in the same period we recognize the related
sales. The accruals reduce revenues and are included in accrued
expenses. At the time a rebate or chargeback payment is made or
a product return is received, which occurs with a delay after
the related sale, we record a reduction to accrued expenses and,
at the end of each quarter, adjust accrued expenses for
differences between estimated and actual payments. Due to
estimates and assumptions inherent in determining the amount of
returns, chargebacks and rebates, the actual amount of product
returns and claims for chargebacks and rebates may be different
from our estimates. |
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Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily on
historical sales and return rates. We also consider the level of
inventory of our products in the distribution channel. We base
our estimate of our Medicaid rebate and commercial rebate
accruals on estimates of usage by rebate-eligible customers,
estimates of the level of inventory of our products in the
distribution channel that remain potentially subject to those
rebates, and the terms of our commercial and regulatory rebate
obligations. We base our estimate of our chargeback accrual on
our estimates of the level of inventory of our products in the
distribution channel that remain subject to chargebacks, and
specific contractual and historical chargeback rates. The
estimate of the level of our products in the distribution
channel is based on data provided by our three key wholesalers
under inventory management agreements. |
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Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves. |
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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. |
76
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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. See Note 2, Summary of Significant
Accounting Policies, in our Notes to Consolidated
Financial Statements included in this report. |
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Recently Issued Accounting Standards |
In December 2004, the FASB issued SFAS No. 123(R),
(Share-based Payment) that requires us to expense
costs related to share-based payment transactions with
employees. The SEC 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. SFAS No. 123(R) became
mandatorily effective on January 1, 2006. Accordingly, we
will adopt SFAS 123(R) in the first quarter of 2006. See
Note 2 to the consolidated financial statements for the
pro-forma effect on net income and earnings per share of
applying SFAS 123.
In November 2004, the FASB issued SFAS No. 151,
(Inventory Costs), an amendment of ARB 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. We are currently evaluating the
effect that SFAS No. 151 will have on our financial
reporting.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to market risk for changes in the market values
of some of our investments (Investment Risk) and the effect of
interest rate changes (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. At December 31, 2005, 2004 and 2003,
we did not hold any derivative financial instruments. The
quantitative and qualitative disclosures about market risk are
set forth below.
The fair market value (fair value) of long-term
fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest
rates rise. In addition, the fair value of our convertible
debentures is affected by our stock price. The estimated fair
value of our total long-term debt at December 31, 2005 was
$336.6 million. Fair values were determined from available
market prices, using current interest rates and terms to
maturity. If interest rates were to increase or decrease 1%, the
fair value of our long-term debt would increase or decrease by
approximately $2.9 million.
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.
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Item 8. |
Financial Statements and Supplementary Data |
Our audited consolidated financial statements and related notes
as of December 31, 2005 and 2004 and for each of the three
years ended December 31, 2005, 2004 and 2003 are included
under Item 15 and begin on page F-1.
77
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Item 9. |
Changes in Accountants and Disagreements with Accountants
on Accounting and Financial Disclosure |
None.
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Item 9A. |
Controls and Procedures |
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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.
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 December 31, 2005.
Based on this evaluation by management, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2005, our disclosure controls and procedures
were effective.
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Managements Report on Internal Control over
Financial Reporting |
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Rule 13a-15(f). Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management has conducted an evaluation of the effectiveness of
our internal control over financial reporting as of
December 31, 2005, based on the framework and criteria
established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management concluded that internal control over
financial reporting was effective as of December 31, 2005.
Our independent registered public accounting firm,
PricewaterhouseCoopers LLP, audited managements assessment
of the effectiveness of our internal control over financial
reporting as of December 31, 2005 as stated in its report
which appears herein.
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Changes in Internal Control over Financial
Reporting |
As discussed in previous 10-Q filings, we made numerous
personnel changes including hiring a new Chief Financial Officer
and additional managerial level finance and accounting resources
to perform supervisory review and monitoring activities. In
addition, we have improved the efficiency and effectiveness of
our financial closing process through automation, better
coordination with external parties, and better organization
within the finance and accounting function. As a result, we have
implemented additional managerial level finance and accounting
supervisory activities during the period-end financial reporting
process. As a result of these efforts, we have concluded that
the material weakness that existed at December 31, 2004 was
fully remediated as of December 31, 2005.
Except as discussed above, there have been no changes in our
internal control over financial reporting that occurred during
the quarter ended December 31, 2005, that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
78
PART III
The information called for by Part III of
Form 10-K
(Item 10 Directors and Executive Officers of
the Registrant, Item 11 Executive Compensation,
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters, Item 13 Certain Relationships and
Related Transactions, and Item 14 Principal
Accounting Fees and Services), is incorporated by reference from
our proxy statement related to our 2006 annual meeting of
shareholders, which will be filed with the SEC not later than
April 30, 2006 (120 days after the end of the fiscal
year covered by this report).
79
PART IV
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Item 15. |
Exhibits, Financial Statement Schedules, and Reports on
Form 8-K |
(a) Documents filed as a part of this report:
(1) Financial Statements
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Page Number | |
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Report of Independent Registered Public Accounting Firm
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F-1 |
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Consolidated Balance Sheets as of December 31, 2005 and 2004
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F-3 |
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Consolidated Statements of Income (Loss) for the years ended
December 31, 2005, 2004 and 2003
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F-4 |
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Consolidated Statements of Shareholders Equity and Other
Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003
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F-5 |
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Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
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F-6 |
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Notes to Consolidated Financial Statements
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F-7 |
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(2) Financial Statement Schedule Valuation and Qualifying
Accounts S-1
All other schedules have been omitted because of the absence of
conditions under which they are required or because the required
information is given in the above-listed financial statements or
notes thereto.
(b) Exhibits
The following Exhibits are filed herewith or incorporated herein
by reference:
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Exhibit |
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Number |
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Description |
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3 |
.1(1) |
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Second Amended and Restated Charter of King Pharmaceuticals, Inc. |
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3 |
.2(1) |
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Amended and Restated Bylaws of King Pharmaceuticals, Inc. |
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4 |
.1(1) |
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Specimen Common Stock Certificate. |
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4 |
.2(1) |
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Form of Rights Agreement by and between King Pharmaceuticals,
Inc. and The Bank of New York (successor in interest to
Union Planters National Bank). |
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10 |
.2(2) |
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Co-Promotion Agreement, dated as of June 22, 2000, between
American Home Products Corporation and King Pharmaceuticals, Inc. |
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10 |
.3(2) |
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Asset Purchase Agreement, dated as of June 22, 2000,
between American Home Products Corporation and King
Pharmaceuticals, Inc. |
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10 |
.5(4) |
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Indenture, dated as of November 1, 2001, among King
Pharmaceuticals, Inc., certain Subsidiary Guarantors and The
Bank of New York, as trustee, relating to Kings
23/4% Convertible
Debentures due November 15, 2021. |
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10 |
.6(6)* |
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1998 King Pharmaceuticals, Inc. Non-Employee Director Stock
Option Plan. |
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10 |
.7(1)* |
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1997 Incentive and Nonqualified Stock Option Plan for Employees
of King Pharmaceuticals, Inc. |
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10 |
.8(4)* |
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King Pharmaceuticals, Inc. 401(k) Retirement Savings Plan. |
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10 |
.9(5)* |
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The Medco Research, Inc. 1989 Stock Option and Stock
Appreciation Rights Plan, as amended through July 29, 1998. |
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10 |
.10(6)* |
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1989 Incentive Stock Option Plan of Jones Medical Industries,
Inc. |
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10 |
.11(6)* |
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Jones Medical Industries, Inc. 1994 Incentive Stock Plan. |
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10 |
.12(6)* |
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Jones Medical Industries, Inc. 1997 Incentive Stock Plan. |
80
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Exhibit |
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Number |
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Description |
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10 |
.13(7) |
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Credit Agreement dated as of April 23, 2002, among King
Pharmaceuticals, Inc., and the Lenders therein, Credit Suisse
First Boston, Cayman Islands Branch, as Administrative Agent, as
Collateral Agent and as Swingline Lender, and Bank of America,
NA, J.P. Morgan Securities Inc., and UBS Warburg LLC as
Co-Syndication Agents, Wachovia Bank National Association, as
Documentation Agent, Credit Suisse First Boston as Sole Lead
Arranger and Bookrunner. |
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10 |
.14(8) |
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Amended and Restated Asset Purchase Agreement by and among Elan
Corporation, plc, Elan Pharma International Limited, Elan
Pharmaceuticals, Inc., Jones Pharma Incorporated and Monarch
Pharmaceuticals, Inc. dated as of May 19, 2003. |
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10 |
.15(9)* |
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King Pharmaceuticals, Inc. Non-Employee Directors Deferred
Compensation Plan. |
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10 |
.16(10)* |
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Offer Letter to Brian A. Markison, dated July 15, 2004. |
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10 |
.17(10) |
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Collaborative Development and Marketing Agreement dated
August 12, 2004 by and between Palatin Technologies, Inc.
and King Pharmaceuticals, Inc. |
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10 |
.18(11)* |
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King Pharmaceuticals, Inc. Severance Pay Plan: Tier I (Effective
March 15, 2005) |
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10 |
.19(12)* |
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Offer letter to Joseph Squicciarino dated May 25, 2005. |
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10 |
.20(12)* |
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Offer letter to Eric J. Bruce dated May 19, 2005. |
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10 |
.21(12)* |
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2005 Executive Management Incentive Award |
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10 |
.22(18)* |
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King Pharmaceuticals, Inc. Incentive Plan. |
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10 |
.23(19)* |
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Compensation Policy for Non-Employee Directors |
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10 |
.24(12)* |
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Salary Amendments For Certain Executive Officers |
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10 |
.25(12)* |
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King Pharmaceuticals, Inc. Executive Deferred Compensation Plan |
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10 |
.26(13)* |
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Form of Restricted Stock Certificate and Restricted Stock Grant
Agreement |
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10 |
.27(13)* |
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Form of Option Certificate and Nonstatutory Stock Option
Agreement. |
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10 |
.28(14) |
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Settlement Agreement, dated as of October 31, 2005, among
the United States of America acting through the entities named
therein, King Pharmaceuticals, Inc. and Monarch Pharmaceuticals,
Inc. |
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10 |
.29(14) |
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Settlement Agreement, dated as of October 31, 2005, among
the state of Massachusetts, King Pharmaceuticals, Inc. and
Monarch Pharmaceuticals, Inc. and general description of the
other state settlement agreements. |
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10 |
.30(14) |
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Corporate Integrity Agreement, dated as of October 31,
2005, between the Office of Inspector General of the Department
of Health and Human Services and King Pharmaceuticals, Inc. |
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10 |
.31(15)* |
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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 |
.32(16)* |
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First Amendment to Retirement and Consulting Agreement, dated as
of November 4, 2005, by and between the Company and James
R. Lattanzi. |
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10 |
.33* |
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Waiver, Release and Non-Solicitation, NonCompete and
Nondisclosure Agreement, dated as of November 1, 2005, by
and between King Pharmaceuticals, Inc. and John A. A. Bellamy |
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10 |
.34* |
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Addendum to the Waiver, Release and Non-Solicitation, Noncompete
and Nondisclosure Agreement, dated as of December 20, 2005,
by and between the Company and John A. A. Bellamy |
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10 |
.35 |
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Collaboration Agreement by and between the Issuer and Pain
Therapeutics, Inc., dated as of November 9, 2005 |
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10 |
.36 |
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License Agreement by and between the Issuer and Pain
Therapeutics, Inc., dated as of December 29, 2005 |
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10 |
.37 |
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License Agreement, by and between the Issuer and Mutual
Pharmaceutical Company, Inc., dated as of December 6, 2005 |
81
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Exhibit |
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Number |
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Description |
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10 |
.38* |
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Severance letter to John A. A. Bellamy dated October 14,
2005. |
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14 |
.1(17) |
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Corporate Code of Conduct and Ethics. |
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21 |
.1 |
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Subsidiaries of the Registrant. |
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23 |
.1 |
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Consent of PricewaterhouseCoopers LLP. |
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31 |
.1 |
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Certificate of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31 |
.2 |
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Certificate of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
.1 |
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Certificate of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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32 |
.2 |
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Certificate of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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* |
Denotes management contract or compensatory plan or arrangement. |
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Portions of this Exhibit have been omitted and filed separately
with the Securities and Exchange Commission as part of an
application for confidential treatment pursuant to the
Securities Exchange Act of 1934. |
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(1) |
Incorporated by reference to Kings Registration Statement
on Form S-1
(Registration
No. 333-38753)
filed October 24, 1997. |
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(2) |
Incorporated by reference to Kings Current Report on
Form 8-K filed
June 30, 2000. |
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(3) |
Incorporated by reference to Kings
Schedule 13-D
filed December 29, 2000, as amended. |
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(4) |
Incorporated by reference to Kings Registration Statement
on Form S-8 filed
February 26, 1999. |
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(5) |
Incorporated by reference to Kings Registration Statement
on Form S-8 filed
March 9, 2000. |
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(6) |
Incorporated by reference to Kings Registration Statement
on Form S-8 filed
September 6, 2000. |
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(7) |
Incorporated by reference to Kings Quarterly Report on
Form 10-Q filed
May 14, 2002. |
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(8) |
Incorporated by reference to Kings Current Report on
Form 8-K filed
June 13, 2003. |
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(9) |
Incorporated by reference to Kings Annual Report on
Form 10-K for the
year ended December 31, 2003. |
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(10) |
Incorporated by reference to Kings Quarterly Report on
Form 10-Q filed
March 21, 2005. |
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(11) |
Incorporated by reference to Kings Current Report on
Form 8-K filed
March 21, 2005. |
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(12) |
Incorporated by reference to Kings Quarterly Report on
Form 10-Q filed
August 9, 2005. |
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(13) |
Incorporated by reference to Kings Quarterly Report on
Form 10-Q filed
November 9, 2005. |
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(14) |
Incorporated by reference to Kings Current Report on
Form 8-K filed
November 4, 2005. |
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(15) |
Incorporated by reference to Kings Amendment No. 1 to
Quarterly Report on
Form 10-Q filed
February 15, 2006. |
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(16) |
Incorporated by reference to Kings Amendment No. 2 to
Current Report on
Form 8-K/ A filed
February 15, 2006. |
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(17) |
Incorporated by reference to Kings Current Report on
Form 8-K filed
December 8, 2005. |
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(18) |
Incorporated by reference to Kings definitive proxy
statement, filed April 28, 2005, related to the 2005 annual
meeting of shareholders. |
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(19) |
Incorporated by reference to Kings Current Report on
Form 8-K filed February 27, 2006. |
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
We have completed integrated audits of King Pharmaceuticals,
Inc.s 2005 and 2004 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of King
Pharmaceuticals, Inc. and its subsidiaries at December 31,
2005 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Controls Over Financial
Reporting as of December 31, 2005 appearing under
Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2005
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for
F-1
external purposes in accordance with generally accepted
accounting principles. A companys internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 28, 2006, except for
the fifteenth paragraph
of Note 19 for which
the date is March 2, 2006
F-2
KING PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
as of December 31, 2005 and 2004
(in thousands, except share data)
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2005 | |
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2004 | |
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ASSETS |
Current assets:
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Cash and cash equivalents
|
|
$ |
30,014 |
|
|
$ |
192,656 |
|
|
Investments in debt securities
|
|
|
494,663 |
|
|
|
149,430 |
|
|
Restricted cash
|
|
|
130,400 |
|
|
|
97,730 |
|
|
Marketable securities
|
|
|
|
|
|
|
16,498 |
|
|
Accounts receivable, net of allowance of $12,280 and $15,348
|
|
|
223,581 |
|
|
|
180,963 |
|
|
Inventories
|
|
|
228,063 |
|
|
|
274,412 |
|
|
Deferred income tax assets
|
|
|
81,777 |
|
|
|
153,979 |
|
|
Prepaid expenses and other current assets
|
|
|
59,291 |
|
|
|
61,395 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,247,789 |
|
|
|
1,127,063 |
|
Property, plant and equipment, net
|
|
|
302,474 |
|
|
|
280,731 |
|
Goodwill
|
|
|
121,152 |
|
|
|
121,152 |
|
Intangible assets, net
|
|
|
967,194 |
|
|
|
1,285,961 |
|
Marketable securities
|
|
|
18,502 |
|
|
|
|
|
Other assets (includes restricted cash of $14,129 and $2,775)
|
|
|
77,099 |
|
|
|
16,318 |
|
Deferred income tax assets
|
|
|
231,032 |
|
|
|
92,931 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,965,242 |
|
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
84,539 |
|
|
$ |
92,920 |
|
|
Accrued expenses
|
|
|
519,620 |
|
|
|
596,010 |
|
|
Income taxes payable
|
|
|
22,301 |
|
|
|
|
|
|
Current portion of long term debt
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
971,460 |
|
|
|
688,930 |
|
Long-term debt
|
|
|
|
|
|
|
345,000 |
|
Other liabilities
|
|
|
20,360 |
|
|
|
41,436 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
991,820 |
|
|
|
1,075,366 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, 15,000,000 shares authorized, no shares
issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, no par value, 300,000,000 shares authorized,
241,802,724 and 241,706,583 shares issued and outstanding
|
|
|
1,222,246 |
|
|
|
1,210,647 |
|
|
Unearned compensation
|
|
|
(8,764 |
) |
|
|
|
|
|
Retained earnings
|
|
|
754,953 |
|
|
|
637,120 |
|
|
Accumulated other comprehensive income
|
|
|
4,987 |
|
|
|
1,023 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,973,422 |
|
|
|
1,848,790 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
2,965,242 |
|
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the years ended December 31, 2005, 2004 and 2003
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,694,753 |
|
|
$ |
1,225,890 |
|
|
$ |
1,424,424 |
|
|
Royalty revenue
|
|
|
78,128 |
|
|
|
78,474 |
|
|
|
68,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,772,881 |
|
|
|
1,304,364 |
|
|
|
1,492,789 |
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues, exclusive of depreciation, amortization and
impairments shown below
|
|
|
322,985 |
|
|
|
352,938 |
|
|
|
385,841 |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
409,451 |
|
|
|
409,775 |
|
|
|
292,084 |
|
|
Medicaid related charge
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
Mylan transaction costs
|
|
|
3,898 |
|
|
|
9,062 |
|
|
|
|
|
|
Co-promotion fees
|
|
|
223,134 |
|
|
|
111,604 |
|
|
|
198,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
636,483 |
|
|
|
595,441 |
|
|
|
490,582 |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
74,015 |
|
|
|
67,939 |
|
|
|
44,078 |
|
|
Research and development in process upon acquisition
|
|
|
188,711 |
|
|
|
16,300 |
|
|
|
194,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
262,726 |
|
|
|
84,239 |
|
|
|
238,078 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
147,049 |
|
|
|
162,115 |
|
|
|
113,745 |
|
|
Intangible asset impairment
|
|
|
221,054 |
|
|
|
149,592 |
|
|
|
124,616 |
|
|
Merger, restructuring, and other nonrecurring charges
|
|
|
4,180 |
|
|
|
10,827 |
|
|
|
|
|
|
Gain on sale of products
|
|
|
(1,675 |
) |
|
|
(9,524 |
) |
|
|
(12,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,592,802 |
|
|
|
1,345,628 |
|
|
|
1,340,837 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
180,079 |
|
|
|
(41,264 |
) |
|
|
151,952 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,175 |
|
|
|
5,974 |
|
|
|
6,849 |
|
|
Interest expense
|
|
|
(11,931 |
) |
|
|
(12,588 |
) |
|
|
(13,396 |
) |
|
Valuation (charge) benefit convertible notes
receivable
|
|
|
|
|
|
|
(2,887 |
) |
|
|
18,551 |
|
|
Loss on investment
|
|
|
(6,182 |
) |
|
|
(6,520 |
) |
|
|
|
|
|
Other, net
|
|
|
(2,026 |
) |
|
|
(749 |
) |
|
|
(629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,964 |
) |
|
|
(16,770 |
) |
|
|
11,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
178,115 |
|
|
|
(58,034 |
) |
|
|
163,327 |
|
Income tax expense (benefit)
|
|
|
61,485 |
|
|
|
(7,412 |
) |
|
|
65,884 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
116,630 |
|
|
|
(50,622 |
) |
|
|
97,443 |
|
Discontinued operations (Note 27):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, including loss on
impairment
|
|
|
1,876 |
|
|
|
(172,750 |
) |
|
|
(8,771 |
) |
|
Income tax expense (benefit)
|
|
|
673 |
|
|
|
(63,084 |
) |
|
|
(3,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
|
1,203 |
|
|
|
(109,666 |
) |
|
|
(5,489 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
117,833 |
|
|
$ |
(160,288 |
) |
|
$ |
91,954 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Income (loss) from continuing operations
|
|
$ |
0.48 |
|
|
$ |
(0.21 |
) |
|
$ |
0.40 |
|
|
|
Income (loss) from discontinued operations
|
|
|
0.01 |
|
|
|
(0.45 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: Income (loss) from continuing operations
|
|
$ |
0.48 |
|
|
$ |
(0.21 |
) |
|
$ |
0.40 |
|
|
|
Income (loss) from discontinued operations
|
|
|
0.01 |
|
|
|
(0.45 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS)
for the years ended December 31, 2003, 2004 and 2005
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
|
|
Other | |
|
|
|
|
| |
|
Unearned | |
|
Retained | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Compensation | |
|
Earnings | |
|
Income | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2003,
|
|
|
240,624,751 |
|
|
$ |
1,201,897 |
|
|
$ |
|
|
|
$ |
705,454 |
|
|
$ |
45 |
|
|
$ |
1,907,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,954 |
|
|
|
|
|
|
|
91,954 |
|
|
Net unrealized gain on marketable securities, net of tax of $363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394 |
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option activity
|
|
|
566,101 |
|
|
|
4,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
241,190,852 |
|
|
|
1,205,970 |
|
|
|
|
|
|
|
797,408 |
|
|
|
1,113 |
|
|
|
2,004,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,288 |
) |
|
|
|
|
|
|
(160,288 |
) |
|
Net unrealized loss on marketable securities, net of tax of $43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132 |
) |
|
|
(132 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option activity
|
|
|
515,731 |
|
|
|
4,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
241,706,583 |
|
|
|
1,210,647 |
|
|
|
|
|
|
|
637,120 |
|
|
|
1,023 |
|
|
|
1,848,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,833 |
|
|
|
|
|
|
|
117,833 |
|
|
Net unrealized gain on marketable securities, net of tax of
$2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,042 |
|
|
|
4,042 |
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation
|
|
|
|
|
|
|
10,742 |
|
|
|
(10,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation amortization
|
|
|
|
|
|
|
|
|
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option activity
|
|
|
96,141 |
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
241,802,724 |
|
|
$ |
1,222,246 |
|
|
$ |
(8,764 |
) |
|
$ |
754,953 |
|
|
$ |
4,987 |
|
|
$ |
1,973,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2005, 2004 and 2003
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
117,833 |
|
|
$ |
(160,288 |
) |
|
$ |
91,954 |
|
|
(Income) loss from discontinued operations
|
|
|
(1,203 |
) |
|
|
109,666 |
|
|
|
5,489 |
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
147,049 |
|
|
|
162,115 |
|
|
|
113,745 |
|
|
|
Amortization of deferred financing costs
|
|
|
3,096 |
|
|
|
3,145 |
|
|
|
3,160 |
|
|
|
Deferred income taxes
|
|
|
(68,047 |
) |
|
|
(17,083 |
) |
|
|
(139,598 |
) |
|
|
Valuation charge on convertible notes receivable
|
|
|
|
|
|
|
2,887 |
|
|
|
(18,151 |
) |
|
|
Impairment of intangible assets
|
|
|
221,054 |
|
|
|
149,592 |
|
|
|
124,616 |
|
|
|
In-process research and development charges
|
|
|
188,711 |
|
|
|
16,300 |
|
|
|
194,000 |
|
|
|
Gain on sale of products
|
|
|
(1,675 |
) |
|
|
(9,524 |
) |
|
|
(12,025 |
) |
|
|
Loss on investment
|
|
|
6,182 |
|
|
|
6,520 |
|
|
|
|
|
|
|
Other non-cash items, net
|
|
|
791 |
|
|
|
9,484 |
|
|
|
6,990 |
|
|
|
Stock based compensation
|
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(43,407 |
) |
|
|
57,978 |
|
|
|
(84,186 |
) |
|
|
|
Inventories
|
|
|
46,349 |
|
|
|
(15,205 |
) |
|
|
(52,855 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
(47,544 |
) |
|
|
(16,161 |
) |
|
|
27,307 |
|
|
|
|
Other assets
|
|
|
(4,471 |
) |
|
|
(3,483 |
) |
|
|
(2,978 |
) |
|
|
|
Accounts payable
|
|
|
(7,713 |
) |
|
|
9,197 |
|
|
|
33,958 |
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(52,544 |
) |
|
|
43,566 |
|
|
|
92,798 |
|
|
|
|
Deferred revenue
|
|
|
(9,092 |
) |
|
|
(9,091 |
) |
|
|
(9,092 |
) |
|
|
|
Income taxes
|
|
|
22,161 |
|
|
|
(78,708 |
) |
|
|
60,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
519,508 |
|
|
|
260,907 |
|
|
|
435,686 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations
(2004 and 2003 revised see Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments in debt securities
|
|
|
(3,744,660 |
) |
|
|
(1,687,684 |
) |
|
|
(5,553,611 |
) |
|
Proceeds from maturity and sale of investments in debt securities
|
|
|
3,399,427 |
|
|
|
1,641,179 |
|
|
|
5,969,186 |
|
|
Transfer (to)/from restricted cash
|
|
|
(73,629 |
) |
|
|
(2,331 |
) |
|
|
(67,743 |
) |
|
Purchases of property, plant and equipment
|
|
|
(53,290 |
) |
|
|
(55,141 |
) |
|
|
(51,201 |
) |
|
Acquisition of primary care business of Elan
|
|
|
|
|
|
|
(36,000 |
) |
|
|
(761,745 |
) |
|
Acquisition of Meridian
|
|
|
|
|
|
|
|
|
|
|
(238,498 |
) |
|
Palatin collaboration agreement
|
|
|
(10,000 |
) |
|
|
(20,000 |
) |
|
|
|
|
|
Purchases of intangible assets
|
|
|
(18,600 |
) |
|
|
(22,200 |
) |
|
|
(12,300 |
) |
|
Proceeds from sale of marketable securities
|
|
|
6,453 |
|
|
|
|
|
|
|
253,097 |
|
|
Purchases of investment securities
|
|
|
|
|
|
|
|
|
|
|
(25,903 |
) |
|
Pain Therapeutic collaboration agreement
|
|
|
(153,711 |
) |
|
|
|
|
|
|
|
|
|
Mutual cross-license agreement
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from loan receivable
|
|
|
|
|
|
|
|
|
|
|
13,320 |
|
|
Proceeds from sale of intangible assets
|
|
|
|
|
|
|
27,458 |
|
|
|
15,659 |
|
|
Other investing activities
|
|
|
3 |
|
|
|
648 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(683,007 |
) |
|
|
(154,071 |
) |
|
|
(459,444 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
Payments on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
|
Proceeds from issuance of common shares and exercise of stock
options, net
|
|
|
857 |
|
|
|
4,677 |
|
|
|
4,053 |
|
|
Payments on other long-term debt
|
|
|
|
|
|
|
(97 |
) |
|
|
(1,296 |
) |
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
857 |
|
|
|
4,580 |
|
|
|
2,543 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations (Revised see
Note 27):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities of
discontinued operations
|
|
|
|
|
|
|
10,185 |
|
|
|
1,618 |
|
|
Net cash provided by (used in) investing activities of
discontinued operations
|
|
|
|
|
|
|
27,927 |
|
|
|
(7,000 |
) |
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(162,642 |
) |
|
|
149,528 |
|
|
|
(26,597 |
) |
Cash and cash equivalents, beginning of year
(Revised see Note 4)
|
|
|
192,656 |
|
|
|
43,128 |
|
|
|
69,725 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year (Revised see
Note 4)
|
|
$ |
30,014 |
|
|
$ |
192,656 |
|
|
$ |
43,128 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
10,552 |
|
|
$ |
10,626 |
|
|
$ |
13,396 |
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$ |
107,178 |
|
|
$ |
90,365 |
|
|
$ |
144,918 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
King Pharmaceuticals, Inc. (King or the
Company) is a vertically integrated pharmaceutical
company that develops, manufactures, markets and sells branded
prescription pharmaceutical products. Through a national sales
force and co-promotion arrangements, King markets its branded
pharmaceutical products to general/family practitioners,
internal medicine physicians, cardiologists, endocrinologists,
neurologists, psychiatrists, pain specialists, sleep
specialists, and hospitals across the United States and in
Puerto Rico. The Company also provides contract manufacturing
for a number of the worlds leading pharmaceutical and
biotechnology companies. In addition, the Company receives
royalties from the rights to certain products (including
Adenoscan®)
previously sold.
These consolidated financial statements include the accounts of
King and all of its wholly owned subsidiaries. See Note 5
and Note 10. All intercompany transactions and balances
have been eliminated in consolidation.
The consolidated financial statements reflect
Prefest®
and
Nordette®
product rights, which the Company divested in 2004, as
discontinued operations.
|
|
2. |
Summary of Significant Accounting Policies |
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under the
Companys supply contracts. Forecasted future cash flows in
particular require considerable judgment and are subject to
inherent imprecision. In the case of impairment testing, changes
in estimates of future cash flows could result in an immediate
material impairment charge and, whether they result in an
impairment charge, could result prospectively in a reduction in
the estimated remaining useful life of tangible or intangible
assets, which could be material to the financial statements.
Other significant estimates include accruals for Medicaid and
commercial 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. Reserves for returns, chargebacks, Medicaid and
commercial rebates each use the estimate of the level of
inventory of the Companys products in the distribution
channel at the end of the period. The estimate of the level of
inventory of the Companys products in the distribution
channel is based on data provided by our three key wholesalers
under inventory management agreements.
The Company is subject to risks and uncertainties that may cause
actual results to differ from the related estimates, and the
Companys estimates may change from time to time in
response to actual developments and new information.
Revenue recognition. Revenue is recognized when title and
risk of loss are transferred to customers, collection of sales
is reasonably assured, and the Company has no further
performance obligations. This is generally at the time products
are received by the customer. Accruals for estimated discounts,
returns, rebates and chargebacks that are determined based on
historical experience, reduce revenues at the time of sale and
are included in accrued expenses. Royalty revenue is recognized
based on a percentage of sales (namely, contractually
agreed-upon royalty rates) reported by third parties.
F-7
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible Assets and Goodwill. Intangible assets, which
include primarily acquired product rights, trademarks, and
patents, are stated at cost, net of accumulated amortization.
Amortization is computed over the estimated useful lives,
ranging from two to forty years, using primarily the
straight-line method. Goodwill is not amortized, but is tested
for impairment on an annual basis during the first quarter, or
more frequently if conditions warrant. We estimate the useful
lives of the assets by factoring in the characteristics of the
products such as: patent protection, competition by products
prescribed for similar indications, estimated future
introductions of competing products, and other factors. The
Company evaluates the remaining useful lives of intangible
assets each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. This evaluation is performed through the quarterly
evaluation of intangibles for impairment. Further, on an annual
basis, the Company reviews the life of each intangible asset and
makes adjustments as deemed appropriate. The Company reviews its
intangible assets for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company reviews goodwill for possible
impairment annually, or whenever events or circumstances
indicate that the carrying amount may not be recoverable. In
evaluating goodwill for impairment, the Company estimates fair
value of the Companys individual business reporting units
on a discounted cash flow basis. Assumptions and estimates used
in the evaluation of impairment may affect the carrying value of
long-lived assets, which could result in impairment charges in
future periods. Such assumptions include projections of future
cash flows and, in some cases, the current fair value of the
asset. In addition, the Companys amortization policies
reflect judgments on the estimated useful lives of assets.
Accruals for rebates, returns, and chargebacks. The
Company establishes accruals for returns, chargebacks, and
commercial and Medicaid rebate obligations in the same period it
recognizes the related sales. The accruals reduce revenues and
are included in accrued expenses. At the time a rebate or
chargeback payment is made or a product return is received,
which occurs with a delay after the related sale, the Company
records a reduction to accrued expenses and, at the end of each
quarter, adjusts accrued expenses for differences between
estimated and actual payments. Due to estimates and assumptions
inherent in determining the amount of returns, chargebacks and
rebates, the actual amount of product returns and claims for
chargeback and rebates may be different from the Companys
estimates.
The Companys product returns accrual is primarily based on
estimates of future product returns over the period during which
customers have a right of return, which is in turn based in part
on estimates of the remaining shelf life of our products when
sold to customers. Future product returns are estimated
primarily based on historical sales and return rates. The
Company estimates its commercial and Medicaid rebate accruals
based on estimates of utilization by rebate-eligible customers,
estimates of the level of inventory of its products in the
distribution channel that remain potentially subject to those
rebates, and the terms of its commercial and Medicaid rebate
obligations. The Company estimates its chargeback accrual based
on its estimates of the level of inventory of its products in
the distribution channel that remain subject to chargebacks, and
specific contractual and historical chargeback rates. The
estimate of the level of our products in the distribution
channel is based on data provided by our three key wholesalers
under inventory management agreements.
The Companys accruals for returns, chargebacks and rebates
are adjusted as appropriate for specific known developments that
may result in a change in its product returns or its rebate and
chargeback obligations. In the case of product returns, the
Company monitors demand levels for its products and the effects
of the introduction of competing products and other factors on
this demand. When the Company identifies decreases in demand for
products or experience higher than historical rates of returns
caused by unexpected discrete events, it further analyzes these
products for potential additional supplemental reserves.
Shipping and Handling Costs. The Company incurred $2,148,
$2,127, and $2,790 in 2005, 2004, and 2003, respectively,
related to third-party shipping and handling costs classified as
selling, general and
F-8
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
administrative expenses in the consolidated statements of
operations. The Company does not bill customers for such costs.
Cash and Cash Equivalents. The Company considers all
highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents. The
Companys cash and cash equivalents are placed in large
domestic banks, which limit the amount of credit exposure.
Restricted Cash. Cash escrowed for a specific purpose is
designated as restricted cash.
Investments in Debt Securities. The Company invests in
auction rate securities as part of its cash management strategy.
Auction rate securities are long-term variable rate bonds tied
to short-term interest rates that are reset through an auction
process generally every seven to 35 days. Previously, the
Company classified auction rate securities as Cash and
Cash Equivalents due to the liquidity provided by the
auction process. In accordance with generally accepted
accounting principles, the Company revised the classification of
auction rate securities for all periods presented as
Investments in Debt Securities in the accompanying
consolidated balance sheet. See Note 4.
Marketable Securities. The Company classifies its
marketable securities as available-for-sale. These securities
are carried at fair market value based on current market quotes,
with unrealized gains and losses reported in shareholders
equity as a component of accumulated other comprehensive income.
Gains or losses on securities sold are based on the specific
identification method. The Company reviews its investment
portfolio as deemed necessary and, where appropriate, adjusts
individual securities for other-than-temporary impairments. The
Company does not hold these securities for speculative or
trading purposes.
Accounts Receivable and Allowance for Doubtful Accounts.
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
managements best estimate of the amount of probable credit
losses in the Companys existing accounts receivable.
Management determines the allowance based on historical
experience along with the present knowledge of potentially
uncollectible accounts. Management reviews its allowance for
doubtful accounts quarterly. Past due balances over
120 days and greater than a specified amount are reviewed
individually for collectibility. All other balances are reviewed
on a pooled basis by type of receivable. Account balances are
charged off against the allowance when management feels it is
probable the receivable will not be recovered. The Company does
not have any off-balance-sheet credit exposure related to
customers.
Inventories. Inventories are stated at the lower of cost
or market. Cost is determined using the
first-in, first-out
(FIFO) method. Product samples held for distribution to
physicians and other healthcare providers represent
approximately 3% and 4% of inventory as of December 31,
2005 and 2004, respectively. The Company has fixed purchase
commitments under supply contracts for certain raw materials. A
loss accrual is recorded when the total inventory for a product
is projected to be more than the forecasted demand.
Income Taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial
statement and the tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded when, in the opinion of management, it is more likely
than not that some or all of the deferred tax assets will not be
realized.
Litigation. At various times the Company may be involved
in patent, product liability, consumer, commercial,
environmental and tax litigations and claims; government
investigations; and other legal proceedings that arise from time
to time in the ordinary course of business (see Note 19).
The Company accrues for amounts related to these legal matters
if it is probable that a liability has been incurred and an
amount is reasonably estimable. If the estimated amount of the
liability is a range and some amount within the range appears to
be a better estimate than any other amount within the range,
that amount is
F-9
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accrued. When no amount within the range is a better estimate
than any other amount, the minimum amount in the range is
accrued. The Company capitalizes legal costs in the defense of
its patents to the extent of an evident increase in the value of
the patent.
Financial Instruments and Derivatives. The Company does
not use financial instruments for trading purposes. On
December 31, 2005 and 2004, the Company did not have any
interest rate protection agreements or other derivatives
outstanding.
The fair value of financial instruments is determined by
reference to various market data or other valuation techniques
as appropriate. Unless otherwise disclosed, the fair values of
financial instruments approximate their recorded values.
Property, Plant and Equipment. Property, plant and
equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Depreciation is computed over the
estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally
15 to 40 years for buildings and improvements and three to
fifteen years for machinery and equipment.
The Company capitalizes certain computer software acquisition
and development costs incurred in connection with developing or
obtaining computer software for internal use. Capitalized
software costs are amortized over the estimated useful lives of
the software which generally range from three to
seven years.
In the event that facts and circumstances indicate that the
carrying amount of property, plant and equipment may be
impaired, evaluation of recoverability is performed using the
estimated future undiscounted cash flows associated with the
asset compared to the assets carrying amount to determine
if a write-down is required. To the extent such projection
indicates that undiscounted cash flow is not expected to be
adequate to recover the carrying amount, the asset would be
written down to its fair value using discounted cash flows.
Research and Development Costs. Research and development
costs are expensed as incurred. Upfront and milestone payments
made to third parties in connection with research and
development collaborations are expensed as incurred up to the
point of regulatory approval. Payments made to third parties
subsequent to regulatory approval are capitalized and amortized
over the remaining useful life. Amounts capitalized for such
payments are included in intangibles assets. Acquired research
and development projects for products that have not received
regulatory approval and that do not have alternative future use
are expensed.
Deferred Financing Costs. Financing costs related to the
$345,000 convertible debt are being amortized over five years to
the first date the debt can be put by the holders to the
Company. Financing costs related to the Senior Secured Revolving
Credit Facility (Note 14) are being amortized over five
years, the term of the facility.
Insurance. The Company is self-insured with respect to
its healthcare benefit program. The Company pays a fee to a
third party to administer the plan. The Company has stop loss
coverage on a per employee basis as well as in the aggregate.
Self-insured costs are accrued based upon reported claims and an
estimated liability for claims incurred but not reported.
Advertising. The Company expenses advertising costs as
incurred and these costs are classified as selling, general and
administrative expenses in the consolidated statements of
operations. Advertising costs for the years ended
December 31, 2005, 2004, and 2003 were $85,044, $87,821,
and $70,865, respectively.
Promotional Fees to Wyeth. On June 22, 2000, the
Company entered into a Co-Promotion Agreement with Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008. Under the agreement, Wyeth paid an upfront fee of $75,000
to King, which was classified as other liabilities and is being
amortized as a reduction of marketing expenses over the term of
the agreement.
F-10
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the Co-Promotion Agreement with Wyeth, the
Company agreed to pay Wyeth an annual promotional fee of
approximately 15% of
Altace®
net sales up to $165,000, 50% of
Altace®
net sales from $165,000 to $465,000 and 52.5% of
Altace®
net sales in excess of $465,000.
The co-promotion fee is accrued quarterly based on a percentage
of
Altace®
net sales at a rate equal to the expected relationship of the
expected co-promotion fee for the year to applicable expected
Altace®
net sales for the year.
Stock Compensation. 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 SFAS No. 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. The Company
recognizes compensation expense for restricted stock on a
straight-line basis over the period that the restrictions
expire. Had compensation cost been determined for options
granted, consistent with SFAS No. 123, the
Companys net income (loss) and diluted income (loss) per
share would have decreased (increased) to the following pro
forma amounts for the years ended December 31, 2005, 2004
and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
117,833 |
|
|
$ |
(160,288 |
) |
|
$ |
91,954 |
|
|
Add: Stock based employee compensation included in net income
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Stock based employee compensation for all awards
|
|
|
7,942 |
|
|
|
5,943 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
111,111 |
|
|
$ |
(166,231 |
) |
|
$ |
90,448 |
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.46 |
|
|
$ |
(0.69 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.49 |
|
|
$ |
(0.66 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.46 |
|
|
$ |
(0.69 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2005,
2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Expected life of option
|
|
|
4.00 |
|
|
|
4.00 |
|
|
|
4.00 |
|
Risk-free interest rate
|
|
|
4.24 |
% |
|
|
2.83 |
% |
|
|
2.79 |
% |
Expected volatility
|
|
|
46.52 |
% |
|
|
47.26 |
% |
|
|
61.00 |
% |
Expected dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The weighted average fair values of options granted during 2005,
2004 and 2003 are $6.18, $6.72 and $7.63, respectively.
Reclassifications. Certain amounts from the prior
consolidated financial statements have been reclassified to
conform to the presentation adopted in 2005.
F-11
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3. |
Concentrations of Credit Risk |
A significant portion of the Companys sales is to
wholesaler customers in the pharmaceutical industry. The Company
monitors the extension of credit to wholesaler customers and has
not experienced significant credit losses. The following table
represents the relative percentage of accounts receivable from
significant wholesaler customers compared to net accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Customer A
|
|
|
31 |
% |
|
|
29 |
% |
|
|
28 |
% |
Customer B
|
|
|
21 |
% |
|
|
23 |
% |
|
|
19 |
% |
Customer C
|
|
|
15 |
% |
|
|
21 |
% |
|
|
21 |
% |
The following table represents a summary of sales to significant
wholesaler customers as a percentage of the Companys gross
sales, including net revenues from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Customer A
|
|
|
27 |
% |
|
|
25 |
% |
|
|
21 |
% |
Customer B
|
|
|
28 |
% |
|
|
28 |
% |
|
|
30 |
% |
Customer C
|
|
|
14 |
% |
|
|
15 |
% |
|
|
16 |
% |
|
|
4. |
Investments in Debt Securities |
The Company invests its excess cash in auction rate securities
as part of its cash management strategy. Auction rate securities
are long-term variable rate bonds tied to short-term interest
rates that are reset through an auction process generally every
seven to 35 days. As of December 31, 2004, the Company
classified auction rate securities as Cash and Cash
Equivalents due to the liquidity provided by the auction
process. In accordance with generally accepted accounting
principles, the Company revised the classification of auction
rate securities for all periods presented as Investments
in Debt Securities in the accompanying consolidated
balance sheet. As of the years ended December 31, 2005 and
2004, there were no cumulative gross unrealized holdings gains
or losses on investments in debt securities.
As of the years ended December 31, 2005 and 2004, auction
rate securities totaled $494,663 and $149,430, respectively. The
revised classification in the Companys consolidated
statement of cash flows for the twelve months ended
December 31, 2004 resulted in a decrease of $46,505 in cash
from investing activities representing the increases in its
holdings in auction rate securities. As of December 31,
2003 auction rate securities totaled $102,925, resulting in an
increase of $415,575 in cash from investing activities for the
twelve months ended December 31, 2003 representing
reductions in holdings in auction rate securities.
This revised classification had no effect on previously reported
total current assets, total assets, working capital, results of
operations or financial covenants, and does not affect
previously reported cash flows from operating or financing
activities.
At December 31, 2005, the Company held common stock of
Palatin as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2005 | |
|
|
|
|
|
|
Gross | |
|
Gross | |
|
2005 |
|
|
2005 | |
|
Unrealized | |
|
Unrealized | |
|
Fair |
|
|
Cost Basis | |
|
Gains | |
|
Losses | |
|
Value |
|
|
| |
|
| |
|
| |
|
|
Palatin common stock
|
|
$ |
12,242 |
|
|
$ |
6,260 |
|
|
|
|
|
|
$18,502 |
|
|
|
|
|
|
|
|
|
|
|
|
The Financial Accounting Standards Board issued FASB
Interpretations No. 46, Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 (ARB No. 51), in
F-12
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 2003, and a further interpretation of FIN 46 in
December 2003 (FIN 46-R, and collectively FIN 46).
FIN 46 clarifies the application of ARB No. 51,
Consolidated Financial Statements, to certain
entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties, referred to as variable interest entities
(VIE). While the Company has or has had interests in
Novavax and Palatin, the Company is not considered to be the
primary beneficiary of these entities. Therefore, in accordance
with the provisions of FIN No. 46, the Company has not
consolidated the financial statements of those entities into its
consolidated financial statements.
The Companys calculation of its product returns reserves
is based on historical sales and return rates over the period
during which customers have a right of return. The Company also
considers current wholesale inventory levels of the
Companys products. Based on data received pursuant to 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 $20,000 and increased net sales from
branded pharmaceuticals, excluding the adjustment to sales
classified as discontinued operations, 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, excluding the adjustment
to sales classified as discontinued operations, by the same
amount as a result of an additional reduction in wholesale
inventory levels of the Companys branded products.
During the third quarter of 2005, the Companys actual
returns of branded pharmaceutical products continued to decrease
significantly compared to actual returns during the quarterly
periods in 2004 and the first quarter of 2005. Additionally,
based on data received pursuant to the Companys inventory
management agreements with its key wholesale customers, the
Company continued to experience normalized wholesale inventory
levels of its branded pharmaceutical products during the third
quarter of 2005. Accordingly, the Company believed that the rate
of returns experienced during the second and third quarters of
2005 was more indicative of what it should expect in future
quarters and adjusted its returns reserve accordingly. This
change in estimate resulted in a decrease of approximately
$15,000 in the returns reserve in the third quarter of 2005 and
a corresponding increase in net sales from branded
pharmaceutical products, excluding the adjustment to sales
classified as discontinued operations. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
in the third quarter of 2005 increased by approximately $5,000.
The effect of the change in estimate on third quarter 2005
operating income was, therefore, approximately $10,000.
As a result of the Companys previously disclosed
determination that it underpaid amounts due to Medicaid and
other government pricing programs from 1998 through 2002, as
further discussed in Note 19, the Company refined its
calculation of the Average Manufacturers Price
(AMP) and Best Price in compliance with federal laws
and regulations. During the third quarter of 2005, the Company
began reporting to the Centers for Medicare and Medicaid
Services using the refined calculation for computing AMP and
Best Price. In addition, during the third quarter of 2005, the
Company recalculated rebates due with respect to prior quarters
utilizing the refined AMP and Best Price calculations. As a
result of this updated information, during the third quarter of
2005, the Company decreased its reserve for estimated Medicaid
and other government pricing program obligations and increased
net sales from branded pharmaceutical products by approximately
$21,000, approximately $8,000 of which related to prior years.
This does not include the adjustment to sales classified as
discontinued operations. As a result of the increase in net
sales, the co-promotion expense related to net sales of
Altace®
increased by approximately
F-13
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$6,000, approximately $4,000 of which related to prior years.
The effect of the change in estimate on operating income was,
therefore, approximately $15,000, approximately $4,000 of which
related to prior years.
Receivables, net of allowance for doubtful accounts, consist of
the following at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Trade
|
|
$ |
204,355 |
|
|
$ |
159,388 |
|
Royalty
|
|
|
18,540 |
|
|
|
20,578 |
|
Other
|
|
|
686 |
|
|
|
997 |
|
|
|
|
|
|
|
|
Total Receivables
|
|
$ |
223,581 |
|
|
$ |
180,963 |
|
|
|
|
|
|
|
|
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
150,979 |
|
|
$ |
168,541 |
|
Work-in process
|
|
|
14,955 |
|
|
|
20,287 |
|
Finished goods (including $6,728 and $10,638 of sample
inventory, respectively)
|
|
|
91,695 |
|
|
|
133,527 |
|
|
|
|
|
|
|
|
|
|
|
257,629 |
|
|
|
322,355 |
|
Less inventory valuation allowance
|
|
|
(29,566 |
) |
|
|
(47,943 |
) |
|
|
|
|
|
|
|
|
|
$ |
228,063 |
|
|
$ |
274,412 |
|
|
|
|
|
|
|
|
|
|
9. |
Property, Plant and Equipment |
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
15,730 |
|
|
$ |
15,724 |
|
Buildings and improvements
|
|
|
120,221 |
|
|
|
107,553 |
|
Machinery and equipment
|
|
|
226,859 |
|
|
|
197,619 |
|
Capital projects in progress
|
|
|
62,942 |
|
|
|
53,116 |
|
|
|
|
|
|
|
|
|
|
|
425,752 |
|
|
|
374,012 |
|
|
Less accumulated depreciation
|
|
|
(123,278 |
) |
|
|
(93,281 |
) |
|
|
|
|
|
|
|
|
|
$ |
302,474 |
|
|
$ |
280,731 |
|
|
|
|
|
|
|
|
Included in net property, plant and equipment as of
December 31, 2005 and 2004 are computer software costs of
$20,536 and $24,719, respectively.
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was $30,736, $31,957 and $21,285, respectively,
which includes $7,845, $6,688 and $3,687, respectively, related
to computer software.
The Companys Rochester, Michigan facility manufactures
products for the Company and various third-parties. As of
December 31, 2005, the net carrying value of the property,
plant and equipment at the
F-14
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rochester facility, excluding that associated with the
production of
Bicillin®,
was $65,964. 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, equipment associated with this facility.
|
|
10. |
Acquisitions and Dispositions |
During the fourth quarter of 2005, the Company entered into a
strategic alliance with Pain Therapeutics, Inc. (Pain
Therapeutics) to develop and commercialize Remoxy
and other abuse-resistant opioid painkillers. Remoxy is an
investigational drug in late-stage clinical development by Pain
Therapeutics for the treatment of
moderate-to-severe
chronic pain. The Company paid $150,000 at the time of close
plus acquisition costs of approximately $3,700 and could make
additional milestone payments of up to $150,000 in cash based on
the successful clinical and regulatory development of
Remoxy and other abuse-resistant opioid products. This
includes a $15,000 cash payment upon acceptance of a regulatory
filing for Remoxy and an additional $15,000 upon its
approval. The Company is responsible for all research and
development expenses related to this alliance, which could total
$100,000. After regulatory approval and commercialization of
Remoxy or other abuse-resistant opioid products developed
through this alliance, the Company will pay a royalty of 15% of
cumulative net sales up to $1,000,000 and 20% of cumulative net
sales over $1,000,000. King is also responsible for the payment
of third-party royalty obligations of Pain Therapeutics related
to products developed under this collaboration. The Company
determined Pain Therapeutics is a VIE, however, the Company is
not considered to be the primary beneficiary of this entity.
Therefore, in accordance with the provisions of FIN No. 46,
the Company has not consolidated the financial statements of
this entity into its consolidated financial statements.
In connection with the strategic alliance with Pain
Therapeutics, the initial collaboration fee and acquisition
costs of $153,711 were classified as in-process research and
development in the accompanying financial statements. The value
of the in-process research and development project was expensed
on the date of acquisition as it had not received regulatory
approval and had no alternative future use. Remoxy is in
Phase III clinical trial. If this Phase III clinical trial is
successful, the Company currently anticipates obtaining FDA
approval in 2008 or 2009. The Company believes there is a
reasonable probability of completing the project successfully.
However, the success of the project depends on the outcome of
the Phase III clinical trial and the ability to successfully
manufacture the product. If the project is not successfully
completed, it could have a material effect on our cash flows and
results of operations. The in-process research and development
is part of the branded pharmaceutical segment.
On December 6, 2005, the Company entered into a
co-exclusive license agreement with Mutual Pharmaceutical
Company, Inc. (Mutual). Under the terms of the
agreement, each of the parties has granted the other a worldwide
license to certain intellectual property, including patent
rights and know-how, relating to metaxalone. The intellectual
property licensed to King relates to the potential for improved
dosing and administration of metaxalone. The Company paid Mutual
an upfront payment of $35,000 and will pay royalties on net
sales of products containing metaxalone beginning
January 1, 2006. This royalty rate may increase depending
on the achievement of certain regulatory and commercial
milestones.
F-15
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the license agreement with Mutual, the
upfront payment of $35,000 has been classified as in-process
research and development in the accompanying financial
statements. The intellectual property licensed to King relates
to the potential for improved dosing and administration of
metaxalone. The value of the
in-process research and
development project was expensed on the date of acquisition as
it had not received regulatory approval. The Company is in the
process of evaluating a potential new formulation of
Skelaxin®.
The success of the project will depend on additional in vitro
and in vivo work in a clinical setting. The costs and the
time-line of the potential project are being evaluated. The
in-process research and
development is part of the branded pharmaceutical segment.
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. See Note 27 for additional
information related to
Nordette®.
On August 12, 2004, the Company entered into a
collaborative agreement with Palatin to jointly develop and, on
obtaining necessary regulatory approvals, commercialize
Palatins PT-141 for the treatment of male and female
sexual dysfunction for $20,000 plus acquisition costs of $498.
Pursuant to the terms of the agreement, Palatin has granted King
a co-exclusive license with Palatin to PT-141 in North America
and an exclusive right to collaborate in the licensing or
sublicensing of PT-141 with Palatin outside North America. At
the time of closing King received approximately
1,176 shares of Palatin common stock and approximately 235
warrants for the right to purchase Palatin common stock. Of the
total purchase price, $3,093 was allocated to the common stock,
$260 was allocated to the warrants, and the remaining $17,145
was allocated to in-process research and development. During the
third quarter of 2005, King invested an additional $10,000 in
Palatin under the terms of this collaboration agreement. King
received 4,499 shares of common stock and 720 warrants for
the right to purchase Palatin Technologies, Inc. common stock.
Of the total investment, $9,149 was allocated to the common
stock and $851 was allocated to the warrants. This investment
reduced the equity portion of the milestone payments due Palatin
upon completion of Phase II clinical trials by the same
amount. In addition to the initial purchase price and the
investment during 2005, King may pay additional potential
milestone payments to Palatin of up to $90,000 for achieving
certain development and regulatory approval targets. A portion
of these milestone payments could consist of additional equity
investments in Palatin. After regulatory approval and
commercialization of PT-141, King may also pay potential
milestone payments to Palatin of up to $130,000 upon achieving
specified annual North American net sales thresholds. King and
Palatin will share all collaboration development and marketing
costs associated with and collaboration net profits derived from
PT-141 based upon an agreed percentage.
On December 19, 2000, September 7, 2001, and
June 24, 2002, the Company acquired convertible senior
notes of $20,000, $10,000 and $10,000, respectively, from
Novavax, Inc. (Novavax). The Company sold all of its
Novavax convertible notes to Novavax on July 19, 2004.
During 2002, the convertible senior notes were deemed to be
impaired as defined under SFAS No. 114,
Accounting by Creditors for Impairment of a Loan.
The Company recorded a valuation allowance of $35,443 during
2002. During 2003, this valuation allowance was reduced by
$18,551. During 2004, the valuation allowance was increased by
$2,887. The Company determined the amount of the valuation
allowance by reference to the December 31, 2002,
December 31, 2003 and June 30, 2004 quoted market
price of the Novavax common stock.
On July 19, 2004, the Company and Novavax mutually agreed
to end their
co-promotion and
license agreements regarding
Estrasorbtm.
As part of this transaction, Novavax reacquired all rights to
Estrasorbtm
as well as all rights to other womens health products that
Novavax may successfully develop utilizing its micellar
nanoparticle technology. Additionally, Novavax repurchased all
of its convertible notes held by King, acquired a portion of
Kings womens health field sales force, and received
approximately $8,000 from the Company to provide support for
marketing and promotion. In return, Novavax paid King $22,000
F-16
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and issued approximately 3,776 shares of Novavax common
stock to King. This transaction resulted in a net gain in the
amount of $4,021 during the third quarter of 2004. As a result
of this transaction, King owned approximately 4,101 shares
of common stock of Novavax that the Company accounted for as
available for sale securities. As of September 30, 2004,
March 31, 2005 and June 30, 2005, the Company
determined the decline in fair value of the Companys
equity interest in Novavax was other than temporary and recorded
charges of $6,520, $6,853 and $369, respectively, which is
reflected in loss on investment in the accompanying consolidated
financial statements. During the third quarter of 2005, the
Company sold its equity interest in Novavax resulting in a gain
on the sale of $1,040.
On June 30, 2004, the Company sold the
Anusol-HC®
and
Proctocort®
product lines to Salix Pharmaceuticals, Inc. (Salix)
for $13,000. In addition, the Company sold inventory of
Anusol-HC®
and
Proctocort®
to Salix for $337. The assets sold included related product
assets, intangible property, advertising and promotional
materials, and labeling and packaging materials. As part of the
transaction, the Company will contract manufacture the
Anusol-HC®
and
Proctocort®
product lines for two years. The Company recorded a $4,715 gain
on the sale of the
Anusol-HC®
and
Proctocort®
product lines, which is included in the gain on sale of products
in the accompanying consolidated financial statements.
On September 8, 2003, the Company sold the
Soloxine®,
Pancrezyme®,
Tumil-K®,
Uroeze®,
and Ammonil product lines (the animal health
products) to Virbac Corporation (Virbac) for
$15,133, including $1,823 allocated to the contract
manufacturing obligation. These assets included related product
assets, intellectual property, unfilled customer orders,
inventories and manufacturing equipment. As part of the
transaction, the Company contract manufactured the
Soloxine®
product for Virbac for up to one year. Of the selling price,
$1,500 was placed into escrow and was not available to the
Company until the earlier of one year from the closing date or
the occurrence of certain events. The Company recorded a $10,307
gain on the sale of the animal health products, which is
included in the gain on sale of products in the accompanying
consolidated financial statements.
On June 12, 2003, the Company acquired the primary care
business of Elan Corporation, plc (Elan) and of some
of its subsidiaries in the United States and Puerto Rico,
including the rights to
Sonata®
and
Skelaxin®
and rights pertaining to potential new formulations of these
products, together with Elans United States primary
care field sales force.
The total initial purchase price of $814,368 includes the cost
of acquisition, assumed liabilities and a portion of contingent
liabilities. See the allocation of the purchase price in the
table below. The identifiable intangible assets were assigned
useful lives with a weighted-average range of 16.5 years as
of the date of acquisition. The acquired business is included in
the branded pharmaceuticals segment. In connection with this
acquisition, $163,416 was placed into escrow to satisfy the
deferred obligations to Wyeth that were assumed by the Company
in connection with the acquisition. Since the Company was
entitled to the interest income and can direct investments of
the escrow fund, the Company included the escrow amount in
current restricted cash and other long-term assets as restricted
cash. The $163,416 placed into escrow was included in the
purchase price as liabilities acquired. These deferred
obligations were payable on a quarterly basis through March
2005. During 2005, 2004, and 2003, the deferred obligation paid
to Wyeth from funds in escrow was $29,605, $66,060, and $67,751,
respectively.
The Company also agreed to pay royalties on net sales of the
current formulation of
Skelaxin®
from the date of closing and certain significant development and
regulatory milestones relating to the ongoing reformulation of
Sonata®.
Contingent liabilities include a portion of the following
conditional obligations of the Company:
|
|
|
|
|
an additional $60,000 if Elan achieves specific milestones in
connection with the development of new formulations of
Sonata®; and |
F-17
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
$15,000 if annual net sales of
Sonata®
exceed $100,000 (see below for the discussion regarding the
Companys decision to discontinue the program to develop a
reformulation of
Sonata®). |
In addition to the initial purchase price, the Company paid
$25,000 in January 2004 as a milestone payment to Elan relating
to the continued exclusivity of
Skelaxin®
and $11,000 during March 2004 as a milestone payment to Elan in
connection with the development of new formulations of
Sonata®.
Of the total estimated purchase price, $175,000 was allocated to
an acquired in-process research and development project
associated with the Companys acquisition of rights to new
formulations of
Sonata®.
Specifically, the goal of the project was to successfully
develop a modified-release formulation of
Sonata®
(Sonata® MR)
that would enable patients who have difficulty staying asleep to
remain asleep for a longer period of time when utilizing the
reformulated product. The value of the acquired in-process
research and development project was expensed on the date of
acquisition, as it had not received regulatory approval as of
that date and had no alternative future use. The project was
valued through the application of a probability-weighted,
discounted cash flow approach with the assistance of an
independent valuation specialist. The estimated cash flows were
projected over a
25-year period
utilizing a discount rate of 20%. The estimated cost to complete
the project at the time of the acquisition was approximately
$120,000, which included up to $71,000 that would be paid upon
successful attainment of certain significant development
milestones of the project. At the time of the acquisition, the
project was in Phase I of clinical development.
Elan commenced a Phase II clinical trial program for the
purpose of developing
Sonata®
MR in March 2004. However, the Phase II clinical trial
results showed that the
Sonata®
MR formulations that Elan developed did not meet contractually
required specifications. After several months of review, the
Company concluded that it was not possible for Elan to develop a
Sonata®
MR formulation meeting the contractually required
specifications. Accordingly, the Company decided to discontinue
the
Sonata®
MR clinical program and terminated the agreement with Elan. On
August 26, 2005, Elan filed a request for mediation
pursuant to the terms of the agreement. The Company participated
in mediation with Elan in early 2006, which did not result in an
agreed resolution. As of December 31, 2005, the Company has
accrued $5,000 as a potential loss under the contract.
The initial allocation of the purchase price of the primary care
business of Elan at the time of acquisition is as follows:
|
|
|
|
|
|
Cash consideration, including transaction fees(1)
|
|
$ |
598,332 |
|
Liabilities acquired
|
|
|
216,036 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
814,368 |
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
Intangible assets(2)
|
|
$ |
597,000 |
|
Prepaid expenses
|
|
|
2,000 |
|
In process research and development (net of tax benefit of
$61,250)
|
|
|
113,750 |
|
Inventory
|
|
|
40,368 |
|
Deferred tax asset
|
|
|
61,250 |
|
|
|
|
|
|
|
$ |
814,368 |
|
|
|
|
|
|
|
(1) |
Excludes restricted cash placed in escrow. |
|
(2) |
The Company recorded $123,000 of the purchase price as patents
and $474,000 of the purchase price as trademarks and product
rights within intangible assets, including $88,000 related to
core technology utilized for
Sonata®
MR. During 2004, the Company wrote off the remaining $82,081 of
the $88,000 |
F-18
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
related to the
Sonata®
MR core technology. See Note 11 for further discussion. The
Sonata®
core technology intangible asset is part of the branded
pharmaceutical segment. |
On January 8, 2003, the Company completed its acquisition
of Meridian Medical Technologies, Inc. (Meridian).
Meridian is a leading manufacturer of auto-injectors for the
self-administration of injectable pharmaceuticals. The Company
paid a cash price of $44.50 per common share to Meridian
shareholders, totaling approximately $246,592, and incurred
$7,317 of expenses related to the transaction resulting in a
total purchase price of $253,909.
The allocation of the purchase price of Meridian is as follows:
|
|
|
|
|
Current assets
|
|
$ |
37,574 |
|
Property, plant and equipment
|
|
|
14,674 |
|
Goodwill
|
|
|
108,597 |
|
Intangible assets trademark and product rights
|
|
|
150,300 |
|
In process research and development
|
|
|
19,000 |
|
Other assets
|
|
|
662 |
|
Current liabilities
|
|
|
(14,505 |
) |
Deferred income taxes
|
|
|
(61,118 |
) |
Other liabilities
|
|
|
(1,275 |
) |
|
|
|
|
|
|
$ |
253,909 |
|
|
|
|
|
None of the goodwill is expected to be deductible for tax
purposes. At the time of the acquisition, the identifiable
intangible assets were assigned useful lives with a
weighted-average range of 32.2 years. The acquisition is
allocated to the Meridian Medical Technologies segment. The
Company financed the acquisition using available cash on hand.
As mentioned above, $19,000 of the purchase price was allocated
to an acquired in-process research and development project, an
auto-injector pre-filled with diazepam indicated for, among
other things, the treatment of epileptic seizures and management
of anxiety disorders which the Company has named
VanquixTM.
The value of the acquired in-process research and development
project was expensed on the date of acquisition, as it had not
received regulatory approval and had no alternative future use.
The project was valued through the application of a
probability-weighted, discounted cash flow approach with the
assistance of an independent valuation specialist. The estimated
cash flows were projected over a
30-year period
utilizing a discount rate of 21%. Pre-tax margins (after an
adjustment to reflect the use of auto-injector core technology)
were assumed to be (10%) in 2003 and improving to 23% in
10 years. The estimated cost to complete the project was
less than $700. The project was originally submitted to the FDA
as an Abbreviated New Drug Application (ANDA), which
referenced an approved New Drug Application (NDA)
owned by the United States Army for a diazepam-filled
auto-injector currently manufactured under contract exclusively
by Meridian. The project as originally contemplated was
substantially complete as of the valuation date. At the time of
valuation, the Company anticipated FDA approval of the project
during 2004. In May 2004, the Company received a letter from the
FDA advising the Company that its ANDA was not approvable. The
FDA raised concerns regarding whether the product, a
self-injectable therapy, is appropriate for self-diagnosis and
use. Following discussions with the FDA, the Company started the
Phase III clinical trial for
VanquixTM
in the first quarter of 2006. Even if the project is not
successfully completed, it would not materially adversely affect
the Companys results of operations.
F-19
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma summary presents the financial
information as if the acquisitions of Meridian and the primary
care business of Elan had occurred on January 1, 2003 for
the year ended December 31, 2003. These pro forma results
do not purport to be indicative of what would have occurred had
the acquisition been made on January 1, 2003, nor are they
indicative of future results.
|
|
|
|
|
|
|
Year | |
|
|
Ended | |
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
|
| |
Total revenues
|
|
$ |
1,609,554 |
|
|
|
|
|
Net income
|
|
$ |
101,459 |
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.42 |
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.42 |
|
|
|
|
|
On December 30, 2002, the Company acquired the exclusive
rights to
Synercid®
from Sanofi-Aventis. As additional consideration to
Sanofi-Aventis for
Synercid®,
the Company agreed to potential milestone payments totaling
$75,000. On December 31, 2005, December 31, 2004, and
December 31, 2003, the Company paid Sanofi-Aventis
milestone payments of $18,600, $21,200, and $10,300
respectively, for the continued recognition of
Synercid®
as an effective treatment for vancomycin-resistant enterococcus
faecium. The remaining $25,000 milestone is payable to
Sanofi-Aventis if
Synercid®
should receive FDA approval to treat methicillin resistant
staphylococcus aureus, or King will pay Sanofi-Aventis a
one-time payment of $5,000 the first time during any
twelve-month period net sales of
Synercid®
exceed $60,000, and a one-time payment of $20,000 the first time
during any twelve-month period net sales of
Synercid®
exceed $75,000.
|
|
11. |
Intangible Assets and Goodwill |
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Trademarks and product rights
|
|
$ |
1,174,028 |
|
|
$ |
296,801 |
|
|
$ |
1,370,711 |
|
|
$ |
222,592 |
|
Patents
|
|
|
261,277 |
|
|
|
171,976 |
|
|
|
267,049 |
|
|
|
130,494 |
|
Other intangibles
|
|
|
9,459 |
|
|
|
8,793 |
|
|
|
9,819 |
|
|
|
8,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
1,444,764 |
|
|
$ |
477,570 |
|
|
$ |
1,647,579 |
|
|
$ |
361,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2005,
2004 and 2003 was $116,313, $130,159 and $92,460, respectively.
Estimated annual amortization expense for intangible assets
owned by the Company at December 31, 2005 for each of the
five succeeding fiscal years is as follows:
|
|
|
|
|
Fiscal Year Ended December 31, |
|
Amount | |
|
|
| |
2006
|
|
$ |
98,214 |
|
2007
|
|
|
81,807 |
|
2008
|
|
|
79,259 |
|
2009
|
|
|
72,322 |
|
2010
|
|
|
68,479 |
|
F-20
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New competitors to
Sonata®
entered the market during 2005. Prescriptions for
Sonata®
have not met expectations. As a result, the Company lowered its
future sales forecast for this product in both the second and
fourth quarters of 2005, which decreased the estimated
undiscounted future cash flows associated with the
Sonata®
intangible assets to a level below their carrying values as of
those dates. Accordingly, the Company recorded intangible asset
impairment charges of $126,923 and $42,582 during the second and
fourth quarters of 2005, respectively, 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 as of those
dates.
Sonata®
is included in the Companys branded pharmaceuticals
reporting segment.
During the third and fourth quarters of 2004, the Company
recorded intangible asset impairment charges totaling $82,081
due to the Companys decision to discontinue the clinical
program to develop a modified-release formulation of
Sonata®.
These impairment charges were based on the estimated fair values
of the expected cash flows of the intangible asset at the
balance sheet dates. Pursuant to an agreement between the
Company and Elan, Elan commenced a Phase II clinical trial
program for the purpose of developing a modified release
formulation of
Sonata®
(Sonata®
MR) in March 2004. However, the Phase II clinical
trial results showed that the
Sonata®
MR formulations that Elan developed did not meet contractually
required specifications. After several months of review, the
Company concluded that it was not possible for Elan to develop a
Sonata®
MR formulation meeting the contractually required
specifications. Accordingly, the Company decided to discontinue
the
Sonata®
MR clinical program and terminated the agreement with Elan. See
Note 10.
As a result of a continuing decline in
Corzide®
prescriptions and the anticipation of additional competition in
the future, the Company lowered its future sales forecast for
this product which decreased the estimated undiscounted future
cash flows associated with the
Corzide®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $43,243 during the fourth quarter of 2005 to adjust
the carrying value of the
Corzide®
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
Corzide®
based on its estimated discounted future cash flows.
Corzide®
is included in the Companys branded pharmaceuticals
reporting segment.
As a result of a continuing decline in end-user demand for
Synercid®
outside of the United States, the Company determined the
estimated undiscounted future cash flows associated with sales
of this product outside of the United States were at a level
below their carrying value of the
Synercid®
intangible assets that are assigned to the markets for this drug
outside of the United States. Accordingly, the Company recorded
an intangible asset impairment charge of $8,307 during the
fourth quarter of 2005 to adjust the carrying value of these
Synercid®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with the
markets for
Synercid®
outside the United States based on their estimated discounted
future cash flows.
Synercid®
is included in the Companys branded pharmaceuticals
reporting segment.
The Rochester, Michigan facility manufactures several products
for the Company, including
Aplisol®
and
Coly-Mycin®.
The products that are manufactured at this facility are
considered one asset group and evaluated for impairment
together. The Company reviewed the Rochester intangible assets
for impairment under SFAS No. 144. Based on that
review, the Company determined that the Rochester intangible
assets were impaired and recorded an impairment charge of
$17,492 during the third quarter of 2004. The Rochester
intangible assets are part of the branded pharmaceutical segment.
During January 2003, the Company was notified of the approval by
the FDA of a second generic fludrocortisone acetate, USP, a
product that represents additional competition for the
Companys
Florinef®
(fludrocortisone acetate, USP) product. The Company recorded an
impairment charge in the amount of $110,970 in the first quarter
of 2003 reflecting the reduction in the fair value of the
Florinef®
intangible
F-21
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets. 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.
Florinef®
and
Tapazole®
are included in the Companys branded pharmaceuticals
reporting segment.
As a result of a continuing decline in
Lorabid®
prescriptions, the Company determined in 2003 that it would not
be able to sell all the
Lorabid®
product required to be purchased under its supply contract with
Eli Lilly. Accordingly, under the requirements of Accounting
Research Bulletin No. 43, during the fourth quarter of
2003 and 2004 the Company recorded $29,959 and $4,483,
respectively, for purchase commitments in excess of expected
demand as a charge to cost of revenues. During 2005, the
contract ended, and as of December 31, 2005 the Company did
not have an excess purchase commitment accrual related to
Lorabid®.
The Company also reviewed the
Lorabid®
intangible assets for impairment under SFAS No. 144.
Based on that review, the Company determined that the
Lorabid®
intangible assets were impaired and recorded an impairment
charge of $4,400 in the third quarter of 2004 to write down the
assets to their estimated fair value.
Lorabid®
is included in the Companys branded pharmaceutical
reporting segment.
During the fourth quarter of 2003 and the third quarter of 2004,
the Company incurred intangible asset impairment charges
totaling $13,646 and $10,711, respectively, that were related to
certain of the Companys smallest branded pharmaceutical
products and the write-off of some unutilized intangible assets.
The impairment charges related to the branded pharmaceutical
products were primarily the result of declining prescriptions
and manufacturing issues with respect to these products. The
impairment charge related to the unutilized intangible assets
were the result of the Companys assessment of the
prospects for commercialization of products utilizing those
intangible assets. All of the affected intangible assets were
part of the branded pharmaceuticals segment.
Demand for some of the Companys non-key products,
including but not limited to
Intal®,
Tilade®
and
Synercid®,
declined over the past year at a rate which triggered a review
of the intangible assets associated with these products. As of
December 31, 2005, the net intangible assets associated
with these three products totals approximately $196,684. The
Company believes that these intangible assets are not currently
impaired based on estimated undiscounted 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 reduce the estimated
remaining useful life and/ or write off a portion or all of
these intangible assets.
Goodwill at December 31, 2003, 2004 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded | |
|
Meridian | |
|
|
|
|
Segment | |
|
Segment | |
|
Total | |
|
|
| |
|
| |
|
| |
Goodwill at December 31, 2003
|
|
$ |
12,742 |
|
|
$ |
108,613 |
|
|
$ |
121,355 |
|
Adjustments
|
|
|
|
|
|
|
(203 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2004
|
|
$ |
12,742 |
|
|
$ |
108,410 |
|
|
$ |
121,152 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2005
|
|
$ |
12,742 |
|
|
$ |
108,410 |
|
|
$ |
121,152 |
|
|
|
|
|
|
|
|
|
|
|
F-22
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain office and manufacturing equipment
and automobiles under non-cancelable operating leases with terms
from one to five years. Estimated future minimum lease payments
as of December 31, 2005 for leases with initial or
remaining terms in excess of one year are as follows:
|
|
|
|
|
2006
|
|
$ |
19,170 |
|
2007
|
|
|
17,177 |
|
2008
|
|
|
17,342 |
|
2009
|
|
|
14,638 |
|
2010
|
|
|
14,987 |
|
Thereafter
|
|
|
3,314 |
|
Lease expense for the years ended December 31, 2005, 2004
and 2003 was approximately $12,085, $12,982 and $10,411,
respectively.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Rebates (see Note 19)
|
|
$ |
172,740 |
|
|
$ |
215,649 |
|
Accrued co-promotion fees
|
|
|
78,772 |
|
|
|
38,184 |
|
Current portion of loss contract (see Note 19)
|
|
|
1,658 |
|
|
|
30,029 |
|
Product returns
|
|
|
50,902 |
|
|
|
122,863 |
|
Chargebacks
|
|
|
13,153 |
|
|
|
27,953 |
|
Medicaid settlement
|
|
|
65,000 |
|
|
|
65,000 |
|
Accrued interest
|
|
|
1,212 |
|
|
|
1,212 |
|
Product recall accrual
|
|
|
1,516 |
|
|
|
4,238 |
|
Contingent liabilities (see Note 19)
|
|
|
879 |
|
|
|
21,969 |
|
Other
|
|
|
133,788 |
|
|
|
68,913 |
|
|
|
|
|
|
|
|
|
|
$ |
519,620 |
|
|
$ |
596,010 |
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Convertible debentures(a)
|
|
$ |
345,000 |
|
|
$ |
345,000 |
|
Senior secured revolving credit facility(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
345,000 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the fourth quarter of 2001, the Company issued $345,000
of
23/4% Convertible
Debentures due November 15, 2021. The debentures are
unsecured unsubordinated obligations, and the payment of
principal and interest is guaranteed by the Companys
domestic subsidiaries on a joint and several basis. The
debentures accrue interest at an initial rate of
23/4%,
which will be reset (but not below |
F-23
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
23/4%
or above
41/4%)
on May 15, 2006, May 15, 2011, and May 15, 2016.
Interest is payable on May 15 and November 15 of each year. |
|
|
|
On or after November 20, 2006, the Company may redeem for
cash all or part of the debentures that have not previously been
converted or repurchased at a price equal to 100% of the
principal amount of the debentures plus accrued interest up to
but not including the date of redemption. Holders may require
the Company to repurchase for cash all or part of their
debentures on November 15, 2006, November 15, 2011 or
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. In addition, upon a change of
control, each holder may require the Company to repurchase for
cash all or a portion of the holders debentures. |
|
|
Holders may surrender their debentures for conversion into
shares of King common stock at the conversion price (initially
$50.16 per share and subject to certain adjustments) if any
of the following conditions are satisfied: |
|
|
|
|
|
if the closing sale price of King common stock, for at least 20
trading days in the 30 trading day period ending on the trading
day prior to the date of surrender, exceeds 110% of the
conversion price per share of King common stock on that
preceding trading day; |
|
|
|
if we have called the debentures for redemption; or |
|
|
|
upon the occurrence of specified corporate transactions. |
|
|
|
The Company has reserved 6,877,990 shares of common stock
in the event such debentures are converted into shares of the
Companys common stock. |
|
|
As of December 31, 2005, the Company has classified the
debentures as a current liability in the accompanying balance
sheet due to the right the holders have to require the Company
to repurchase the debentures on November 15, 2006. |
|
|
|
(b) |
|
On April 23, 2002, the Company established a $400,000 five
year Senior Secured Revolving Credit Facility. The facility has
been collateralized in general by all real estate with a value
of $5,000 or more and all personal property of the Company and
its significant subsidiaries. The Companys obligations
under the Senior Secured Revolving Credit Facility are
unconditionally guaranteed on a senior basis by significant
subsidiaries. The Senior Secured Revolving Credit Facility
accrues interest at the Companys 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 Senior Secured Revolving Credit Facility and
(b) letters of credit outstanding. As of December 31,
2005, the Company had $1,044 of letters of credit outstanding
under this facility. |
|
|
|
To establish the Senior Secured Revolving Credit Facility, the
Company incurred $5,067 of deferred financing costs that are
being amortized over five years, the life of the Senior Secured
Revolving Credit Facility. |
|
|
The Senior Secured Revolving Credit Facility requires the
Company to maintain a minimum net worth of no less than
$1.2 billion plus 50% of the Companys 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 |
F-24
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 December 31, 2005, the Company has complied with these
covenants. |
Amortization expense related to deferred financing costs was
$3,096, $3,145 and $3,160 for 2005, 2004 and 2003, respectively,
and is included in interest expense.
For the years ended December 31, 2005, 2004 and 2003, the
Company capitalized interest of approximately $1,720, $1,185,
and $1,180, respectively related to construction in process.
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred revenue from co-promotion revenue fees
|
|
$ |
16,512 |
|
|
$ |
25,603 |
|
Contingent milestone liabilities (Note 10)
|
|
|
|
|
|
|
9,605 |
|
Long-term portion of loss contract
|
|
|
|
|
|
|
3,589 |
|
Other
|
|
|
3,848 |
|
|
|
2,639 |
|
|
|
|
|
|
|
|
|
|
$ |
20,360 |
|
|
$ |
41,436 |
|
|
|
|
|
|
|
|
|
|
16. |
Financial Instruments |
The following disclosures of the estimated fair values of
financial instruments are made in accordance with the
requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using
available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable. The carrying amounts of these items are a
reasonable estimate of their fair values.
Marketable Securities and Investments in Debt Securities.
The fair value of marketable securities and investments in debt
securities are based primarily on quoted market prices. If
quoted market prices are not readily available, fair values are
based on quoted market prices of comparable instruments.
Long-Term Debt. The fair value of the Companys
long-term debt, including the current portion, at
December 31, 2005 and 2004 is estimated to be approximately
$336,592 and $327,750, respectively, using quoted market price.
F-25
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net income tax expense (benefit) from continuing operations
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
124,799 |
|
|
$ |
3,152 |
|
|
$ |
192,126 |
|
|
State
|
|
|
5,076 |
|
|
|
6,540 |
|
|
|
13,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$ |
129,875 |
|
|
$ |
9,692 |
|
|
$ |
205,138 |
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(72,458 |
) |
|
$ |
(17,780 |
) |
|
$ |
(134,036 |
) |
|
State
|
|
|
4,068 |
|
|
|
676 |
|
|
|
(5,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
$ |
(68,390 |
) |
|
$ |
(17,104 |
) |
|
$ |
(139,254 |
) |
|
|
|
|
|
|
|
|
|
|
Total expense (benefit)
|
|
$ |
61,485 |
|
|
$ |
(7,412 |
) |
|
$ |
65,884 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the difference between the federal statutory
tax rate and the effective income tax rate as a percentage of
income from continuing operations before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal statutory tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal benefit
|
|
|
5.1 |
|
|
|
(12.4 |
) |
|
|
4.3 |
|
Charitable donations
|
|
|
(5.4 |
) |
|
|
25.4 |
|
|
|
(3.8 |
) |
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Fines and penalties
|
|
|
|
|
|
|
(39.3 |
) |
|
|
|
|
Other
|
|
|
(0.2 |
) |
|
|
4.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
34.5 |
% |
|
|
12.8 |
% |
|
|
40.3 |
% |
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued expenses and reserves
|
|
$ |
82,837 |
|
|
$ |
149,000 |
|
Net operating losses
|
|
|
3,340 |
|
|
|
1,445 |
|
Intangible assets
|
|
|
262,227 |
|
|
|
120,544 |
|
Charitable contribution carryover
|
|
|
35,210 |
|
|
|
26,570 |
|
Other
|
|
|
2,701 |
|
|
|
4,831 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
386,315 |
|
|
|
302,390 |
|
Valuation allowance
|
|
|
(9,214 |
) |
|
|
(3,950 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
377,101 |
|
|
|
298,440 |
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(33,538 |
) |
|
|
(30,661 |
) |
Other
|
|
|
(30,754 |
) |
|
|
(20,869 |
) |
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(64,292 |
) |
|
|
(51,530 |
) |
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
312,809 |
|
|
$ |
246,910 |
|
|
|
|
|
|
|
|
F-26
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has $9,300 of foreign operating loss carryforwards
which may be carried forward indefinitely; a valuation allowance
has been provided as it is more likely than not that the
deferred tax assets relating to those loss carryforwards will
not be fully realized. Additionally, a valuation allowance has
been provided against certain state deferred tax assets where it
is more likely than not that the deferred tax asset will not be
realized.
The Company sponsors a defined contribution employee retirement
savings 401(k) plan that covers all employees over 21 years
of age. The plan allows for employees contributions, which
are matched by the Company up to a specific amount under
provisions of the plan. Company contributions during the years
ended December 31, 2005, 2004 and 2003 were $4,953, $4,858,
and $3,860, respectively. The plan also provides for
discretionary profit-sharing contributions by the Company. There
were no discretionary profit-sharing contributions during the
years ended December 31, 2005, 2004 and 2003.
|
|
19. |
Commitments and 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 Pharmaceuticals 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 143
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
F-27
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
theories, including but not limited to, product liability,
strict liability, negligence, breach of warranty and
misrepresentation.
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 seventeen 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, Minnesota, Florida, Maryland 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
F-28
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 Pharmaceutical
Industry 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 thirty-four 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, Mississippi and Alabama, some of which the
Company is seeking to have transferred to the United States
District Court for the District of Massachusetts and combined
with the existing multi-district litigation.
|
|
|
Settlement of Governmental Pricing Investigation |
On October 31, 2005, the Company entered into (i) a
definitive settlement agreement with the United States of
America, acting through the United States Department of Justice
and the United States Attorneys Office for the Eastern
District of Pennsylvania and on behalf of the Office of
Inspector General of the United States Department of Health
and Human Services (HHS/ OIG) and the Department of
Veterans Affairs, to resolve the governmental investigations
related to the Companys underpayment of rebates owed to
Medicaid and other governmental pricing programs during the
period from 1994 to 2002 (the Federal Settlement
Agreement), and (ii) similar settlement agreements
with 48 states and the District of Columbia (collectively,
the State Settlement Agreements, and together with
the Federal Settlement Agreement, the Settlement
Agreements). The Company has agreed to a settlement with
the remaining state on substantially the same terms as the other
state settlements, and the Company currently expects to enter
into a definitive settlement agreement with that state before
the end of the first quarter of 2006. Consummation of the
Federal Settlement Agreement and some State Settlement
Agreements is or was subject to court approval. On
February 24, 2006, the United States District Court for the
Eastern District of Pennsylvania (District Court)
approved the Federal Settlement Agreement. All interested
parties, including King, the individual purportedly acting as a
relator under the False Claims Act and the affected
states, have requested that the District Court approve the State
Settlement Agreements that require court approval.
Pursuant to the Settlement Agreements, the Company agreed to pay
a total of approximately $124,100 (the Settlement
Amount) and interest on the Settlement Amount at the rate
of 3.75% from July 1, 2005 to the date of consummation of
the settlement. The Company has further agreed to pay, subject
to certain conditions, (i) legal fees relating to the
settlement in the amount of approximately $800, and
(ii) approximately $1,000 in settlement costs. The
Settlement Amount includes approximately $50,600 for payment to
49 states and the District of Columbia. The Settlement
Amount includes approximately $63,700 representing the amount of
underpayments to Medicaid and other governmental pricing
programs from 1994 to 2002 and approximately $60,400 to cover
interest, penalties and other costs.
F-29
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On March 2, 2006, the Company paid approximately $126,900,
comprising the Settlement Amount and accrued interest under its
Settlement Agreements with the United States and the
48 states and the District of Columbia. The Company has
agreed to pay approximately $400 to the remaining state. The
Company currently expects to make this payment and the other
remaining payments by the end of the first quarter of 2006.
Certain decisions of the District Court relating to the
relators dispute with certain states over a potential
share award remain subject to appeal. Any share award would be
paid solely by the government and would not affect the amount
the Company is required to pay pursuant to the settlement.
Consequently, the Company believes the reversal of any such
decision or decisions would not have a material effect on it.
In addition to the Settlement Agreements, the Company has
entered into a five-year corporate integrity agreement with HHS/
OIG (the Corporate Integrity Agreement) pursuant to
which the Company is required, among other things, to keep in
place the Companys current compliance program, to provide
periodic reports to HHS/ OIG and to submit to audits relating to
the Companys Medicaid rebate calculations.
The Company accrued in prior years a total of $130,400 in
respect of its estimated underpayments to Medicaid and other
governmental pricing programs and estimated settlement costs
with all relevant governmental parties, which sum is classified
as restricted cash and an accrued expense in the accompanying
balance sheet. This sum is sufficient to cover the full cost of
all sums owed the federal and state governments pursuant to the
Settlement Agreements, together with related obligations to
reimburse the expenses of some of the parties.
The previously disclosed claim seeking damages from the Company
because of alleged retaliatory actions against the relator was
dismissed with prejudice on January 31, 2006.
The Settlement Agreements will not resolve any of the previously
disclosed civil suits that are pending against the Company and
related individuals and entities discussed in the section
Securities and ERISA Litigation below.
As previously reported, the SEC has also been conducting an
investigation relating to the Companys underpayments to
governmental programs, as well as into the Companys
previously disclosed errors relating to reserves for product
returns. While the SECs investigation is continuing with
respect to the product returns issue, the Staff of the SEC has
advised the Company that it has determined not to recommend
enforcement action against the Company with respect to the
aforementioned governmental pricing matter. The Staff of the SEC
notified the Company of this determination pursuant to the final
paragraph of Securities Act Release 5310. Although the SEC could
still consider charges against individuals in connection with
the governmental pricing matter, the Company does not believe
that any governmental unit with authority to assert criminal
charges is considering any charges of that kind.
The Company continues to cooperate with the SECs ongoing
investigation. Based on all information currently available to
it, the Company does not anticipate that the results of the
SECs ongoing investigation will have a material adverse
effect on King, including by virtue of any obligations to
indemnify current or former officers and directors.
|
|
|
Securities and ERISA 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 the Companys
securities against the Company, its directors, former directors,
executive officers, former executive officers, a Company
F-30
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subsidiary, and a former director of the subsidiary in the
United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934, in connection with
the Companys underpayment of rebates owed to Medicaid and
other governmental pricing programs, and certain transactions
between the Company and the Benevolent Fund. 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. 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 in this action has commenced. The
Court has set a trial date of April 10, 2007.
The Company has estimated a probable loss contingency for the
class action lawsuit described above. The Company believes this
loss contingency will be paid on behalf of the Company by its
insurance carriers. Accordingly, as of December 31, 2005,
the Company has recorded a liability and a receivable for this
amount, classified in accrued expenses and prepaid and other
current assets, respectively in the accompanying consolidated
financial statements.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of the
Companys current and former officers and directors, with
respect to the same events at issue in the federal securities
litigation described above. These cases have been consolidated,
and on October 3, 2003, plaintiffs filed a consolidated
amended complaint. On November 17, 2003, defendants filed a
motion to dismiss or stay the consolidated amended complaint.
The court denied the motion to dismiss, but granted a stay of
proceedings. On October 11, 2004, the court lifted the stay
to permit plaintiffs to file a further amended complaint adding
class action claims related to the Companys
then-anticipated merger with Mylan Laboratories, Inc. On
October 26, 2004, defendants filed a partial answer to the
further amended complaint, and moved to dismiss the newly-added
claims. Following the termination of the Mylan merger agreement,
plaintiffs voluntarily dismissed these claims. Discovery with
respect to the remaining claims in the case has commenced. No
trial date has been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
In August 2004, a separate class action lawsuit was filed in
Tennessee state court, asserting claims solely with respect to
the Companys then-anticipated merger with Mylan
Laboratories. Defendants filed a
F-31
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
motion to dismiss the case on November 30, 2004, which
remains pending. The Company believes that the claims in this
case are moot following termination of the Mylan merger
agreement.
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 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 is unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any, except
as noted above, in the pending litigation. If the Company were
not to prevail in the pending litigation, or if any governmental
sanctions are imposed in excess of those described above,
neither of which it can predict or reasonably estimate at this
time, its business, financial condition, results of operations
and cash flows could be materially adversely affected.
Responding to the government investigations and defending the
Company 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 Abbreviated New Drug Application (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 New Drug Application (NDA). Cobalt
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and Aventis Pharma Deutschland GmbH
(Aventis) 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 provided the
Company an automatic stay of FDA approval of Cobalts ANDA
for 30 months from no earlier than February 5, 2003.
That 30 month stay expired in August 2005 and on
October 24, 2005, the FDA granted final approval of
Cobalts ANDA. In March 2004, Cobalt stipulated to
infringement of the 722 patent. Subsequent to filing
F-32
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. On February 27, 2006,
the Company, Aventis and Cobalt agreed that, subject to certain
conditions, within 38 days, all parties will submit a joint
stipulation dismissing without prejudice the litigation before
the U.S. District Court of Massachusetts.
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 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,
the Company filed civil actions for infringement of the
722 patent against Lupin in the U.S. District
Courts for the District of Maryland and the Eastern District of
Virginia. 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. On February 1,
2006, the Maryland and Virginia cases were consolidated into a
single action in the Eastern District of Virginia. Trial is
currently scheduled to begin in that action on June 6, 2006.
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 December 31, 2005, the
Company had net intangible assets related to
Altace®
of $239,502. If a generic version of
Altace®
enters the market, the Company may have to write off a portion
or all of the 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. A patent
infringement suit was filed 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 provided 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 provided the Company with an automatic stay of
FDA approval of Eon Labs ANDA for its proposed 400 mg
and 800 mg products for 30 months 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,
F-33
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 December 31, 2005,
the Company had net intangible assets related to
Skelaxin®
of $170,384. If demand for
Skelaxin®
declines below current expectations, the Company may have to
write off a portion or all of these intangible assets.
The Company has entered into an agreement with a generic
pharmaceutical company to launch an authorized generic of
Skelaxin in the event the Company faces generic competition for
Skelaxin. However, the Company cannot provide any assurance
regarding the extent to which this strategy will be successful,
if at all.
Barr Laboratories Inc. (Barr) filed an ANDA, which
included a Paragraph IV certification, with the FDA seeking
permission to market a generic version of
Prefest®.
United States Patent No. 5,108,995 (the
995 patent), a utility patent with
method of treatment claims relating to
Prefest®,
and United States Patent No. 5,382,573 (the
573 patent), a utility patent with
pharmaceutical preparation claims relating to
Prefest®,
were issued on April 28, 1992, and January 17, 1995,
respectively. The 995 patent and the 573 patent are
both listed in the FDAs Orange Book. The 995 patent
does not expire until April 28, 2009, and the 573
patent does not expire until January 17, 2012. On
October 15, 2003, the Company received notice of
Barrs Paragraph IV certification, which alleges
noninfringement and invalidity of the 995 patent and the
573 patent. On November 26, 2003, the Company filed a
Complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provided the
Company an automatic stay of FDA approval of Barrs ANDA
for 30 months from no earlier than October 15, 2003.
Subsequently, Barr purchased the rights to
Prefest®
from the Company, and the lawsuit was dismissed on
January 11, 2005 as a result of the transaction.
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. (Teva)
and Teva Pharmaceutical
F-34
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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. As of December 31,
2005, the Company had net intangible assets related to
Sonata®
of $12,883. 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.
|
|
|
Other Commitments and Contingencies |
The following summarizes the Companys unconditional
purchase obligations at December 31, 2005:
|
|
|
|
|
|
2006
|
|
$ |
151,495 |
|
2007
|
|
|
107,772 |
|
2008
|
|
|
96,979 |
|
2009
|
|
|
112 |
|
2010
|
|
|
113 |
|
Thereafter
|
|
|
21 |
|
|
|
|
|
|
Total
|
|
$ |
356,492 |
|
|
|
|
|
The unconditional purchase obligations of the Company are
primarily related to minimum purchase requirements under
contracts with suppliers to purchase raw materials and finished
goods related to the Companys branded pharmaceutical
products.
The Company has a supply agreement with a third party to produce
ramipril, the active ingredient in
Altace®.
This supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires the Company to
purchase certain minimum levels of ramipril as long as the
Company maintains market exclusivity on
Altace®
in the United States, and thereafter the parties must negotiate
in good faith the annual minimum purchase quantities. If sales
of
Altace®
do not increase, if the Company is unable to maintain market
exclusivity for
Altace®
in accordance with current expectations, if the Companys
product life cycle management is not successful, or if the
supply agreement or the annual minimum purchase requirements do
not terminate at an optimal time, the Company may incur losses
in connection with the purchase commitments under the supply
agreement. In the event the Company incurs losses in connection
with the purchase commitments under the supply agreement, there
may be a material adverse effect upon the Companys results
of operations and cash flows.
F-35
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had a supply agreement with Eli Lilly to produce
Lorabid®
which required the Company to purchase certain minimum levels of
inventory of
Lorabid®
through September 1, 2005. Based on changes in estimated
prescription trends, the Company anticipated the minimum
purchase commitments under the supply agreement would be greater
than that which the Company would be able to sell to its
customers. As a result, the Company recorded income of $482
during 2005 and charges of $4,483 and $29,959 during 2004 and
2003, respectively, related to the liability associated with the
amount of its purchase commitments in excess of expected demand.
The Company orders metaxalone, the active ingredient in
Skelaxin®,
from two suppliers. If sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments of
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
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 that are separately categorized into four
therapeutic areas, including cardiovascular/metabolic,
neuroscience, hospital/acute care, and other. These branded
prescription products are aggregated because of the similarity
in regulatory environment, manufacturing processes, methods of
distribution, and types of customer. Meridian develops,
manufactures, and sells pharmaceutical products that are
administered with an auto-injector to both commercial and
government markets. The principal source of revenues in the
commercial market is the
EpiPen®
product line marketed by Dey, L.P., an epinephrine filled
auto-injector, 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 primarily 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 gross
profit. Reportable segments were separately identified based on
revenues, segment profit (excluding depreciation) 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. The Companys revenues are
substantially all derived from activities within the United
States and Puerto Rico. The Companys assets are
substantially all located within the United States and Puerto
Rico.
F-36
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
1,542,124 |
|
|
$ |
1,076,517 |
|
|
$ |
1,272,350 |
|
|
Meridian Medical Technologies
|
|
|
129,261 |
|
|
|
123,329 |
|
|
|
124,157 |
|
|
Royalties
|
|
|
78,128 |
|
|
|
78,474 |
|
|
|
68,365 |
|
|
Contract manufacturing(1)
|
|
|
601,404 |
|
|
|
505,537 |
|
|
|
278,836 |
|
|
All other
|
|
|
1,201 |
|
|
|
(1 |
) |
|
|
628 |
|
|
Eliminations(1)
|
|
|
(579,237 |
) |
|
|
(479,492 |
) |
|
|
(251,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues
|
|
$ |
1,772,881 |
|
|
$ |
1,304,364 |
|
|
$ |
1,492,789 |
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
1,319,200 |
|
|
$ |
824,949 |
|
|
$ |
991,770 |
|
|
Meridian Medical Technologies
|
|
|
66,303 |
|
|
|
64,033 |
|
|
|
57,954 |
|
|
Royalties
|
|
|
69,125 |
|
|
|
67,596 |
|
|
|
57,122 |
|
|
Contract manufacturing
|
|
|
(4,888 |
) |
|
|
(5,162 |
) |
|
|
85 |
|
|
All other
|
|
|
156 |
|
|
|
10 |
|
|
|
17 |
|
|
Other operating costs and expenses
|
|
|
(1,269,817 |
) |
|
|
(992,690 |
) |
|
|
(954,996 |
) |
|
Other income (expense)
|
|
|
(1,964 |
) |
|
|
(16,770 |
) |
|
|
11,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before tax
|
|
$ |
178,115 |
|
|
$ |
(58,034 |
) |
|
$ |
163,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total assets:
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
2,654,782 |
|
|
$ |
2,602,768 |
|
|
Meridian Medical Technologies
|
|
|
261,956 |
|
|
|
275,850 |
|
|
Royalties
|
|
|
20,444 |
|
|
|
22,430 |
|
|
Contract manufacturing
|
|
|
26,840 |
|
|
|
23,108 |
|
|
All other
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$ |
2,965,242 |
|
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
|
(1) |
Contract manufacturing revenues include $579,237, $479,492 and
$251,547 of intercompany sales for the years ended
December 31, 2005, 2004 and 2003, respectively. |
F-37
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents branded pharmaceutical revenues by
therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
$ |
749,352 |
|
|
$ |
494,785 |
|
|
$ |
730,616 |
|
|
Neuroscience
|
|
|
427,767 |
|
|
|
298,928 |
|
|
|
246,814 |
|
|
Hospital/acute care
|
|
|
314,192 |
|
|
|
246,822 |
|
|
|
255,732 |
|
|
Other
|
|
|
50,813 |
|
|
|
35,982 |
|
|
|
39,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$ |
1,542,124 |
|
|
$ |
1,076,517 |
|
|
$ |
1,272,350 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures of $53,290, $55,141 and $51,201 for the
years ended December 31, 2005, 2004 and 2003, respectively,
are substantially related to the branded pharmaceuticals and
contract manufacturing segments.
|
|
21. |
Related Party Transactions |
The Company donated inventory with a carrying value of $16,322
in 2003 and $1,452 in 2004 to the Benevolent Fund. The
Benevolent Fund is a nonprofit corporation organized under the
laws of the Commonwealth of Virginia and is exempt from taxation
under Section 501(c)(3) of the Internal Revenue Code. The
Benevolent Fund obtains pharmaceutical products either as
gifts-in-kind from
manufacturers or by purchase from third-party distributors or
wholesalers. The Benevolent Fund donates the pharmaceutical
products purchased or received as
gifts-in-kind to
medical missions in the United States and in foreign countries
to advance its humanitarian aid efforts. Jefferson J. Gregory
served as the Companys Chief Executive Officer and
Chairman of the Board until May 14, 2004. John M. Gregory
and Mary Ann Blessing, brother and sister of Jefferson J.
Gregory, serve as President of the Board of Directors of the
Benevolent Fund and Treasurer of the Board of Directors of the
Benevolent Fund, respectively.
On December 26, 2002, the Company sold $4,701 of
Cortisporin®,
Silvadene®
and
Tigan®
to a third-party wholesaler, which in turn resold those products
to the Benevolent Fund in January 2003. The Company recognized
revenue associated with this transaction as the Benevolent Fund
distributed the products to the beneficiaries of the Benevolent
Funds charitable donations. During 2003, the Company
recognized $4,270 of the deferred revenue. The remainder was
recognized in 2004.
The Company periodically makes contributions to charitable and
not-for-profit organizations in communities where its facilities
are located. In April 2004, the Company made a three-year pledge
totaling $900 to Sullins Academy, a private school offering
education in grades K-8. The Company recorded the pledge during
the second quarter of 2004. During the fourth quarter of 2003
and the first quarter of 2004, the Company made a contribution
to Sullins Academy of $150. At certain times during this period,
children of some Company employees, including the Companys
former Chief Executive Officer and the former President,
attended Sullins Academy, and the former President and the
spouse of the former Chief Executive Officer served as volunteer
members of the Sullins Academy board of directors.
The Company is authorized to issue 15 million shares of
blank-check preferred stock, the terms and
conditions of which will be determined by the Board of
Directors. As of December 31, 2005 and 2004, there were no
shares issued or outstanding.
F-38
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Accumulated Other Comprehensive Income |
Accumulated other comprehensive income consists of the following
components:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net unrealized gains on marketable securities, net of tax
|
|
$ |
4,629 |
|
|
$ |
587 |
|
Foreign currency translation, net of tax
|
|
|
358 |
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
$ |
4,987 |
|
|
$ |
1,023 |
|
|
|
|
|
|
|
|
The Company has various incentive stock plans for executives and
employees. In connection with the plans, options to purchase
common stock are granted at option prices not less than the fair
market values of the common stock at the time the options are
granted and either vest immediately or ratably over a designated
period. Restricted stock grants generally vest at the end of a
three year period, but may vest over other designated periods as
determined by the Company. As of December 31, 2005,
34,274,018 shares of common stock are available for future
grant. The Company granted 690,692 shares of restricted stock
during 2005 with a weighted average grant date fair value of
$15.55. During 2005, the Company recognized expense of $1,978
related to restricted stock.
A total of 7,073,966, 5,979,551 and 3,849,864 options to
purchase common stock were outstanding under these plans as of
December 31, 2005, 2004 and 2003, respectively, of which
3,242,563, 2,607,131 and 3,561,167, respectively, were
exercisable.
Certain of the incentive stock plans allow for employee payment
of option exercise prices in the form of either cash or
previously held common stock of the Company. Shares tendered in
payment of the option exercise price must be owned by the
employee making the tender, for either six months or one year
depending on how the shares were acquired, prior to the date of
tender.
A summary of the status of the Companys plans as of
December 31, 2005 and changes during the years ended
December 31, 2005, 2004 and 2003 are presented in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Outstanding options, January 1
|
|
|
5,979,551 |
|
|
|
3,849,864 |
|
|
|
4,908,317 |
|
|
Exercised
|
|
|
(79,630 |
) |
|
|
(530,720 |
) |
|
|
(578,245 |
) |
|
Granted
|
|
|
2,039,400 |
|
|
|
3,883,417 |
|
|
|
101,000 |
|
|
Cancelled
|
|
|
(865,355 |
) |
|
|
(1,223,010 |
) |
|
|
(581,208 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding options, December 31
|
|
|
7,073,966 |
|
|
|
5,979,551 |
|
|
|
3,849,864 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average price of options outstanding, January 1
|
|
$ |
20.28 |
|
|
$ |
22.48 |
|
|
$ |
21.27 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average price of options exercised
|
|
$ |
9.21 |
|
|
$ |
6.55 |
|
|
$ |
7.31 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average price of options granted
|
|
$ |
14.99 |
|
|
$ |
16.83 |
|
|
$ |
13.95 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average price of options cancelled
|
|
$ |
20.68 |
|
|
$ |
22.19 |
|
|
$ |
25.90 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average price of options outstanding, December 31
|
|
$ |
18.83 |
|
|
$ |
20.28 |
|
|
$ |
22.48 |
|
|
|
|
|
|
|
|
|
|
|
F-39
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options outstanding at December 31, 2005 have exercise
prices between $4.67 and $40.98, with a weighted average
exercise price of $22.35 and a remaining contractual life of
approximately 7.65 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
|
Average | |
|
Average | |
|
|
|
|
Exercise | |
|
Remaining | |
Range of Exercise |
|
|
|
Price per | |
|
Contractual | |
Prices per Share |
|
Shares | |
|
Share | |
|
Life in Years | |
|
|
| |
|
| |
|
| |
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.67-$10.50
|
|
|
363,961 |
|
|
$ |
7.68 |
|
|
|
5.38 |
|
|
$10.51-$15.75
|
|
|
2,335,463 |
|
|
|
14.62 |
|
|
|
9.43 |
|
|
$15.76-$23.64
|
|
|
3,404,729 |
|
|
|
18.24 |
|
|
|
7.32 |
|
|
$24.50-$36.75
|
|
|
527,830 |
|
|
|
32.20 |
|
|
|
5.0 |
|
|
$36.76-$40.98
|
|
|
441,983 |
|
|
|
38.94 |
|
|
|
5.81 |
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.67-$40.98
|
|
|
7,073,966 |
|
|
$ |
18.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
Range of Exercise |
|
|
|
Average Exercise | |
Prices per Share |
|
Shares | |
|
Price per Share | |
|
|
| |
|
| |
Exercisable:
|
|
|
|
|
|
|
|
|
|
$ 4.67-$10.50
|
|
|
230,461 |
|
|
$ |
7.14 |
|
|
$10.51-$15.75
|
|
|
287,463 |
|
|
|
12.42 |
|
|
$15.76-$23.64
|
|
|
1,754,826 |
|
|
|
18.84 |
|
|
$24.50-$36.75
|
|
|
527,830 |
|
|
|
32.20 |
|
|
$36.76-$40.98
|
|
|
441,983 |
|
|
|
38.94 |
|
|
|
|
|
|
|
|
|
$ 4.67-$40.98
|
|
|
3,242,563 |
|
|
$ |
22.35 |
|
|
|
|
|
|
|
|
During 2005, 2004 and 2003, the Company granted 70,000, 81,698
and 70,000 options, respectively, of common stock to its
non-employee directors under the 1998 King Pharmaceuticals, Inc.
Non-Employee Director Stock Option Plan (1998 Stock Option
Plan) at an exercise price equal to market value at the
date of grant. The options vested after one year of service for
the 2005, 2004 and 2003 grants. Options totaling 331,830 issued
under the 1998 Stock Option Plan were outstanding at
December 31, 2005 of which 261,830 were fully vested.
Options under the 1998 Stock Option Plan expire 10 years
from the date of grant. These options are included in amounts
reflected in the above tables.
|
|
23. |
Income per Common Share |
The basic and diluted income per common share was determined
based on the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,751,128 |
|
|
|
241,475,058 |
|
|
|
240,989,093 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,751,128 |
|
|
|
241,475,058 |
|
|
|
240,989,093 |
|
|
Effect of dilutive share based awards
|
|
|
152,252 |
|
|
|
|
|
|
|
537,540 |
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
241,903,380 |
|
|
|
241,475,058 |
|
|
|
241,526,633 |
|
|
|
|
|
|
|
|
|
|
|
F-40
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2004, options to
purchase 444,990 shares of common stock were not
included in the computation of diluted earnings (loss) per share
because their inclusion would have been anti-dilutive and would
have reduced the loss per share. In addition, the weighted
average stock options that were anti-dilutive at
December 31, 2005, 2004 and 2003 were 5,469,722, 5,895,970
and 3,034,318 shares, respectively. The convertible debentures
could also be converted into 6,877,990 shares of common
stock in the future, subject to certain contingencies outlined
in the indenture (Note 14). Because the convertible
debentures are anti-dilutive, they were not included in the
calculation of diluted income per common share.
|
|
24. |
Recently Issued Accounting Standards |
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 SEC 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. SFAS No. 123(R) becomes mandatorily effective on
January 1, 2006. Accordingly, the Company will adopt
SFAS 123(R) in the first quarter of 2006. See Note 2
for the pro-forma effect on net income and earnings per share of
applying SFAS 123.
In November 2004, the FASB issued SFAS No. 151,
(Inventory Costs), an amendment of ARB 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.
|
|
25. |
Restructuring Activities and Executive Retirements |
During 2005, the Company made the decision to reduce its work
force in order to improve efficiencies in operations.
Accordingly, the Company incurred a charge of $2,267 during the
year ended December 31, 2005. The Company had $1,509
accrued relating to these activities as of December 31,
2005.
During 2004 the Company incurred restructuring charges as a
result of separation agreements with several executives, the
relocation of the Companys sales and marketing operations
from Bristol, Tennessee to Princeton, New Jersey, the
termination of the womens health sales force, 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 | |
|
|
Balance at | |
|
Income | |
|
|
|
|
|
Balance at | |
|
|
December 31, | |
|
Statement | |
|
|
|
|
|
December 31, | |
|
|
2004 | |
|
Impact | |
|
Payments | |
|
Non-Cash | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Employee separation payments
|
|
$ |
|
|
|
$ |
2,267 |
|
|
$ |
758 |
|
|
$ |
|
|
|
$ |
1,509 |
|
Employee relocation
|
|
|
|
|
|
|
322 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
Facility demolition costs
|
|
|
924 |
|
|
|
(924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Termination of lease
|
|
|
|
|
|
|
1,733 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
782 |
|
|
|
282 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
924 |
|
|
$ |
4,180 |
|
|
$ |
3,095 |
|
|
$ |
500 |
|
|
$ |
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charges in 2005 of $1,590, $2,516, and $74
relate to the branded pharmaceutical segment, the Meridian
Medical Technologies segment, and the contract manufacturing
segment,
F-41
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. The accrued employee separation payments as of
December 31, 2005 are expected to be paid during 2006.
|
|
26. |
Quarterly Financial Information (unaudited) |
The following table sets forth summary financial information for
the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 By Quarter |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
368,625 |
|
|
$ |
462,939 |
|
|
$ |
518,032 |
|
|
$ |
423,285 |
|
Operating income (loss)
|
|
|
111,553 |
|
|
|
28,835 |
|
|
|
187,347 |
|
|
|
(147,656 |
) |
Net income (loss)
|
|
|
70,055 |
|
|
|
20,497 |
|
|
|
121,857 |
|
|
|
(94,576 |
) |
Basic income (loss) per common share(1)
|
|
$ |
0.29 |
|
|
$ |
0.08 |
|
|
$ |
0.50 |
|
|
$ |
(0.39 |
) |
Diluted income (loss) per common share(1)
|
|
$ |
0.29 |
|
|
$ |
0.08 |
|
|
$ |
0.50 |
|
|
$ |
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 By Quarter |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
291,450 |
|
|
$ |
275,611 |
|
|
$ |
394,684 |
|
|
$ |
342,619 |
|
Operating income (loss)
|
|
|
7,344 |
|
|
|
(59,842 |
) |
|
|
(11,653 |
) |
|
|
22,888 |
|
Net (loss) income
|
|
|
(104,076 |
) |
|
|
(62,924 |
) |
|
|
(8,014 |
) |
|
|
14,727 |
|
Basic (loss) income per common share(1)
|
|
$ |
(0.43 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.06 |
|
Diluted (loss) income per common share(1)
|
|
$ |
(0.43 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.06 |
|
|
|
(1) |
Quarterly amounts may not total to annual amounts due to the
effect of rounding on a quarterly basis. |
|
|
27. |
Discontinued Operations |
Research, referred to as the Womens Health Initiative, was
conducted by the National Institutes of Health. Data from the
trial released in July 2002 indicated that an increase in
certain health risks may result from the long-term use of a
competitors combination hormone replacement therapy for
women. News of this data and the perception it has created have
negatively affected the entire combination hormone therapy and
the oral estrogen therapy markets including certain of the
Companys products. Prescriptions for some of the
Companys other womens health products have also
continued to decline over the past few years primarily due to
the availability of generics. 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, which the Company divested on November 22,
2004 and December 23, 2004, respectively, 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 and third quarters of
2004, the Company wrote down intangible assets by the amount of
$169,591 and $5,734, respectively, to reduce the carrying value
of the intangible assets associated with these products to their
estimated fair value less costs to sell. The Company determined
the fair value of these assets based on managements
discounted cash flow projections for the products less expected
selling costs.
In 2004, the Company had reported the cash flows from operating,
investing and financing activities related to discontinued
operations on a combined basis for the years ended
December 31, 2004 and 2003. We have revised the
presentation in the 2004 and 2003 statement of cash flows to
separately disclose the
F-42
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operating and investing activities attributable to our
discontinued operations and to reconcile net income to net cash
provided by operating activities of continuing operations.
Previously, we reconciled income from continuing operations to
net cash provided by operating activities of continuing
operations. There were no financing activities attributable to
our discontinued operations.
Summarized financial information for the discontinued operations
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
1,856 |
|
|
$ |
13,182 |
|
|
$ |
13,112 |
|
Operating income (loss), including expected loss on disposal
|
|
|
1,876 |
|
|
|
(172,750 |
) |
|
|
(8,771 |
) |
Net income (loss)
|
|
|
1,203 |
|
|
|
(109,666 |
) |
|
|
(5,489 |
) |
On July 26, 2004, the Company entered into a merger
agreement with Mylan Laboratories Inc. and a wholly owned
subsidiary of Mylan, pursuant to which Mylan agreed to acquire
King in a stock-for-stock transaction. On February 27,
2005, Mylan and King announced they had mutually agreed to
terminate that agreement. As of March 1, 2005 both Mylan
and King would have had a right to terminate the merger
agreement and following discussions, the companies were not able
to agree on terms for a revised transaction.
In February, the Company entered into a collaboration with Arrow
International Limited and certain of its affiliates
(collectively, Arrow) to commercialize novel
formulations of ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted King
rights to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. Under certain
conditions, Arrow will be responsible for the manufacture and
supply of new formulations of ramipril for King. Additionally,
the Company has granted Cobalt Pharmaceuticals, Inc. a
non-exclusive right to enter into the U.S. ramipril market with
a generic of the currently marketed
Altace®
product, formulation of ramipril, which would be supplied by
King. Cobalt is an affiliate of Arrow, but is not a party to the
collaboration.
Pursuant to the agreements, King made an upfront payment to
Arrow of $35,000. Arrow will also receive payments from King of
$50,000 based on the timing of certain events and could receive
an additional $25,000 based on the occurrence of certain
conditions. Additionally, Arrow will earn fees for the
manufacture and supply of new formulations of ramipril.
On February 27, 2006, the Company, Aventis Deutschland GmbH and
Cobalt Pharmaceuticals, Inc. agreed that, subject to certain
conditions, within 38 days, all parties will submit a joint
stipulation dismissing without prejudice the litigation filed
before the U.S. District Court of Massachusetts against
Cobalt to enforce U.S. Patent Nos. 5,061,722 and 5,403,856,
with respect to
Altace®
pursuant to the Hatch-Waxman Act.
|
|
30. |
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
F-43
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
F-44
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Guarantor | |
|
Non Guarantor | |
|
Eliminating | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
26,802 |
|
|
$ |
1,071 |
|
|
$ |
2,141 |
|
|
$ |
|
|
|
$ |
30,014 |
|
Investments in debt securities
|
|
|
494,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494,663 |
|
Restricted cash
|
|
|
130,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400 |
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,221 |
|
|
|
221,854 |
|
|
|
506 |
|
|
|
|
|
|
|
223,581 |
|
Inventories
|
|
|
195,421 |
|
|
|
31,877 |
|
|
|
765 |
|
|
|
|
|
|
|
228,063 |
|
Deferred income tax assets
|
|
|
21,524 |
|
|
|
60,253 |
|
|
|
|
|
|
|
|
|
|
|
81,777 |
|
Prepaid expenses and other current assets
|
|
|
50,724 |
|
|
|
8,566 |
|
|
|
1 |
|
|
|
|
|
|
|
59,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
920,755 |
|
|
|
323,621 |
|
|
|
3,413 |
|
|
|
|
|
|
|
1,247,789 |
|
Property, plant, and equipment, net
|
|
|
108,712 |
|
|
|
193,762 |
|
|
|
|
|
|
|
|
|
|
|
302,474 |
|
Goodwill
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
Intangible assets, net
|
|
|
44 |
|
|
|
963,944 |
|
|
|
3,206 |
|
|
|
|
|
|
|
967,194 |
|
Marketable securities
|
|
|
18,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,502 |
|
Other assets
|
|
|
30,225 |
|
|
|
46,874 |
|
|
|
|
|
|
|
|
|
|
|
77,099 |
|
Deferred income tax assets
|
|
|
(9,483 |
) |
|
|
239,452 |
|
|
|
1,063 |
|
|
|
|
|
|
|
231,032 |
|
Investment in subsidiaries
|
|
|
2,299,835 |
|
|
|
|
|
|
|
|
|
|
|
(2,299,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,368,590 |
|
|
$ |
1,888,805 |
|
|
$ |
7,682 |
|
|
$ |
(2,299,835 |
) |
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
60,700 |
|
|
$ |
23,762 |
|
|
$ |
77 |
|
|
$ |
|
|
|
$ |
84,539 |
|
Accrued expenses
|
|
|
151,125 |
|
|
|
368,491 |
|
|
|
4 |
|
|
|
|
|
|
|
519,620 |
|
Income taxes payable
|
|
|
24,123 |
|
|
|
(1,701 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
22,301 |
|
Current portion of long-term debt
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
580,948 |
|
|
|
390,552 |
|
|
|
(40 |
) |
|
|
|
|
|
|
971,460 |
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
17,371 |
|
|
|
2,989 |
|
|
|
|
|
|
|
|
|
|
|
20,360 |
|
Intercompany payable (receivable)
|
|
|
796,849 |
|
|
|
(808,256 |
) |
|
|
11,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,395,168 |
|
|
|
(414,715 |
) |
|
|
11,367 |
|
|
|
|
|
|
|
991,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,973,422 |
|
|
|
2,303,520 |
|
|
|
(3,685 |
) |
|
|
(2,299,835 |
) |
|
|
1,973,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
3,368,590 |
|
|
$ |
1,888,805 |
|
|
$ |
7,682 |
|
|
$ |
(2,299,835 |
) |
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
Guarantor | |
|
Non Guarantor | |
|
Eliminating | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
164,451 |
|
|
$ |
27,035 |
|
|
$ |
1,170 |
|
|
$ |
|
|
|
$ |
192,656 |
|
Investments in debt securities
|
|
|
149,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,430 |
|
Restricted cash
|
|
|
66,543 |
|
|
|
31,187 |
|
|
|
|
|
|
|
|
|
|
|
97,730 |
|
Marketable securities
|
|
|
16,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,498 |
|
Accounts receivable, net
|
|
|
3,344 |
|
|
|
174,797 |
|
|
|
2,822 |
|
|
|
|
|
|
|
180,963 |
|
Inventories
|
|
|
237,448 |
|
|
|
36,743 |
|
|
|
221 |
|
|
|
|
|
|
|
274,412 |
|
Deferred income tax assets
|
|
|
32,809 |
|
|
|
121,170 |
|
|
|
|
|
|
|
|
|
|
|
153,979 |
|
Prepaid expenses and other current assets
|
|
|
22,846 |
|
|
|
38,481 |
|
|
|
68 |
|
|
|
|
|
|
|
61,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
693,369 |
|
|
|
429,413 |
|
|
|
4,281 |
|
|
|
|
|
|
|
1,127,063 |
|
Property, plant, and equipment, net
|
|
|
112,416 |
|
|
|
168,313 |
|
|
|
2 |
|
|
|
|
|
|
|
280,731 |
|
Goodwill
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
Intangible assets, net
|
|
|
194 |
|
|
|
1,275,474 |
|
|
|
10,293 |
|
|
|
|
|
|
|
1,285,961 |
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
16,078 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
16,318 |
|
Deferred income tax assets
|
|
|
14,197 |
|
|
|
78,734 |
|
|
|
|
|
|
|
|
|
|
|
92,931 |
|
Investment in subsidiaries
|
|
|
2,186,234 |
|
|
|
|
|
|
|
|
|
|
|
(2,186,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,022,488 |
|
|
$ |
2,073,326 |
|
|
$ |
14,576 |
|
|
$ |
(2,186,234 |
) |
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
61,427 |
|
|
$ |
31,339 |
|
|
$ |
154 |
|
|
$ |
|
|
|
$ |
92,920 |
|
Accrued expenses
|
|
|
125,095 |
|
|
|
470,899 |
|
|
|
16 |
|
|
|
|
|
|
|
596,010 |
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
186,522 |
|
|
|
502,238 |
|
|
|
170 |
|
|
|
|
|
|
|
688,930 |
|
Long-term debt
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
Other liabilities
|
|
|
29,417 |
|
|
|
12,019 |
|
|
|
|
|
|
|
|
|
|
|
41,436 |
|
Intercompany payable (receivable)
|
|
|
612,759 |
|
|
|
(620,511 |
) |
|
|
7,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,173,698 |
|
|
|
(106,254 |
) |
|
|
7,922 |
|
|
|
|
|
|
|
1,075,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,848,790 |
|
|
|
2,179,580 |
|
|
|
6,654 |
|
|
|
(2,186,234 |
) |
|
|
1,848,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
3,022,488 |
|
|
$ |
2,073,326 |
|
|
$ |
14,576 |
|
|
$ |
(2,186,234 |
) |
|
$ |
2,924,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended 12/31/2005 | |
|
|
| |
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
491,613 |
|
|
$ |
1,691,216 |
|
|
|
1,049 |
|
|
$ |
(489,125 |
) |
|
$ |
1,694,753 |
|
|
Royalty revenue
|
|
|
|
|
|
|
78,128 |
|
|
|
|
|
|
|
|
|
|
|
78,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
491,613 |
|
|
|
1,769,344 |
|
|
|
1,049 |
|
|
|
(489,125 |
) |
|
|
1,772,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
152,011 |
|
|
|
659,552 |
|
|
|
547 |
|
|
|
(489,125 |
) |
|
|
322,985 |
|
|
Selling, general and administrative
|
|
|
218,455 |
|
|
|
416,328 |
|
|
|
1,700 |
|
|
|
|
|
|
|
636,483 |
|
|
Research and development
|
|
|
35,646 |
|
|
|
227,080 |
|
|
|
|
|
|
|
|
|
|
|
262,726 |
|
|
Depreciation and amortization
|
|
|
15,754 |
|
|
|
130,620 |
|
|
|
675 |
|
|
|
|
|
|
|
147,049 |
|
|
Intangible asset impairment
|
|
|
|
|
|
|
212,747 |
|
|
|
8,307 |
|
|
|
|
|
|
|
221,054 |
|
|
Restructuring charges
|
|
|
1,730 |
|
|
|
2,450 |
|
|
|
|
|
|
|
|
|
|
|
4,180 |
|
|
Gain on sale of intangible assets
|
|
|
(64 |
) |
|
|
(1,611 |
) |
|
|
|
|
|
|
|
|
|
|
(1,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
423,532 |
|
|
|
1,647,166 |
|
|
|
11,229 |
|
|
|
(489,125 |
) |
|
|
1,592,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
68,081 |
|
|
|
122,178 |
|
|
|
(10,180 |
) |
|
|
|
|
|
|
180,079 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,659 |
|
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
18,175 |
|
|
Interest expense
|
|
|
(11,865 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
(11,931 |
) |
|
Valuation (charge) benefit convertible notes
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investment
|
|
|
(6,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,182 |
) |
|
Other, net
|
|
|
(579 |
) |
|
|
(1,016 |
) |
|
|
(431 |
) |
|
|
|
|
|
|
(2,026 |
) |
|
Equity in earnings (loss) of subsidiaries
|
|
|
113,679 |
|
|
|
|
|
|
|
|
|
|
|
(113,679 |
) |
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(57,355 |
) |
|
|
58,088 |
|
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
55,357 |
|
|
|
57,522 |
|
|
|
(1,164 |
) |
|
|
(113,679 |
) |
|
|
(1,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
123,438 |
|
|
|
179,700 |
|
|
|
(11,344 |
) |
|
|
(113,679 |
) |
|
|
178,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
5,616 |
|
|
|
56,874 |
|
|
|
(1,005 |
) |
|
|
|
|
|
|
61,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
117,822 |
|
|
|
122,826 |
|
|
|
(10,339 |
) |
|
|
(113,679 |
) |
|
|
116,630 |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
18 |
|
|
|
1,858 |
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
Income tax expense (benefit)
|
|
|
7 |
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
|
11 |
|
|
|
1,192 |
|
|
|
|
|
|
|
|
|
|
|
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
117,833 |
|
|
$ |
124,018 |
|
|
$ |
(10,339 |
) |
|
$ |
(113,679 |
) |
|
$ |
117,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended 12/31/2004 | |
|
|
| |
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
374,833 |
|
|
$ |
1,222,515 |
|
|
$ |
2,030 |
|
|
$ |
(373,488 |
) |
|
$ |
1,225,890 |
|
|
Royalty revenue
|
|
|
|
|
|
|
78,474 |
|
|
|
|
|
|
|
|
|
|
|
78,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
374,833 |
|
|
|
1,300,989 |
|
|
|
2,030 |
|
|
|
(373,488 |
) |
|
|
1,304,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
135,430 |
|
|
|
590,388 |
|
|
|
608 |
|
|
|
(373,488 |
) |
|
|
352,938 |
|
|
Selling, general and administrative
|
|
|
264,024 |
|
|
|
330,434 |
|
|
|
983 |
|
|
|
|
|
|
|
595,441 |
|
|
Research and development
|
|
|
509 |
|
|
|
83,730 |
|
|
|
|
|
|
|
|
|
|
|
84,239 |
|
|
Depreciation and amortization
|
|
|
16,925 |
|
|
|
144,722 |
|
|
|
468 |
|
|
|
|
|
|
|
162,115 |
|
|
Intangible asset impairment
|
|
|
4,399 |
|
|
|
145,193 |
|
|
|
|
|
|
|
|
|
|
|
149,592 |
|
|
Restructuring charges
|
|
|
7,646 |
|
|
|
3,181 |
|
|
|
|
|
|
|
|
|
|
|
10,827 |
|
|
Gain on sale of intangible assets
|
|
|
(4,022 |
) |
|
|
(5,502 |
) |
|
|
|
|
|
|
|
|
|
|
(9,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
424,911 |
|
|
|
1,292,146 |
|
|
|
2,059 |
|
|
|
(373,488 |
) |
|
|
1,345,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(50,078 |
) |
|
|
8,843 |
|
|
|
(29 |
) |
|
|
|
|
|
|
(41,264 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,101 |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
5,974 |
|
|
Interest expense
|
|
|
(12,492 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
(12,588 |
) |
|
Valuation (charge) benefit convertible notes
receivable
|
|
|
(2,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,887 |
) |
|
Loss on investment
|
|
|
(6,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,520 |
) |
|
Other, net
|
|
|
(820 |
) |
|
|
(82 |
) |
|
|
153 |
|
|
|
|
|
|
|
(749 |
) |
|
Equity in earnings (loss) of subsidiaries
|
|
|
(84,284 |
) |
|
|
|
|
|
|
|
|
|
|
84,284 |
|
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(33,648 |
) |
|
|
33,937 |
|
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(135,550 |
) |
|
|
34,632 |
|
|
|
(136 |
) |
|
|
84,284 |
|
|
|
(16,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(185,628 |
) |
|
|
43,475 |
|
|
|
(165 |
) |
|
|
84,284 |
|
|
|
(58,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(25,315 |
) |
|
|
18,026 |
|
|
|
(123 |
) |
|
|
|
|
|
|
(7,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(160,313 |
) |
|
|
25,449 |
|
|
|
(42 |
) |
|
|
84,284 |
|
|
|
(50,622 |
) |
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
40 |
|
|
|
(172,790 |
) |
|
|
|
|
|
|
|
|
|
|
(172,750 |
) |
|
Income tax expense (benefit)
|
|
|
15 |
|
|
|
(63,099 |
) |
|
|
|
|
|
|
|
|
|
|
(63,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
|
25 |
|
|
|
(109,691 |
) |
|
|
|
|
|
|
|
|
|
|
(109,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(160,288 |
) |
|
$ |
(84,242 |
) |
|
$ |
(42 |
) |
|
$ |
84,284 |
|
|
$ |
(160,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended 12/31/2003 | |
|
|
| |
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
329,974 |
|
|
$ |
1,420,875 |
|
|
$ |
3,056 |
|
|
$ |
(329,481 |
) |
|
$ |
1,424,424 |
|
|
Royalty revenue
|
|
|
|
|
|
|
68,365 |
|
|
|
|
|
|
|
|
|
|
|
68,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
329,974 |
|
|
|
1,489,240 |
|
|
|
3,056 |
|
|
|
(329,481 |
) |
|
|
1,492,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
145,930 |
|
|
|
568,510 |
|
|
|
882 |
|
|
|
(329,481 |
) |
|
|
385,841 |
|
|
Selling, general and administrative
|
|
|
64,489 |
|
|
|
425,987 |
|
|
|
106 |
|
|
|
|
|
|
|
490,582 |
|
|
Research and development
|
|
|
900 |
|
|
|
237,178 |
|
|
|
|
|
|
|
|
|
|
|
238,078 |
|
|
Depreciation and amortization
|
|
|
8,013 |
|
|
|
105,308 |
|
|
|
424 |
|
|
|
|
|
|
|
113,745 |
|
|
Intangible asset impairment
|
|
|
7,425 |
|
|
|
117,191 |
|
|
|
|
|
|
|
|
|
|
|
124,616 |
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(12,025 |
) |
|
|
|
|
|
|
|
|
|
|
(12,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
226,757 |
|
|
|
1,442,149 |
|
|
|
1,412 |
|
|
|
(329,481 |
) |
|
|
1,340,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
103,217 |
|
|
|
47,091 |
|
|
|
1,644 |
|
|
|
|
|
|
|
151,952 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,960 |
|
|
|
889 |
|
|
|
|
|
|
|
|
|
|
|
6,849 |
|
|
Interest expense
|
|
|
(13,391 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(13,396 |
) |
|
Valuation (charge) benefit convertible notes
receivable
|
|
|
18,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,551 |
|
|
Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(650 |
) |
|
|
(149 |
) |
|
|
170 |
|
|
|
|
|
|
|
(629 |
) |
|
Equity in earnings (loss) of subsidiaries
|
|
|
46,830 |
|
|
|
|
|
|
|
|
|
|
|
(46,830 |
) |
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(9,567 |
) |
|
|
9,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
47,733 |
|
|
|
10,302 |
|
|
|
170 |
|
|
|
(46,830 |
) |
|
|
11,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
150,950 |
|
|
|
57,393 |
|
|
|
1,814 |
|
|
|
(46,830 |
) |
|
|
163,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
58,996 |
|
|
|
6,253 |
|
|
|
635 |
|
|
|
|
|
|
|
65,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
91,954 |
|
|
|
51,140 |
|
|
|
1,179 |
|
|
|
(46,830 |
) |
|
|
97,443 |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
(8,771 |
) |
|
|
|
|
|
|
|
|
|
|
(8,771 |
) |
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(3,282 |
) |
|
|
|
|
|
|
|
|
|
|
(3,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
|
|
|
|
|
(5,489 |
) |
|
|
|
|
|
|
|
|
|
|
(5,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
91,954 |
|
|
$ |
45,651 |
|
|
$ |
1,179 |
|
|
$ |
(46,830 |
) |
|
$ |
91,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash flows from operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
117,833 |
|
|
$ |
124,018 |
|
|
$ |
(10,339 |
) |
|
$ |
(113,679 |
) |
|
$ |
117,833 |
|
|
$ |
(160,288 |
) |
|
$ |
(84,242 |
) |
|
$ |
(42 |
) |
|
$ |
84,284 |
|
|
$ |
(160,288 |
) |
|
$ |
91,954 |
|
|
$ |
45,651 |
|
|
|
1,179 |
|
|
$ |
(46,830 |
) |
|
$ |
91,954 |
|
|
(Income) loss from discontinued operations
|
|
|
(11 |
) |
|
|
(1,192 |
) |
|
|
|
|
|
|
|
|
|
|
(1,203 |
) |
|
|
(25 |
) |
|
|
109,691 |
|
|
|
|
|
|
|
|
|
|
|
109,666 |
|
|
|
|
|
|
|
5,489 |
|
|
|
|
|
|
|
|
|
|
|
5,489 |
|
Equity in earnings of subsidiaries
|
|
|
(113,679 |
) |
|
|
|
|
|
|
|
|
|
|
113,679 |
|
|
|
|
|
|
|
84,284 |
|
|
|
|
|
|
|
|
|
|
|
(84,284 |
) |
|
|
|
|
|
|
(46,830 |
) |
|
|
|
|
|
|
|
|
|
|
46,830 |
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,754 |
|
|
|
130,620 |
|
|
|
675 |
|
|
|
|
|
|
|
147,049 |
|
|
|
16,924 |
|
|
|
144,724 |
|
|
|
467 |
|
|
|
|
|
|
|
162,115 |
|
|
|
8,914 |
|
|
|
104,408 |
|
|
|
423 |
|
|
|
|
|
|
|
113,745 |
|
|
Amortization of deferred financing costs
|
|
|
3,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,096 |
|
|
|
3,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,145 |
|
|
|
3,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,160 |
|
|
Deferred income taxes
|
|
|
32,817 |
|
|
|
(99,801 |
) |
|
|
(1,063 |
) |
|
|
|
|
|
|
(68,047 |
) |
|
|
(16,050 |
) |
|
|
(1,033 |
) |
|
|
|
|
|
|
|
|
|
|
(17,083 |
) |
|
|
13,700 |
|
|
|
(153,298 |
) |
|
|
|
|
|
|
|
|
|
|
(139,598 |
) |
|
Valuation charge on convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,887 |
|
|
|
(18,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,151 |
) |
|
Impairment of intangible assets
|
|
|
|
|
|
|
212,747 |
|
|
|
8,307 |
|
|
|
|
|
|
|
221,054 |
|
|
|
4,400 |
|
|
|
145,192 |
|
|
|
|
|
|
|
|
|
|
|
149,592 |
|
|
|
7,425 |
|
|
|
117,191 |
|
|
|
|
|
|
|
|
|
|
|
124,616 |
|
|
In-process research and development charges
|
|
|
35,000 |
|
|
|
153,711 |
|
|
|
|
|
|
|
|
|
|
|
188,711 |
|
|
|
17,145 |
|
|
|
(845 |
) |
|
|
|
|
|
|
|
|
|
|
16,300 |
|
|
|
|
|
|
|
194,000 |
|
|
|
|
|
|
|
|
|
|
|
194,000 |
|
|
Gain on sale of products
|
|
|
(64 |
) |
|
|
(1,611 |
) |
|
|
|
|
|
|
|
|
|
|
(1,675 |
) |
|
|
(4,879 |
) |
|
|
(4,645 |
) |
|
|
|
|
|
|
|
|
|
|
(9,524 |
) |
|
|
(805 |
) |
|
|
(11,220 |
) |
|
|
|
|
|
|
|
|
|
|
(12,025 |
) |
|
Loss on investment
|
|
|
6,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,182 |
|
|
|
6,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash items, net
|
|
|
19 |
|
|
|
(544 |
) |
|
|
1,316 |
|
|
|
|
|
|
|
791 |
|
|
|
498 |
|
|
|
8,986 |
|
|
|
|
|
|
|
|
|
|
|
9,484 |
|
|
|
47 |
|
|
|
6,943 |
|
|
|
|
|
|
|
|
|
|
|
6,990 |
|
|
Stock based compensation
|
|
|
1,616 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,124 |
|
|
|
(46,532 |
) |
|
|
1,001 |
|
|
|
|
|
|
|
(43,407 |
) |
|
|
1,185 |
|
|
|
58,301 |
|
|
|
(1,508 |
) |
|
|
|
|
|
|
57,978 |
|
|
|
12,823 |
|
|
|
(86,861 |
) |
|
|
(1,314 |
) |
|
|
(8,834 |
) |
|
|
(84,186 |
) |
|
|
Inventories
|
|
|
42,026 |
|
|
|
4,866 |
|
|
|
(543 |
) |
|
|
|
|
|
|
46,349 |
|
|
|
(14,325 |
) |
|
|
(910 |
) |
|
|
30 |
|
|
|
|
|
|
|
(15,205 |
) |
|
|
(84,826 |
) |
|
|
31,560 |
|
|
|
411 |
|
|
|
|
|
|
|
(52,855 |
) |
|
|
Prepaid expenses and other current assets
|
|
|
(30,933 |
) |
|
|
(16,624 |
) |
|
|
13 |
|
|
|
|
|
|
|
(47,544 |
) |
|
|
(20,729 |
) |
|
|
4,636 |
|
|
|
(68 |
) |
|
|
|
|
|
|
(16,161 |
) |
|
|
1,189 |
|
|
|
26,118 |
|
|
|
|
|
|
|
|
|
|
|
27,307 |
|
|
|
Other assets
|
|
|
(4,339 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
(4,471 |
) |
|
|
(3,243 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
(3,483 |
) |
|
|
(2,970 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(2,978 |
) |
|
|
Accounts payable
|
|
|
(897 |
) |
|
|
(6,739 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
(7,713 |
) |
|
|
8,555 |
|
|
|
507 |
|
|
|
135 |
|
|
|
|
|
|
|
9,197 |
|
|
|
(12,085 |
) |
|
|
37,190 |
|
|
|
19 |
|
|
|
8,834 |
|
|
|
33,958 |
|
|
|
Accrued expenses and other liabilities
|
|
|
23,157 |
|
|
|
(75,688 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
(52,544 |
) |
|
|
52,522 |
|
|
|
(8,972 |
) |
|
|
16 |
|
|
|
|
|
|
|
43,566 |
|
|
|
11,853 |
|
|
|
80,945 |
|
|
|
|
|
|
|
|
|
|
|
92,798 |
|
|
|
Deferred revenue
|
|
|
(9,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,092 |
) |
|
|
(9,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,091 |
) |
|
|
(9,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,092 |
) |
|
|
Income taxes
|
|
|
27,172 |
|
|
|
(4,944 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
22,161 |
|
|
|
(78,323 |
) |
|
|
55 |
|
|
|
(440 |
) |
|
|
|
|
|
|
(78,708 |
) |
|
|
97,062 |
|
|
|
(36,948 |
) |
|
|
440 |
|
|
|
|
|
|
|
60,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of
continuing operations
|
|
|
147,781 |
|
|
|
372,517 |
|
|
|
(790 |
) |
|
|
|
|
|
|
519,508 |
|
|
|
(108,888 |
) |
|
|
371,205 |
|
|
|
(1,410 |
) |
|
|
|
|
|
|
260,907 |
|
|
|
73,368 |
|
|
|
361,160 |
|
|
|
1,158 |
|
|
|
|
|
|
|
435,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations
(2004 and 2003 revised See Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments in debt securities
|
|
|
(3,744,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,744,660 |
) |
|
|
(1,687,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,687,684 |
) |
|
|
(5,553,611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,553,611 |
) |
|
Proceeds from maturity and sale of investments in debt securities
|
|
|
3,399,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,399,427 |
|
|
|
1,641,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,641,179 |
|
|
|
5,969,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,969,186 |
|
|
Transfer (to)/from restricted cash
|
|
|
(75,211 |
) |
|
|
1,582 |
|
|
|
|
|
|
|
|
|
|
|
(73,629 |
) |
|
|
(1,459 |
) |
|
|
(872 |
) |
|
|
|
|
|
|
|
|
|
|
(2,331 |
) |
|
|
(67,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,743 |
) |
|
Purchases of property, plant and equipment
|
|
|
(11,749 |
) |
|
|
(41,541 |
) |
|
|
|
|
|
|
|
|
|
|
(53,290 |
) |
|
|
(12,034 |
) |
|
|
(43,105 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(55,141 |
) |
|
|
(7,874 |
) |
|
|
(43,327 |
) |
|
|
|
|
|
|
|
|
|
|
(51,201 |
) |
|
Acquisition of primary care business of Elan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
|
|
(761,745 |
) |
|
|
|
|
|
|
|
|
|
|
(761,745 |
) |
|
Acquisition of Meridian
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253,908 |
) |
|
|
15,410 |
|
|
|
|
|
|
|
|
|
|
|
(238,498 |
) |
|
Palatin collaboration agreement
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
|
|
(20,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of intangible assets
|
|
|
|
|
|
|
(16,705 |
) |
|
|
(1,895 |
) |
|
|
|
|
|
|
(18,600 |
) |
|
|
|
|
|
|
(18,942 |
) |
|
|
(3,258 |
) |
|
|
|
|
|
|
(22,200 |
) |
|
|
(2,000 |
) |
|
|
(10,300 |
) |
|
|
|
|
|
|
|
|
|
|
(12,300 |
) |
|
Proceeds from sale of marketable securities
|
|
|
6,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,097 |
|
|
Purchases of investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,903 |
) |
|
Pain Therapeutic collaboration agreement
|
|
|
|
|
|
|
(153,711 |
) |
|
|
|
|
|
|
|
|
|
|
(153,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual cross- license agreement
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loan receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,320 |
|
|
|
|
|
|
|
|
|
|
|
13,320 |
|
|
Proceeds from sale of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,715 |
|
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
27,458 |
|
|
|
14,460 |
|
|
|
1,199 |
|
|
|
|
|
|
|
|
|
|
|
15,659 |
|
|
Other investing activities
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
668 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
648 |
|
|
|
46 |
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(470,739 |
) |
|
|
(210,373 |
) |
|
|
(1,895 |
) |
|
|
|
|
|
|
(683,007 |
) |
|
|
(51,615 |
) |
|
|
(99,196 |
) |
|
|
(3,260 |
) |
|
|
|
|
|
|
(154,071 |
) |
|
|
325,750 |
|
|
|
(785,194 |
) |
|
|
|
|
|
|
|
|
|
|
(459,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
Payments on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
|
Proceeds from issuance of common shares and exercise of stock
options, net
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
4,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,677 |
|
|
|
4,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,053 |
|
|
Payments on other long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97 |
) |
|
|
(1,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,296 |
) |
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
|
Intercompany
|
|
|
184,452 |
|
|
|
(188,108 |
) |
|
|
3,656 |
|
|
|
|
|
|
|
|
|
|
|
250,935 |
|
|
|
(254,980 |
) |
|
|
4,045 |
|
|
|
|
|
|
|
|
|
|
|
(432,854 |
) |
|
|
432,217 |
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
185,309 |
|
|
|
(188,108 |
) |
|
|
3,656 |
|
|
|
|
|
|
|
857 |
|
|
|
255,515 |
|
|
|
(254,980 |
) |
|
|
4,045 |
|
|
|
|
|
|
|
4,580 |
|
|
|
(430,311 |
) |
|
|
432,217 |
|
|
|
637 |
|
|
|
|
|
|
|
2,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations (Revised See
Note 27):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,820 |
|
|
|
6,365 |
|
|
|
|
|
|
|
|
|
|
|
10,185 |
|
|
|
|
|
|
|
1,618 |
|
|
|
|
|
|
|
|
|
|
|
1,618 |
|
|
Net cash provided by (used in) investing activities of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,927 |
|
|
|
(7,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(137,649 |
) |
|
|
(25,964 |
) |
|
|
971 |
|
|
|
|
|
|
|
(162,642 |
) |
|
|
126,759 |
|
|
|
23,394 |
|
|
|
(625 |
) |
|
|
|
|
|
|
149,528 |
|
|
|
(38,193 |
) |
|
|
9,801 |
|
|
|
1,795 |
|
|
|
|
|
|
|
(26,597 |
) |
|
Cash and cash equivalents, beginning of year
(Revised See Note 4)
|
|
|
164,451 |
|
|
|
27,035 |
|
|
|
1,170 |
|
|
|
|
|
|
|
192,656 |
|
|
|
37,692 |
|
|
|
3,641 |
|
|
|
1,795 |
|
|
|
|
|
|
|
43,128 |
|
|
|
75,885 |
|
|
|
(6,160 |
) |
|
|
|
|
|
|
|
|
|
|
69,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year (Revised See
Note 4)
|
|
$ |
26,802 |
|
|
$ |
1,071 |
|
|
$ |
2,141 |
|
|
|
|
|
|
$ |
30,014 |
|
|
$ |
164,451 |
|
|
$ |
27,035 |
|
|
$ |
1,170 |
|
|
$ |
|
|
|
$ |
192,656 |
|
|
$ |
37,692 |
|
|
$ |
3,641 |
|
|
|
1,795 |
|
|
$ |
|
|
|
$ |
43,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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F-47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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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 |
March 3, 2006
In accordance with the requirements of the Securities Exchange
Act, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.
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Signature |
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Capacity |
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Date |
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/s/ Ted G. Wood
Ted G. Wood |
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Non-Executive Chairman of the Board
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March 3, 2006 |
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/s/ Brian A. Markison
Brian A. Markison |
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President, Chief Executive Officer and Director
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March 3, 2006 |
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/s/ Joseph Squicciarino
Joseph Squicciarino |
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Chief Financial Officer (principal financial and accounting
officer)
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March 3, 2006 |
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/s/ Earnest W.
Deavenport, Jr.
Earnest W. Deavenport, Jr. |
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Director
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March 3, 2006 |
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/s/ Elizabeth M.
Greetham
Elizabeth M. Greetham |
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Director
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March 3, 2006 |
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/s/ Gregory D. Jordan
Gregory D. Jordan |
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Director
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March 3, 2006 |
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/s/ R. Charles Moyer
R. Charles Moyer |
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Director
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March 3, 2006 |
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/s/ Philip M. Pfeffer
Philip M. Pfeffer |
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Director
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March 3, 2006 |
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/s/ D. Greg Rooker
D. Greg Rooker |
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Director
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March 3, 2006 |
II-1
KING PHARMACEUTICALS, INC.
Schedule II. Valuation and Qualifying Accounts
(In thousands)
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Column A |
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Column B | |
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Column C Additions | |
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Column D | |
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Column E | |
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Charged | |
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Balances at | |
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Charged to | |
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(Credited) | |
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Balance at | |
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Beginning of | |
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Cost and | |
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to Other | |
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End of | |
Description |
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Period | |
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Expenses | |
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Accounts | |
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Deductions(1) | |
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Period | |
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Allowance for doubtful accounts, deducted from accounts
receivable in the balance sheet
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Year ended December 31, 2005
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$ |
15,348 |
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$ |
939 |
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$ |
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$ |
4,007 |
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$ |
12,280 |
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Year ended December 31, 2004
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11,055 |
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7,476 |
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3,183 |
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15,348 |
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Year ended December 31, 2003
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7,513 |
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4,176 |
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1,063 |
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1,697 |
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11,055 |
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Valuation allowance for deferred tax assets, deducted from
deferred income tax assets in the balance sheet
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Year ended December 31, 2005
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$ |
3,950 |
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$ |
5,264 |
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$ |
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$ |
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$ |
9,214 |
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Year ended December 31, 2004
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6,525 |
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2,575* |
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3,950 |
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Year ended December 31, 2003
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3,124 |
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3,401 |
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6,525 |
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(1) |
Amounts represent write-offs of accounts. |
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* |
Valuation account reduced and credited to income. |
S-1