King Pharmaceuticals, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
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(Mark One) |
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þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2006 |
|
OR |
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|
For the transition period
from to |
Commission File
No. 001-15875
King Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Tennessee |
|
54-1684963 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
|
501 Fifth Street, Bristol, TN |
|
37620 |
(Address of principal executive offices) |
|
(Zip Code) |
(423) 989-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. (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
Number of shares outstanding of Registrants common stock
as of May 8, 2006: 242,207,928
TABLE OF CONTENTS
i
PART I FINANCIAL INFORMATION
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|
Item 1. |
Financial Statements |
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
328,298 |
|
|
$ |
30,014 |
|
|
Investments in debt securities
|
|
|
486,154 |
|
|
|
494,663 |
|
|
Restricted cash
|
|
|
|
|
|
|
130,400 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$11,795 and $12,280, respectively
|
|
|
268,336 |
|
|
|
223,581 |
|
|
Inventories
|
|
|
217,256 |
|
|
|
228,063 |
|
|
Deferred income tax assets
|
|
|
75,570 |
|
|
|
81,777 |
|
|
Prepaid expenses and other current assets
|
|
|
82,041 |
|
|
|
59,291 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,457,655 |
|
|
|
1,247,789 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
302,162 |
|
|
|
302,474 |
|
Intangible assets, net
|
|
|
972,395 |
|
|
|
967,194 |
|
Goodwill
|
|
|
121,152 |
|
|
|
121,152 |
|
Marketable securities
|
|
|
15,494 |
|
|
|
18,502 |
|
Deferred income tax assets
|
|
|
265,729 |
|
|
|
231,032 |
|
Other assets (includes restricted cash of $14,250 and $14,129,
respectively)
|
|
|
82,560 |
|
|
|
77,099 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,217,147 |
|
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
69,369 |
|
|
$ |
84,539 |
|
|
Accrued expenses
|
|
|
440,512 |
|
|
|
519,620 |
|
|
Income taxes payable
|
|
|
74,959 |
|
|
|
22,301 |
|
|
Current portion of long-term debt
|
|
|
180,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
764,840 |
|
|
|
971,460 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000 |
|
|
|
|
|
Other liabilities
|
|
|
19,857 |
|
|
|
20,360 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,184,697 |
|
|
|
991,820 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,032,450 |
|
|
|
1,973,422 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
3,217,147 |
|
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
See accompanying notes.
1
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
464,599 |
|
|
$ |
350,570 |
|
|
Royalty revenue
|
|
|
19,636 |
|
|
|
18,055 |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
484,235 |
|
|
|
368,625 |
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization
shown below
|
|
|
92,404 |
|
|
|
72,216 |
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
105,054 |
|
|
|
92,850 |
|
|
Mylan transaction costs
|
|
|
|
|
|
|
3,277 |
|
|
Co-promotion fees
|
|
|
65,289 |
|
|
|
34,655 |
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expense
|
|
|
170,343 |
|
|
|
130,782 |
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29,882 |
|
|
|
11,472 |
|
|
Research and development-in process upon acquisition
|
|
|
85,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
114,882 |
|
|
|
11,472 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
34,365 |
|
|
|
41,426 |
|
|
Restructuring charges (Note 13)
|
|
|
|
|
|
|
2,023 |
|
|
Gain on sale of products
|
|
|
|
|
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
411,994 |
|
|
|
257,072 |
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
72,241 |
|
|
|
111,553 |
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,960 |
|
|
|
2,277 |
|
|
Interest expense
|
|
|
(2,984 |
) |
|
|
(2,701 |
) |
|
Loss on investment
|
|
|
|
|
|
|
(6,853 |
) |
|
Gain on early extinguishment of debt
|
|
|
1,022 |
|
|
|
|
|
|
Other, net
|
|
|
(510 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
3,488 |
|
|
|
(7,526 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
75,729 |
|
|
|
104,027 |
|
Income tax expense
|
|
|
24,894 |
|
|
|
36,922 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
50,835 |
|
|
|
67,105 |
|
|
|
|
|
|
|
|
Discontinued operations (Note 16):
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(247 |
) |
|
|
4,682 |
|
|
|
Income tax (benefit) expense
|
|
|
(89 |
) |
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations, net
|
|
|
(158 |
) |
|
|
2,950 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
50,677 |
|
|
$ |
70,055 |
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.21 |
|
|
$ |
0.28 |
|
|
|
Total (loss) income from discontinued operations
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.21 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.21 |
|
|
$ |
0.28 |
|
|
|
Total (loss) income from discontinued operations
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.21 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
See accompanying notes.
2
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
|
|
Other | |
|
|
|
|
| |
|
Unearned | |
|
Retained | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Compensation | |
|
Earnings | |
|
Income (Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2004
|
|
|
241,706,583 |
|
|
$ |
1,210,647 |
|
|
$ |
|
|
|
$ |
637,120 |
|
|
$ |
1,023 |
|
|
$ |
1,848,790 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,055 |
|
|
|
|
|
|
|
70,055 |
|
|
Net unrealized loss on marketable securities, net of tax of $429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(742 |
) |
|
|
(742 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,234 |
|
Stock option activity
|
|
|
24,085 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
|
241,730,668 |
|
|
$ |
1,210,703 |
|
|
$ |
|
|
|
$ |
707,175 |
|
|
$ |
202 |
|
|
$ |
1,918,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
241,802,724 |
|
|
$ |
1,222,246 |
|
|
$ |
(8,764 |
) |
|
$ |
754,953 |
|
|
$ |
4,987 |
|
|
$ |
1,973,422 |
|
Adoption of statement of Financial Accounting Standard 123(R)
|
|
|
|
|
|
|
(8,764 |
) |
|
|
8,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,677 |
|
|
|
|
|
|
|
50,677 |
|
|
Net unrealized loss on marketable securities, net of tax of
$1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,252 |
) |
|
|
(2,252 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,415 |
|
Stock-based compensation expense
|
|
|
|
|
|
|
3,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,889 |
|
Exercise of stock options
|
|
|
394,330 |
|
|
|
6,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,468 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
242,197,054 |
|
|
$ |
1,224,095 |
|
|
$ |
|
|
|
$ |
805,630 |
|
|
$ |
2,725 |
|
|
$ |
2,032,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash flows (used in) provided by operating activities
|
|
$ |
(5,592 |
) |
|
$ |
23,503 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
130,279 |
|
|
|
(7,982 |
) |
|
Purchases of investments in debt securities
|
|
|
(784,976 |
) |
|
|
(317,730 |
) |
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
793,485 |
|
|
|
167,145 |
|
|
Purchases of property, plant and equipment
|
|
|
(8,768 |
) |
|
|
(9,075 |
) |
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
1 |
|
|
Purchases of product rights
|
|
|
(23,926 |
) |
|
|
|
|
|
Arrow International Limited collaboration agreement
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities (2005
Revised see Note 14)
|
|
|
71,094 |
|
|
|
(167,641 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
6,468 |
|
|
|
56 |
|
|
Excess tax benefits from stock-based compensation
|
|
|
274 |
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
400,000 |
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(163,350 |
) |
|
|
|
|
|
Debt issuance costs
|
|
|
(10,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
232,782 |
|
|
|
56 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
298,284 |
|
|
|
(144,082 |
) |
Cash and cash equivalents, beginning of period (2005
Revised see Note 14)
|
|
|
30,014 |
|
|
|
192,656 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period (2005
Revised see Note 14)
|
|
$ |
328,298 |
|
|
$ |
48,574 |
|
|
|
|
|
|
|
|
See accompanying notes.
4
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and 2005
(Unaudited)
(In thousands, except per share data)
The accompanying unaudited interim condensed consolidated
financial statements of King Pharmaceuticals, Inc.
(King or the Company) were prepared by
the Company in accordance with the instructions to
Form 10-Q and
Rule 10-01 of
Regulation S-X
and, accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three months ended
March 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2006. These consolidated statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys
Annual Report on
Form 10-K for the
year ended December 31, 2005. The year-end condensed
balance sheet was derived from the audited consolidated
financial statements but does not include all disclosures
required by generally accepted accounting principles.
These consolidated financial statements include the accounts of
King and all of its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
|
|
2. |
Stock-Based Compensation |
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, which requires
the recognition of the fair value of stock-based compensation in
net earnings. The Company adopted SFAS No. 123(R) using the
modified prospective application transition method and therefore
the Companys prior period condensed consolidated financial
statements have not been restated and do not reflect the
recognition of stock-based compensation costs. For the three
months ended March 31, 2006, the Companys net income
includes $3,889 of compensation costs and $1,135 of income tax
benefits related to the Companys stock-based compensation
arrangements. Prior to the Companys adoption of SFAS
No. 123(R), it accounted for stock options under the
disclosure-only provision of SFAS No. 123,
Accounting for Stock Based Compensation, as amended
by SFAS No. 148. Under the disclosure only provision
of SFAS No. 123, no compensation cost was recognized for
stock options granted prior to January 1, 2006. SFAS
No. 123(R) will apply to new option grants and to options
modified on or after January 1, 2006. Additionally,
compensation costs for options that are unvested as of
January 1, 2006 must be recognized over their remaining
service period.
Prior to the Companys adoption of
SFAS No. 123(R), benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash
flows. SFAS No. 123(R) requires excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid. For the three months ended March 31, 2006,
tax benefits in excess of recognized compensation costs
associated with stock option exercises were $274 and are
reflected as cash inflows from financing activities.
For the three months ended March 31, 2005, had compensation
costs for the Companys stock compensation plans been
recognized for options granted, consistent with
SFAS No. 123, the Companys
5
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net income, basic income per common share and diluted income per
common share would include adjustments for the following pro
forma amounts:
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, 2005 | |
|
|
| |
Net income:
|
|
|
|
|
|
As reported
|
|
$ |
70,055 |
|
|
Less: pro forma compensation costs for options granted
|
|
|
(1,351 |
) |
|
|
|
|
|
Pro forma
|
|
$ |
68,704 |
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
As reported
|
|
$ |
0.29 |
|
|
|
|
|
|
Pro forma
|
|
$ |
0.28 |
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
As reported
|
|
$ |
0.29 |
|
|
|
|
|
|
Pro forma
|
|
$ |
0.28 |
|
|
|
|
|
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model.
Restricted Stock Awards and Long-Term Performance Unit
Awards.
Restricted Stock Awards (RSAs) and
Long-Term Performance
Unit Awards (LPUs) have been granted under our
Incentive Plan to certain employees.
RSAs are grants of shares of common stock restricted from sale
or transfer for a period of time, generally three years from
grant, but may be restricted over other designated periods as
determined by the Companys Board of Directors or a
Committee of the Board.
The fair value of RSAs is based upon the market price of the
underlying common stock as of the date of grant. Compensation
expense is recognized on a
straight-line basis,
including an estimate for forfeitures, over the vesting period.
LPUs are rights to receive common stock of the Company in which
the number of shares ultimately received depends on the
Companys performance over time. The Company has granted
LPUs with two different performance criteria. LPUs have been
granted with a one year performance cycle, at the end of which
shares of common stock will be earned based on 2006 operating
targets. LPUs have also been granted based on a three year
performance cycle, at the end of which shares of common stock
will be earned based on
market-related
performance targets over the years 2006 through 2008. The
vesting period for the one year and three year LPUs is three
years from the date of grant. At the end of the applicable
performance period, the number of shares of common stock awarded
will be determined by adjusting upward or downward from the
performance target in a range between 0% and 200%. The final
performance percentage on which the number of shares of common
stock to be issued will be based, considering performance
metrics established for the performance period, will be
determined by the Companys Board of Directors or a
Committee of the Board at its sole discretion.
The fair value of LPUs with a one year performance cycle is
based upon the market price of the underlying common stock as of
the date of grant. At each reporting period, compensation
expense is recognized based on the most probable performance
outcome, including an estimate for forfeitures, on a
straight-line basis
over the vesting period. Total compensation expense for each
award will be based upon the actual number of shares of common
stock that vest multiplied by market price of the common stock
as of the date grant.
6
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of LPUs with a three year performance cycle is
based on long-term market-based performance targets using a
Monte Carlo simulation model which considers the likelihood of
all possible outcomes and determines the number of shares
expected to vest under each simulation and the expected stock
price at that level. The fair value on grant date of the LPU
will be recognized over the required service period and will not
change regardless of the Companys actual performance
versus the long-term market-based performance targets.
The following activity has occurred under the Companys
existing plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
|
Grant-Date | |
|
|
Shares | |
|
Fair Value | |
|
|
| |
|
| |
Restricted Stock Awards:
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2005
|
|
|
687,775 |
|
|
$ |
15.55 |
|
|
Granted
|
|
|
168,500 |
|
|
|
19.58 |
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at March 31, 2006
|
|
|
856,275 |
|
|
$ |
16.34 |
|
|
|
|
|
|
|
|
Long-Term Performance Unit Awards (one year performance
cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2005
|
|
|
|
|
|
$ |
|
|
|
Granted
|
|
|
523,970 |
|
|
|
19.68 |
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at March 31, 2006
|
|
|
523,970 |
|
|
$ |
19.68 |
|
|
|
|
|
|
|
|
Long-Term Performance Unit Awards (three year performance
cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2005
|
|
|
|
|
|
$ |
|
|
|
Granted
|
|
|
126,580 |
|
|
|
29.93 |
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at March 31, 2006
|
|
|
126,580 |
|
|
$ |
29.93 |
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $10,621 of total
unrecognized compensation costs related to RSAs which are
expected to be recognized over a weighted average period of
2.24 years. The expense recognized over the service period
includes an estimate of awards that will be forfeited.
Previously, the Company recorded the effect of forfeitures as
they occurred. The cumulative effect of changing from recording
forfeitures related to restricted stock awards as they occurred
to estimating forfeitures during the service period was
immaterial. As of March 31, 2006, there was $12,980 of
total unrecognized compensation costs related to LPUs which are
expected to be recognized over a weighted average period of
2.97 years. As of March 31, 2005, there were no
outstanding RSAs or LPUs.
Stock Options. Nonqualified and incentive stock options
have been granted to the Companys officers, employees and
directors under its stock option plans. In connection with the
plans, options to purchase common stock of the Company are
granted at option prices not less than the fair market value of
the common stock at the date of grant and either vest
immediately or ratably over a designated period, generally
one-third on each of the first three anniversaries of the grant
date. Compensation expense is recognized on a
straight-line basis,
including an estimate for forfeitures, over the vesting period.
7
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in the
three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Expected volatility
|
|
|
52.6 |
% |
|
|
46.41 |
% |
Expected term (in years)
|
|
|
6 |
|
|
|
4 |
|
Risk-free interest rate
|
|
|
4.61 |
% |
|
|
4.04 |
% |
Expected dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
For the three months ended March 31, 2006, the Company
utilized the short-cut method to estimate the
expected term for stock options granted. Stock options granted
prior to 2004 did not have similar vesting characteristics as
those granted in the most recent periods and generally vested at
the date of grant. The stock options granted after
January 1, 2004 generally vest one-third on each of the
first three anniversaries of the grant date. As a result, the
data required to estimate the post-vesting exercise behavior was
not sufficient to calculate a historical estimate. The short-cut
method allows the Company to estimate the expected term using
the average of the contractual term and the vesting period. The
expected volatility is determined based on the historical
volatility of King common stock over the expected term. The
risk-free rate is based on the U.S. Treasury rate for the
expected term at the date of grant.
A summary of option activity under the plans for the three
months ended March 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
|
|
|
|
|
Weighted | |
|
Remaining | |
|
Aggregate | |
|
|
|
|
Average | |
|
Contractual | |
|
Intrinsic | |
|
|
Shares | |
|
Exercise Price | |
|
Term (years) | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding options, December 31, 2005,
|
|
|
7,073,966 |
|
|
$ |
18.83 |
|
|
|
7.65 |
|
|
$ |
8,106 |
|
|
Granted
|
|
|
328,260 |
|
|
|
19.49 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(394,396 |
) |
|
|
16.40 |
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(216,789 |
) |
|
|
25.54 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(51,714 |
) |
|
|
15.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, March 31, 2006
|
|
|
6,739,327 |
|
|
$ |
18.82 |
|
|
|
7.61 |
|
|
$ |
9,101 |
|
Exercisable, March 31, 2006
|
|
|
3,572,135 |
|
|
$ |
21.54 |
|
|
|
6.28 |
|
|
$ |
3,414 |
|
As of March 31, 2006, there was $15,476 of total
unrecognized compensation costs related to stock options. These
costs are expected to be recognized over a weighted average
period of 1.1 years.
Cash received from stock option exercises for the three months
ended March 31, 2006 was $6,468. The income tax benefits
from stock option exercises totaled $256 for the three months
ended March 31, 2006.
During the three months ended March 31, the following
activity occurred under the Companys plans which cover
stock options, RSAs and LPUs:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total intrinsic value of stock options exercised
|
|
$ |
812 |
|
|
$ |
19 |
|
Total fair value of stock awards vested
|
|
$ |
|
|
|
$ |
|
|
As of March 31, 2006, an aggregate of
33,377,103 shares were available for future grant under the
Companys stock plans. Awards that expire or are cancelled
without delivery of shares generally become available for
issuance under the King Pharmaceuticals, Inc. Incentive Plan.
8
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The basic and diluted income (loss) per common share was
determined using the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,022,443 |
|
|
|
241,723,742 |
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,022,443 |
|
|
|
241,723,742 |
|
|
Effect of stock options
|
|
|
361,405 |
|
|
|
78,904 |
|
|
Effect of dilutive share awards
|
|
|
197,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,581,316 |
|
|
|
241,802,646 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share included
options to purchase 5,309,829 shares of common stock, 28,297
RSAs and 79,512 LPUs. The
23/4%
Convertible Debentures due November 15, 2021 could also be
converted into 3,588,517 shares of common stock in the future,
subject to certain contingencies outlined in the indenture (See
Note 8). Because the convertible debentures are
anti-dilutive, they were not included in the calculation of
diluted income per common share. The
11/4
% Convertible Senior Notes due April 1, 2026 could
be converted into common stock in the future, subject to certain
contingencies (See Note 8). These notes are anti-dilutive
because the conversion price of the notes was greater than the
average market price of King Pharmaceuticals, Inc. common stock
during the quarter.
For the three months ended March 31, 2005, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share included
options to purchase 5,659,994 shares of common stock. The
23/4
% Convertible Debentures due November 15, 2021 could
also be converted into 6,877,990 shares of common stock in the
future, subject to certain contingencies outlined in the
indenture (See Note 8). Because the convertible debentures
are anti-dilutive, they were not included in the calculation of
diluted income per common share.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
128,226 |
|
|
$ |
150,979 |
|
Work-in-process
|
|
|
21,102 |
|
|
|
14,955 |
|
Finished goods (including $3,568 and $6,728 of sample inventory,
respectively)
|
|
|
93,504 |
|
|
|
91,695 |
|
|
|
|
|
|
|
|
|
|
|
242,832 |
|
|
|
257,629 |
|
Inventory valuation allowance
|
|
|
(25,576 |
) |
|
|
(29,566 |
) |
|
|
|
|
|
|
|
Total inventories
|
|
$ |
217,256 |
|
|
$ |
228,063 |
|
|
|
|
|
|
|
|
9
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5. |
Property, Plant and Equipment |
The Companys Rochester, Michigan facility manufactures
products for the Company and various third parties. As of
March 31, 2006, the net carrying value of the property,
plant and equipment at the Rochester facility, excluding the net
carrying value associated with the production of
Bicillin®,
was $64,705. Overall production volume at this facility declined
in recent years. 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
decline further or if the Company is not successful in
transferring additional production to the Rochester facility,
the Company may have to write off a portion of the property,
plant and equipment associated with this facility.
The net book value of some of the Companys manufacturing
facilities currently exceeds fair market value. Management
currently believes that the long-term assets associated with
these facilities are not impaired based on estimated
undiscounted future cash flows. However, if the Company were to
approve a plan to sell or close any of the facilities for which
the carrying value exceeds fair market value, the Company would
have to write off a portion of the assets, or reduce the
estimated useful life of the assets, which would accelerate
depreciation.
On March 1, 2006, the Company acquired the exclusive right
to market and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD. Under the terms of the agreements, the initial
purchase price was $23,924, plus acquisition costs of $623. As
an additional component of the purchase price, the Company will
pay Allerex an earn-out
equal to a percentage of future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, the Company will increase intangible assets by
the amount of the accrual. The aggregate of these payments will
not exceed $13,164. During the first quarter of 2006, the
accrued earn-out
equaled $159 and intangible assets was increased by the same
amount.
The allocation of the initial purchase price is as follows:
|
|
|
|
|
Intangible assets
|
|
$ |
23,926 |
|
Inventory
|
|
|
618 |
|
Fixed assets
|
|
|
3 |
|
|
|
|
|
|
|
$ |
24,547 |
|
|
|
|
|
At the time of the acquisition, the identifiable assets were
assigned useful lives of 9.8 years. The acquisition is
allocated to the Meridian Medical Technologies segment. The
Company financed the acquisition using available cash on hand.
On February 12, 2006, the Company entered into a
collaboration with Arrow International Limited and certain of
its affiliates, not including Cobalt Pharmaceuticals, Inc.
(collectively, Arrow) to commercialize novel
formulations of ramipril, the active ingredient in the
Companys
Altace®
product. Under a series of agreements, Arrow has granted King
rights to certain current and future New Drug Applications
regarding novel formulations of ramipril and intellectual
property, including patent rights and technology licenses
relating to these novel formulation. Arrow will have
responsibility for the manufacture and supply of the new
formulations of ramipril for King; however, under certain
conditions King may manufacture and supply the formulations of
ramipril instead.
10
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon execution of the agreements, King made an initial 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 fulfillment of
certain conditions. Additionally, Arrow will earn fees for the
manufacture and supply of the new formulations of ramipril.
In connection with the agreement with Arrow, the initial payment
of $35,000 and the future non-contingent payments of $50,000 are
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. Arrow filed a New Drug Application
(NDA) for a novel formulation of ramipril in January
2006. The success of the project will depend on additional
development activities and FDA approval. The estimated costs to
complete the project are approximately $3,500. The Company
currently anticipates obtaining FDA approval for the novel
formulation during 2007 or 2008. The in-process research and
development is part of the branded pharmaceutical segment.
On February 12, 2006, the Company entered into an agreement
with Cobalt Pharmaceuticals, Inc., (Cobalt) an
affiliate of Arrow, whereby Cobalt will have the non-exclusive
right to distribute a generic formulation of the Companys
currently marketed
Altace®
product in the U.S. market, which generic product would be
supplied by King.
|
|
7. |
Intangible Assets and Goodwill |
The following table reflects the components of intangible assets
as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Trademarks and product rights
|
|
$ |
1,198,113 |
|
|
$ |
315,057 |
|
|
$ |
1,174,028 |
|
|
$ |
296,801 |
|
Patents
|
|
|
268,266 |
|
|
|
179,518 |
|
|
|
261,277 |
|
|
|
171,976 |
|
Other intangibles
|
|
|
9,459 |
|
|
|
8,868 |
|
|
|
9,459 |
|
|
|
8,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
1,475,838 |
|
|
$ |
503,443 |
|
|
$ |
1,444,764 |
|
|
$ |
477,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2006 and 2005 was $25,873 and $34,263, respectively.
As of March 31, 2006, the net intangible assets associated
with
Intal®,
Tilade®
and
Synercid®
products totals approximately $191,269. The Company believes
that these intangible assets are not currently impaired based on
estimated undiscounted cash flows associated with these assets.
However, if the Companys estimates regarding future cash
flows prove to be incorrect or adversely change, the Company may
have to reduce the estimated remaining useful life and/or write
off a portion or all of these intangible assets.
Goodwill at March 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded | |
|
Meridian | |
|
|
|
|
Segment | |
|
Segment | |
|
Total | |
|
|
| |
|
| |
|
| |
Goodwill
|
|
$ |
12,742 |
|
|
$ |
108,410 |
|
|
$ |
121,152 |
|
|
|
|
|
|
|
|
|
|
|
11
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Convertible senior notes(a)
|
|
$ |
400,000 |
|
|
$ |
|
|
Convertible debentures(b)
|
|
|
180,000 |
|
|
|
345,000 |
|
Senior secured revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
580,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
180,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$ |
400,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of 2006, the Company issued $400,000 of
11/4% Convertible
Senior Notes due April 1, 2026 (Notes). The
Notes are unsecured obligations and are guaranteed by each of
the Companys domestic subsidiaries on a joint and several
basis. The Notes accrue interest at an initial rate of
11/4
%. Beginning with the six-month interest period that
commences on April 1, 2013, the Company will pay additional
interest during any six-month interest period if the average
trading price of the Notes during the five consecutive trading
days ending on the second trading day immediately preceding the
first day of such six-month period equals 120% or more of the
principal amount of the Notes. Interest is payable on
April 1 and October 1 of each year, beginning
October 1, 2006. |
|
|
|
On or after April 5, 2013, the Company may redeem for cash
some or all of the Notes at any time at a price equal to 100% of
the principal amount of the Notes to be redeemed, plus any
accrued and unpaid interest, and liquidated damages, if any, to
but excluding the date fixed for redemption. Holders may require
the Company to purchase for cash some or all of their Notes on
April 1, 2013, April 1, 2016 and April 1, 2021,
or upon the occurrence of a fundamental change (such as a change
of control or a termination of trading), at 100% of the
principal amount of the Notes to be purchased, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the purchase date. |
|
|
|
Prior to April 1, 2012, the Notes are convertible under the
following circumstances: |
|
|
|
if the price of the Companys common stock
reaches a specified threshold during specified periods, |
|
|
|
if the Notes have been called for redemption, or |
|
|
|
if specified corporate transactions or other
specified events occur. |
|
|
|
The Notes are convertible at any time on and after April 1,
2012, until the close of business on the business day
immediately preceding maturity. Subject to certain exceptions,
the Company will deliver cash and shares of the Companys
common stock, as follows: (i) an amount in cash equal to
the lesser of (a) the principal amount of Notes surrendered
for conversion and (b) the product of the conversion rate
and the average price of the Companys common stock (the
conversion value), and (ii) if the conversion
value is greater than the principal amount, a specified amount
in cash or shares of the Companys common stock, at the
Companys election. The initial conversion price is
approximately $20.83 per share of common stock. If certain
corporate transactions occur on or prior to April 1, 2013,
the Company will increase the conversion rate in certain
circumstances. |
|
|
|
The Company has reserved 23,732,724 shares of common stock
in the event the Notes are converted into shares of the
Companys common stock. |
|
|
|
To establish the Notes, the Company incurred approximately
$10,610 of deferred financing costs that are being amortized
over seven years. |
|
(b) |
|
During the fourth quarter of 2001, the Company issued $345,000
of
23/4
% Convertible Debentures due November 15, 2021
(Debentures). On March 29, 2006, the Company
repurchased $165,000 of the Debentures prior to maturity for
$163,350, resulting in a gain of $1,650. In addition, the Company |
12
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
wrote off deferred financing costs of $628 relating to the
repurchased Debentures. See Note 17 for a discussion of a
subsequent event related to the Debentures. |
Fen/Phen Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multi-district litigation (MDL) court has been
established in Philadelphia, Pennsylvania, In re Fen-Phen
Litigation. The plaintiffs seek, among other things,
compensatory and punitive damages and/or court-supervised
medical monitoring of persons who have ingested the product.
The Companys wholly-owned subsidiary, King Pharmaceuticals
Research and Development, Inc., (King Research and
Development) is a defendant in approximately 140
multi-plaintiff (1,674 plaintiffs) lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine. These lawsuits have been filed in various
jurisdictions throughout the United States and in each of these
lawsuits King Research and Development, as the successor to
Jones Pharma, Inc. (Jones), is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine, or phentermine, Jones was a
distributor of a generic phentermine product and, after its
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones has filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones distribution of
Obenix®
or Jones generic phentermine product. King Research and
Developments insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntarily
dismissals without the payment of settlement proceeds. In the
event that King Research and Developments insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
13
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the Company is one of many defendants in six
multi-plaintiff lawsuits that claim damages for personal injury
arising from our 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 the Company intends to vigorously pursue all defenses
available to it. The Company is being indemnified in the six
lawsuits by GlaxoSmithKline, for which the Company manufactured
the anorexigenic product, provided that neither the lawsuits nor
the associated liabilities are based upon the Companys
independent negligence or intentional acts. The Company intends
to submit a claim for any unreimbursed costs to its 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 assume defense of
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.
Thimerosal/ Childrens Vaccine Related
Litigation
The Company and Parkedale Pharmaceuticals, Inc., a wholly-owned
subsidiary of the Company, are named as defendants in lawsuits
filed in California, Mississippi and Illinois (Madison County),
along with other pharmaceutical companies. Most of the
defendants manufactured or sold the mercury-based preservative
thimerosal or manufactured or sold childrens vaccines
containing thimerosal. We did not manufacture or sell a
childrens vaccine or thimerosal. For two years we
manufactured and sold an influenza vaccine that contained
thimerosal. None of the plaintiffs has alleged taking our
influenza vaccine.
In these cases, the plaintiffs have attempted to link the
receipt of the mercury-based products to neurological defects in
children. The plaintiffs claim unfair business practices,
fraudulent misrepresentations, negligent misrepresentations,
product liability, Proposition 65 violations, breach of implied
warranty, and claims premised on the allegation 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 Company has given its product liability insurance carrier
proper notice of all of these matters and defense counsel is
vigorously defending the Companys interests. The Company
has filed motions to dismiss based on the Federal Vaccine Act
and lack of product identification. The Company was voluntarily
dismissed in Mississippi due, among other things, to lack of
product identification in the plaintiffs complaints. The
Company was voluntarily dismissed in the only case filed in
Chicago and motions to dismiss based on the Vaccine Act are
still pending in all of the remaining Illinois cases. The
California Proposition 65 claims were dismissed in the
California Trial Court, affirmed in the California Court of
Appeals and no further appeals were filed. Subsequent
Proposition 65 claims were dismissed. Management believes that
the claims against the Company are without merit and the Company
intends to defend these lawsuits vigorously, but the Company is
unable currently to predict the outcome or to reasonably
estimate the range of potential loss, if any.
Hormone Replacement Therapy
Currently, the Company has been named as a defendant in
twenty-nine (29 plaintiffs) lawsuits involving the manufacture
and sale of hormone replacement therapy drugs. Numerous
pharmaceutical companies have also been sued. The Company was
also named in several large multiple plaintiff lawsuits, but
those multiple plaintiff cases have been voluntarily dismissed
or dismissed by the Court for lack of product identification.
These remaining 29 lawsuits have been filed in Alabama,
Arkansas, Missouri,
14
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pennsylvania, Ohio, Minnesota, Florida, Maryland, Mississippi
and Minnesota. An MDL Court has been established in Little Rock,
Arkansas, In re: Prempro Products Liability Litigation,
and all of the plaintiffs claims are pending in that Court
except for one lawsuit pending in Philadelphia, Pennsylvania
State Court. Many of these plaintiffs allege that the Company
and other defendants failed to conduct adequate research and
testing before the sale of the products and post-sale
surveillance to establish the safety and efficacy of the
long-term hormone therapy regimen and, as a result, misled
consumers when marketing their products. Plaintiffs also allege
negligence, strict liability, breach of implied warranty, breach
of express warranty, fraud and misrepresentation. Discovery of
the plaintiffs claims against the Company has begun but is
in early stages. Cases involving other defendants may be tried
during 2006. The Company intends to defend these lawsuits
vigorously but is unable currently to predict the outcome or to
reasonably estimate the range of potential loss, if any. The
Company may have limited insurance for these claims.
Average Wholesale Price Litigation
In August 2004, King and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of King, were
named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (AWP) and fraudulently failed to
accurately report their best prices and their
average manufacturers prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits, and
treble and punitive damages. The United States District Court
for the District of Massachusetts has been established as the
MDL court for the case, In re: Pharmaceutical Industry
Average Wholesale Pricing Litigation.
Forty-one New York counties have filed lawsuits against the
pharmaceutical industry, including the Company and Monarch.
Forty of these lawsuits are pending in the MDL court in the
District of Massachusetts. The remaining case is pending in the
New York State Court. The allegations in these cases are
virtually the same as the allegations in the New York City case.
Motions to dismiss have been filed by all defendants in all New
York City and County cases and are currently pending. 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.
In January 2005, the State of Alabama filed a lawsuit in State
Court against 79 defendants including the Company and
Monarch. The four causes of action center on the allegation that
all defendants fraudulently inflated AWPs of their products. In
October 2005, the State of Mississippi filed a lawsuit in State
Court against the Company, Monarch and eighty-four other
defendants and alleged fourteen causes of action. Many of those
causes of action allege that all defendants fraudulently
inflated the AWPs and wholesale acquisition costs
(WACs) of their products. A motion to dismiss the
allegations based upon criminal statutes, motion to transfer
venue from Hinds County to Rankin County, a motion for
protective order regarding discovery, a motion for more definite
statement and other motions are currently pending before the
Court in Mississippi. In Alabama, a motion to dismiss was filed
and denied by the court, and that case is in early stages of
discovery. The relief sought in both of these cases is similar
to the relief sought in the New York City lawsuit.
|
|
|
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
15
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2005 State Settlement
Agreements). On March 6, 2006, the Company entered
into a definitive settlement agreement with the remaining state
on substantially the same terms as the other state settlements
(this most recent state settlement, the Federal Settlement
Agreement and the 2005 State Settlement Agreements are
collectively referred to as the Settlement
Agreements). Consummation of the Federal Settlement
Agreement and some state Settlement Agreements was subject to
court approval, which was granted by the United States District
Court for the Eastern District of Pennsylvania (District
Court) during the first quarter of 2006.
During the first quarter of 2006, the Company paid approximately
$129,268, comprising (i) all amounts due under each of the
Settlement Agreements and (ii) all the Companys
obligations to reimburse other parties for expenses related to
the settlement, including the previously disclosed legal fees of
approximately $787 and the previously disclosed settlement costs
of approximately $950.
The individual purportedly acting as a relator under
the False Claims Act has appealed certain decisions of the
District Court relating to the relators dispute with
certain states over a potential share award. Any share award
would be paid solely by the government and would not affect the
amount paid by the Company pursuant to the Settlement
Agreements. 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 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 Securities and Exchange Commission
(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.
16
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported
class action complaints were filed by holders of the
Companys securities against the Company, its directors,
former directors, executive officers, former executive officers,
a Company subsidiary, and a former director of the subsidiary in
the United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934, 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.
In November 2005, the parties agreed to submit the matter to
non-binding mediation. After an extensive mediation process, an
agreement in principle to settle the litigation was reached on
April 26, 2006. The parties have not yet completed the
negotiation and execution of a definitive settlement agreement,
and no assurance can be given that such an agreement will be
reached. Further, any such agreement will be subject to approval
by the court.
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, the Company previously recorded
a liability and a receivable for this amount, which are
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
17
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 motion to dismiss the case on
November 30, 2004. On March 14, 2006, plaintiff
dismissed the case.
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.
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 (unless the patents are held invalid,
unenforceable, or not infringed) 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 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. The
parties submitted a joint stipulation of dismissal on
April 4, 2006, and the Court granted dismissal.
The Company has received a request for information from the
U.S. Federal Trade Commission (FTC) in
connection with the dismissal without prejudice of the
Companys patent infringement
18
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
litigation against Cobalt under the Hatch-Waxman Act of 1984.
The Company is cooperating with the FTC in this investigation.
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
lawsuit against Lupin provides the Company with an automatic
stay of FDA approval of Lupins ANDA for up to
30 months (unless the patents are held invalid,
unenforceable, or not infringed) 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 March 31, 2006, the
Company had net intangible assets related to
Altace®
of $240,112. 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 (unless the patents
are held invalid, unenforceable, or not infringed) from no
earlier than January 24, 2003. That 30 month stay
expired in July 2005. 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
(unless the patents are held invalid, unenforceable, or not
infringed) from no earlier than November 18, 2002 and
November 3, 2004, respectively. The 30 month stay of
FDA approval for Eon Labs ANDA for its proposed
400 mg product expired in May 2005. The Company intends to
vigorously enforce its rights under the 128 and
102 patents to the full extent of the law.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. The Company believes that
this decision is arbitrary, capricious, and inconsistent with
the FDAs previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent,
19
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 their pending Citizen
Petitions and responses. On December 8, 2005, Mutual filed
another supplement with the FDA in which it withdrew its prior
Petition for Stay, supplement, and opposition to Kings
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 March 31, 2006, the
Company had net intangible assets related to
Skelaxin®
of $166,497. 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 version
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.
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 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
(unless the patents are held invalid, unenforceable, or not
infringed) 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
(unless the patents are held invalid, unenforceable, or not
infringed) from no earlier than June 21, 2005. The Company
intends to vigorously enforce its rights under the
538 patent. As of March 31, 2006, the Company
had net intangible
20
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets related to
Sonata®
of $9,522. 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.
The Company has a supply agreement with a third party to produce
ramipril, the active ingredient in
Altace®.
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 the
Company is unable to maintain market exclusivity for
Altace®
in accordance with current expectations and/or if the
Companys product life cycle management is not successful,
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.
|
|
10. |
Accounting Developments |
In November 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs, an
amendment of Accounting Research Bulletin No. 43.
SFAS No. 151 requires certain production overhead
costs to be allocated to inventory based upon the normal
capacity of the manufacturing facility. When the Companys
manufacturing facilities are operating below their normal
capacity, unfavorable variances cannot be allocated to inventory
and must be expensed in the period in which they are incurred.
Normal capacity is not defined as full capacity by
SFAS No. 151. SFAS No. 151 provided guidance
that normal capacity refers to a range of production levels
expected to be achieved over a number of periods or seasons
under normal circumstances. The Company believes each of its
operating facilities are currently operating at levels
considered to be normal capacity as defined by
SFAS No. 151 as these plants have operated at their
current levels for a number of periods and are expected to
continue to operate within a range of this normal capacity in
the foreseeable future. Accordingly, the adoption of
SFAS No. 151, as of January 1, 2006, did not have
an effect on the Companys financial statements.
The Companys effective income tax rate varies from the
statutory rate for the three months ended March 31, 2006
primarily due to tax benefits related to charitable
contributions of inventory, tax-exempt interest income, and
domestic manufacturing, which benefits are partially offset by
state taxes.
The Companys business is classified into five reportable
segments: branded pharmaceuticals, Meridian Medical Technologies
(Meridian), royalties, contract manufacturing and
all other. Branded pharmaceuticals includes a variety of branded
prescription products that are separately categorized into four
therapeutic areas: 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 to both commercial and government markets pharmaceutical
products that are administered with an auto-injector. The
principal source of revenues in the commercial market is the
EpiPen®
product, an epinephrine filled auto-injector which is primarily
prescribed for the treatment of severe allergic reactions
21
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and which is marketed, distributed and sold by Dey, L.P.
Government revenues are principally derived from the sale of
nerve agent antidotes and other emergency medicine auto-injector
products marketed to the U.S. Department of Defense and
other federal, state and local agencies, particularly those
involved in homeland security, as well as to approved foreign
governments. 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 segment
profit. Reportable segments were separately identified based on
revenues, segment profit (excluding depreciation and
amortization) 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.
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
417,620 |
|
|
$ |
321,769 |
|
|
Meridian Medical Technologies
|
|
|
41,284 |
|
|
|
23,214 |
|
|
Royalties
|
|
|
19,636 |
|
|
|
18,055 |
|
|
Contract manufacturing and other
|
|
|
121,282 |
|
|
|
119,365 |
|
|
Eliminations
|
|
|
(115,587 |
) |
|
|
(113,778 |
) |
|
|
|
|
|
|
|
|
|
Consolidated total net revenues
|
|
$ |
484,235 |
|
|
$ |
368,625 |
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
352,229 |
|
|
$ |
272,112 |
|
|
Meridian Medical Technologies
|
|
|
22,037 |
|
|
|
12,313 |
|
|
Royalties
|
|
|
17,266 |
|
|
|
15,806 |
|
|
Contract manufacturing and other
|
|
|
299 |
|
|
|
(3,822 |
) |
|
Other operating costs and expense
|
|
|
(319,590 |
) |
|
|
(184,856 |
) |
|
Other income (expense)
|
|
|
3,488 |
|
|
|
(7,526 |
) |
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax
|
|
$ |
75,729 |
|
|
$ |
104,027 |
|
|
|
|
|
|
|
|
22
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total assets:
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
2,861,327 |
|
|
$ |
2,654,782 |
|
|
Meridian Medical Technologies
|
|
|
293,389 |
|
|
|
261,956 |
|
|
Royalties
|
|
|
23,916 |
|
|
|
20,444 |
|
|
Contract manufacturing and other
|
|
|
38,515 |
|
|
|
26,840 |
|
|
Other
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$ |
3,217,147 |
|
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
The following represents branded pharmaceutical revenues by
therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total revenues:
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
$ |
203,868 |
|
|
$ |
134,518 |
|
|
Neuroscience
|
|
|
119,893 |
|
|
|
91,395 |
|
|
Hospital/acute care
|
|
|
81,016 |
|
|
|
85,848 |
|
|
Other
|
|
|
12,843 |
|
|
|
10,008 |
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$ |
417,620 |
|
|
$ |
321,769 |
|
|
|
|
|
|
|
|
|
|
13. |
Restructuring Activities |
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.
A summary of the types of costs accrued and incurred are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued | |
|
|
|
|
|
|
|
Accrued | |
|
|
Balance at | |
|
Income |
|
|
|
|
|
Balance at | |
|
|
December 31, | |
|
Statement |
|
|
|
|
|
March 31, | |
|
|
2005 | |
|
Impact |
|
Payments | |
|
Non-cash |
|
2006 | |
|
|
| |
|
|
|
| |
|
|
|
| |
Employee separation payments
|
|
$ |
1,509 |
|
|
$ |
|
|
|
$ |
980 |
|
|
$ |
|
|
|
$ |
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, accrued restructuring charges relate
to the Companys branded pharmaceutical segment. The
accrued employee separation payments as of March 31, 2006
are expected to be paid during 2006.
|
|
14. |
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. During the first quarter of 2005, the
Company classified auction rate securities as Cash and
Cash Equivalents. In accordance with generally accepted
accounting principles, the Company since revised the
classification of auction rate securities for the first quarter
of 2005 as Investments in Debt Securities. The
revised classification in the Companys consolidated
statement of cash flows for the three months ended
March 31, 2005 resulted in a decrease of $150,585 in cash
from investing activities representing the increases in the
Companys holdings in auction
23
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rate securities. As of the three months ended March 31,
2006 and 2005, there were no cumulative gross unrealized gains
or losses on investments in debt securities.
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 and retail 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.
As a result of actual returns during the first quarter of 2006,
the estimated rate of returns used in the calculation of the
Companys returns reserve for some of the Companys
products continued to improve. During the first quarter of 2006,
the Company decreased its reserve for returns by approximately
$8,000 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 this increase in
net sales, the co-promotion expense related to net sales of
Altace®
in the first quarter of 2006 increased by approximately $1,000
and royalty expense related to net sales of
Skelaxin®
increased by approximately $1,000. The effect of the change in
estimate on first quarter 2006 operating income was, therefore,
approximately $6,000.
|
|
16. |
Discontinued Operations |
On March 30, 2004, the Companys Board of Directors
approved managements decision to market for divestiture
many of the Companys womens health products. On
November 22, 2004, the Company sold all of its rights in
Prefest®
for approximately $15,000. On December 23, 2004, the
Company sold all of its rights in
Nordette®
for approximately $12,000.
The
Prefest®
and
Nordette®
product rights, 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®
were formerly included in the Companys branded
pharmaceuticals segment.
Summarized financial information for the discontinued operations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Total revenues
|
|
$ |
(250 |
) |
|
$ |
4,682 |
|
Operating (loss) income
|
|
|
(247 |
) |
|
|
4,682 |
|
Net (loss) income
|
|
$ |
(158 |
) |
|
$ |
2,950 |
|
Discontinued operations during 2006 and 2005 are primarily due
to changes in estimated reserves for returns and rebates.
On April 28, 2006, the Company commenced a tender offer to
purchase any and all of its outstanding
23/4
% Convertible Debentures due November 15, 2021 at a
purchase price of 99.625% of the principal
24
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amount, for an aggregate payment of $179,325 if the maximum
amount of Debentures is purchased. The Company anticipates that
it will purchase Debentures tendered in the tender offer by
utilizing its cash on hand, including a portion of the net
proceeds it received from the issuance of the Notes. The tender
offer is subject to customary conditions and will expire, unless
extended or terminated, on May 26, 2006.
|
|
18. |
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 aggregate principal amount of the Debentures,
of which $180,000 remain outstanding as of March 31, 2006,
under the $400,000 aggregate principal amount of the Notes, and
under the $400,000 Senior Secured Revolving Credit Facility on a
joint and several basis. There are no restrictions under the
Companys financing arrangements on the ability of the
Guarantor Subsidiaries to distribute funds to the Company in the
form of cash dividends, loans or advances. The following
combined financial data provides information regarding the
financial position, results of operations and cash flows of the
Guarantor Subsidiaries (condensed consolidating financial data).
Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management
has determined that such information would not be material to
the holders of the debt.
25
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
|
|
(Unaudited) | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
Eliminating | |
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
Eliminating | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Entries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
325,511 |
|
|
$ |
420 |
|
|
$ |
2,367 |
|
|
$ |
|
|
|
$ |
328,298 |
|
|
$ |
26,802 |
|
|
$ |
1,071 |
|
|
$ |
2,141 |
|
|
$ |
|
|
|
$ |
30,014 |
|
|
Investments in debt securities
|
|
|
486,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,154 |
|
|
|
494,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494,663 |
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400 |
|
|
Accounts receivable, net
|
|
|
601 |
|
|
|
265,482 |
|
|
|
2,253 |
|
|
|
|
|
|
|
268,336 |
|
|
|
1,221 |
|
|
|
221,854 |
|
|
|
506 |
|
|
|
|
|
|
|
223,581 |
|
|
Inventories
|
|
|
175,767 |
|
|
|
41,349 |
|
|
|
140 |
|
|
|
|
|
|
|
217,256 |
|
|
|
195,421 |
|
|
|
31,877 |
|
|
|
765 |
|
|
|
|
|
|
|
228,063 |
|
|
Deferred income tax assets
|
|
|
15,317 |
|
|
|
60,253 |
|
|
|
|
|
|
|
|
|
|
|
75,570 |
|
|
|
21,524 |
|
|
|
60,253 |
|
|
|
|
|
|
|
|
|
|
|
81,777 |
|
|
Prepaid expenses and other current assets
|
|
|
71,834 |
|
|
|
10,207 |
|
|
|
|
|
|
|
|
|
|
|
82,041 |
|
|
|
50,724 |
|
|
|
8,566 |
|
|
|
1 |
|
|
|
|
|
|
|
59,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,075,184 |
|
|
|
377,711 |
|
|
|
4,760 |
|
|
|
|
|
|
|
1,457,655 |
|
|
|
920,755 |
|
|
|
323,621 |
|
|
|
3,413 |
|
|
|
|
|
|
|
1,247,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
109,671 |
|
|
|
192,491 |
|
|
|
|
|
|
|
|
|
|
|
302,162 |
|
|
|
108,712 |
|
|
|
193,762 |
|
|
|
|
|
|
|
|
|
|
|
302,474 |
|
Intangible assets, net
|
|
|
22 |
|
|
|
969,227 |
|
|
|
3,146 |
|
|
|
|
|
|
|
972,395 |
|
|
|
44 |
|
|
|
963,944 |
|
|
|
3,206 |
|
|
|
|
|
|
|
967,194 |
|
Goodwill
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
121,152 |
|
|
|
|
|
|
|
|
|
|
|
121,152 |
|
Marketable securities
|
|
|
15,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,494 |
|
|
|
18,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,502 |
|
Deferred income tax assets
|
|
|
(5,031 |
) |
|
|
269,697 |
|
|
|
1,063 |
|
|
|
|
|
|
|
265,729 |
|
|
|
(9,483 |
) |
|
|
239,452 |
|
|
|
1,063 |
|
|
|
|
|
|
|
231,032 |
|
Other assets
|
|
|
34,379 |
|
|
|
48,181 |
|
|
|
|
|
|
|
|
|
|
|
82,560 |
|
|
|
30,225 |
|
|
|
46,874 |
|
|
|
|
|
|
|
|
|
|
|
77,099 |
|
Investments in subsidiaries
|
|
|
2,351,045 |
|
|
|
|
|
|
|
|
|
|
|
(2,351,045 |
) |
|
|
|
|
|
|
2,299,835 |
|
|
|
|
|
|
|
|
|
|
|
(2,299,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,580,764 |
|
|
$ |
1,978,459 |
|
|
$ |
8,969 |
|
|
$ |
(2,351,045 |
) |
|
$ |
3,217,147 |
|
|
$ |
3,368,590 |
|
|
$ |
1,888,805 |
|
|
$ |
7,682 |
|
|
$ |
(2,299,835 |
) |
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
41,625 |
|
|
$ |
27,656 |
|
|
$ |
88 |
|
|
$ |
|
|
|
$ |
69,369 |
|
|
$ |
60,700 |
|
|
$ |
23,762 |
|
|
$ |
77 |
|
|
$ |
|
|
|
$ |
84,539 |
|
|
Accrued expenses
|
|
|
69,121 |
|
|
|
371,388 |
|
|
|
3 |
|
|
|
|
|
|
|
440,512 |
|
|
|
151,125 |
|
|
|
368,491 |
|
|
|
4 |
|
|
|
|
|
|
|
519,620 |
|
|
Income taxes payable
|
|
|
76,229 |
|
|
|
(1,149 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
74,959 |
|
|
|
24,123 |
|
|
|
(1,701 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
22,301 |
|
|
Current portion of long-term debt
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
366,975 |
|
|
|
397,895 |
|
|
|
(30 |
) |
|
|
|
|
|
|
764,840 |
|
|
|
580,948 |
|
|
|
390,552 |
|
|
|
(40 |
) |
|
|
|
|
|
|
971,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
15,674 |
|
|
|
4,183 |
|
|
|
|
|
|
|
|
|
|
|
19,857 |
|
|
|
17,371 |
|
|
|
2,989 |
|
|
|
|
|
|
|
|
|
|
|
20,360 |
|
Intercompany payable (receivable)
|
|
|
765,665 |
|
|
|
(777,616 |
) |
|
|
11,951 |
|
|
|
|
|
|
|
|
|
|
|
796,849 |
|
|
|
(808,256 |
) |
|
|
11,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,548,314 |
|
|
|
(375,538 |
) |
|
|
11,921 |
|
|
|
|
|
|
|
1,184,697 |
|
|
|
1,395,168 |
|
|
|
(414,715 |
) |
|
|
11,367 |
|
|
|
|
|
|
|
991,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,032,450 |
|
|
|
2,353,997 |
|
|
|
(2,952 |
) |
|
|
(2,351,045 |
) |
|
|
2,032,450 |
|
|
|
1,973,422 |
|
|
|
2,303,520 |
|
|
|
(3,685 |
) |
|
|
(2,299,835 |
) |
|
|
1,973,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
3,580,764 |
|
|
$ |
1,978,459 |
|
|
$ |
8,969 |
|
|
$ |
(2,351,045 |
) |
|
$ |
3,217,147 |
|
|
$ |
3,368,590 |
|
|
$ |
1,888,805 |
|
|
$ |
7,682 |
|
|
$ |
(2,299,835 |
) |
|
$ |
2,965,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 | |
|
Three Months Ended March 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
97,832 |
|
|
$ |
462,668 |
|
|
$ |
1,557 |
|
|
$ |
(97,458 |
) |
|
$ |
464,599 |
|
|
$ |
94,318 |
|
|
$ |
349,259 |
|
|
$ |
440 |
|
|
$ |
(93,447 |
) |
|
$ |
350,570 |
|
|
Royalty revenue
|
|
|
|
|
|
|
19,636 |
|
|
|
|
|
|
|
|
|
|
|
19,636 |
|
|
|
|
|
|
|
18,055 |
|
|
|
|
|
|
|
|
|
|
|
18,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
97,832 |
|
|
|
482,304 |
|
|
|
1,557 |
|
|
|
(97,458 |
) |
|
|
484,235 |
|
|
|
94,318 |
|
|
|
367,314 |
|
|
|
440 |
|
|
|
(93,447 |
) |
|
|
368,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
37,355 |
|
|
|
151,782 |
|
|
|
725 |
|
|
|
(97,458 |
) |
|
|
92,404 |
|
|
|
39,170 |
|
|
|
126,263 |
|
|
|
230 |
|
|
|
(93,447 |
) |
|
|
72,216 |
|
|
Selling, general and administrative
|
|
|
49,086 |
|
|
|
121,661 |
|
|
|
(404 |
) |
|
|
|
|
|
|
170,343 |
|
|
|
39,079 |
|
|
|
88,330 |
|
|
|
96 |
|
|
|
|
|
|
|
127,505 |
|
|
Mylan transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,277 |
|
|
Research and development
|
|
|
873 |
|
|
|
114,009 |
|
|
|
|
|
|
|
|
|
|
|
114,882 |
|
|
|
161 |
|
|
|
11,311 |
|
|
|
|
|
|
|
|
|
|
|
11,472 |
|
|
Depreciation and amortization
|
|
|
4,010 |
|
|
|
30,295 |
|
|
|
60 |
|
|
|
|
|
|
|
34,365 |
|
|
|
3,887 |
|
|
|
37,373 |
|
|
|
166 |
|
|
|
|
|
|
|
41,426 |
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
1,864 |
|
|
|
|
|
|
|
|
|
|
|
2,023 |
|
|
Gain on sale of products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
91,324 |
|
|
|
417,747 |
|
|
|
381 |
|
|
|
(97,458 |
) |
|
|
411,994 |
|
|
|
85,733 |
|
|
|
264,294 |
|
|
|
492 |
|
|
|
(93,447 |
) |
|
|
257,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
6,508 |
|
|
|
64,557 |
|
|
|
1,176 |
|
|
|
|
|
|
|
72,241 |
|
|
|
8,585 |
|
|
|
103,020 |
|
|
|
(52 |
) |
|
|
|
|
|
|
111,553 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,853 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
5,960 |
|
|
|
2,042 |
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
2,277 |
|
|
Interest expense
|
|
|
(2,981 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(2,984 |
) |
|
|
(2,686 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(2,701 |
) |
|
Gain on early extinguishment of debt
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,853 |
) |
|
Other, net
|
|
|
(57 |
) |
|
|
(534 |
) |
|
|
81 |
|
|
|
|
|
|
|
(510 |
) |
|
|
(77 |
) |
|
|
(32 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
(249 |
) |
|
Equity in earnings (loss) of subsidiaries
|
|
|
51,218 |
|
|
|
|
|
|
|
|
|
|
|
(51,218 |
) |
|
|
|
|
|
|
79,657 |
|
|
|
|
|
|
|
|
|
|
|
(79,657 |
) |
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(10,649 |
) |
|
|
10,781 |
|
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
(12,193 |
) |
|
|
12,342 |
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
44,406 |
|
|
|
10,351 |
|
|
|
(51 |
) |
|
|
(51,218 |
) |
|
|
3,488 |
|
|
|
59,890 |
|
|
|
12,530 |
|
|
|
(289 |
) |
|
|
(79,657 |
) |
|
|
(7,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
50,914 |
|
|
|
74,908 |
|
|
|
1,125 |
|
|
|
(51,218 |
) |
|
|
75,729 |
|
|
|
68,475 |
|
|
|
115,550 |
|
|
|
(341 |
) |
|
|
(79,657 |
) |
|
|
104,027 |
|
Income tax expense (benefit)
|
|
|
237 |
|
|
|
24,263 |
|
|
|
394 |
|
|
|
|
|
|
|
24,894 |
|
|
|
(1,580 |
) |
|
|
38,621 |
|
|
|
(119 |
) |
|
|
|
|
|
|
36,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
50,677 |
|
|
|
50,645 |
|
|
|
731 |
|
|
|
(51,218 |
) |
|
|
50,835 |
|
|
|
70,055 |
|
|
|
76,929 |
|
|
|
(222 |
) |
|
|
(79,657 |
) |
|
|
67,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, including loss on
impairment
|
|
|
|
|
|
|
(247 |
) |
|
|
|
|
|
|
|
|
|
|
(247 |
) |
|
|
|
|
|
|
4,682 |
|
|
|
|
|
|
|
|
|
|
|
4,682 |
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
(89 |
) |
|
|
|
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net
|
|
|
|
|
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
|
|
|
|
2,950 |
|
|
|
|
|
|
|
|
|
|
|
2,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
50,677 |
|
|
$ |
50,487 |
|
|
$ |
731 |
|
|
$ |
(51,218 |
) |
|
$ |
50,677 |
|
|
$ |
70,055 |
|
|
$ |
79,879 |
|
|
$ |
(222 |
) |
|
$ |
(79,657 |
) |
|
$ |
70,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 | |
|
Three Months Ended March 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Non | |
|
|
|
|
|
Non | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
King | |
|
|
|
Guarantor | |
|
Guarantor | |
|
King | |
|
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Consolidated | |
|
King | |
|
Subsidiaries | |
|
Subsidiaries | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Cash flows from operating activities of continuing operations
|
|
$ |
(38,462 |
) |
|
$ |
33,187 |
|
|
$ |
(317 |
) |
|
$ |
(5,592 |
) |
|
$ |
(7,771 |
) |
|
$ |
30,702 |
|
|
$ |
572 |
|
|
$ |
23,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
130,279 |
|
|
|
|
|
|
|
|
|
|
|
130,279 |
|
|
|
(9,564 |
) |
|
|
1,582 |
|
|
|
|
|
|
|
(7,982 |
) |
|
Purchases of investments in debt securities
|
|
|
(784,976 |
) |
|
|
|
|
|
|
|
|
|
|
(784,976 |
) |
|
|
(317,730 |
) |
|
|
|
|
|
|
|
|
|
|
(317,730 |
) |
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
793,485 |
|
|
|
|
|
|
|
|
|
|
|
793,485 |
|
|
|
167,145 |
|
|
|
|
|
|
|
|
|
|
|
167,145 |
|
|
Purchases of property, plant and equipment
|
|
|
(5,095 |
) |
|
|
(3,673 |
) |
|
|
|
|
|
|
(8,768 |
) |
|
|
(2,081 |
) |
|
|
(6,994 |
) |
|
|
|
|
|
|
(9,075 |
) |
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Purchases of product rights
|
|
|
|
|
|
|
(23,926 |
) |
|
|
|
|
|
|
(23,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow International Limited collaboration agreement
|
|
|
|
|
|
|
(35,000 |
) |
|
|
|
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities of
continuing operations
|
|
|
133,693 |
|
|
|
(62,599 |
) |
|
|
|
|
|
|
71,094 |
|
|
|
(162,229 |
) |
|
|
(5,412 |
) |
|
|
|
|
|
|
(167,641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
6,468 |
|
|
|
|
|
|
|
|
|
|
|
6,468 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
Excess tax benefit from stock-based compensation
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(163,350 |
) |
|
|
|
|
|
|
|
|
|
|
(163,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(10,610 |
) |
|
|
|
|
|
|
|
|
|
|
(10,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
(29,304 |
) |
|
|
28,761 |
|
|
|
543 |
|
|
|
|
|
|
|
49,760 |
|
|
|
(50,030 |
) |
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of
continuing operations
|
|
|
203,478 |
|
|
|
28,761 |
|
|
|
543 |
|
|
|
232,782 |
|
|
|
49,816 |
|
|
|
(50,030 |
) |
|
|
270 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
298,709 |
|
|
|
(651 |
) |
|
|
226 |
|
|
|
298,284 |
|
|
|
(120,184 |
) |
|
|
(24,740 |
) |
|
|
842 |
|
|
|
(144,082 |
) |
Cash and cash equivalents, beginning of period
|
|
|
26,802 |
|
|
|
1,071 |
|
|
|
2,141 |
|
|
|
30,014 |
|
|
|
164,451 |
|
|
|
27,035 |
|
|
|
1,170 |
|
|
|
192,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
325,511 |
|
|
$ |
420 |
|
|
$ |
2,367 |
|
|
$ |
328,298 |
|
|
$ |
44,267 |
|
|
$ |
2,295 |
|
|
$ |
2,012 |
|
|
$ |
48,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk
Factors set out below and in our Annual Report on
Form 10-K for the
year ended December 31, 2005, which are supplemented by the
discussion which follows; (b) our audited consolidated
financial statements and related notes which are included in our
Annual Report on
Form 10-K for the
year ended December 31, 2005; and (c) our unaudited
consolidated financial statements and related notes which are
included in this report on
Form 10-Q. Please
see the sections entitled Risk Factors and A
Warning About Forward-Looking Statements for a discussion
of the uncertainties, risks and assumptions associated with
these statements.
I. OVERVIEW
Our Business
We are a vertically integrated pharmaceutical company that
develops, manufactures, markets and sells branded prescription
pharmaceutical products. To capitalize on opportunities in the
pharmaceutical industry, we seek to develop,
in-license, acquire or
obtain commercialization rights to novel branded prescription
pharmaceutical products in attractive markets.
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. We work to achieve organic
growth by maximizing the potential of our currently marketed
products through sales and marketing and prudent product
life-cycle management. We also work to achieve organic growth
through the successful development of new branded pharmaceutical
products. Additionally, we seek to achieve growth through the
acquisition or
in-licensing of novel
branded pharmaceutical products in later stages of development
and technologies that have significant market potential that
complement our three 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.
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.
29
|
|
II. |
RESULTS OF OPERATIONS |
|
|
|
Three Months Ended March 31, 2006 and 2005 |
The following table summarizes total revenues and cost of
revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Total Revenues
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
417,620 |
|
|
$ |
321,769 |
|
|
Meridian Medical Technologies
|
|
|
41,284 |
|
|
|
23,214 |
|
|
Royalties
|
|
|
19,636 |
|
|
|
18,055 |
|
|
Contract manufacturing
|
|
|
5,695 |
|
|
|
5,587 |
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
484,235 |
|
|
$ |
368,625 |
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
65,391 |
|
|
$ |
49,657 |
|
|
Meridian Medical Technologies
|
|
|
19,247 |
|
|
|
10,901 |
|
|
Royalties
|
|
|
2,370 |
|
|
|
2,249 |
|
|
Contract manufacturing
|
|
|
5,396 |
|
|
|
9,409 |
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
92,404 |
|
|
$ |
72,216 |
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$ |
352,229 |
|
|
$ |
272,112 |
|
|
Meridian Medical Technologies
|
|
|
22,037 |
|
|
|
12,313 |
|
|
Royalties
|
|
|
17,266 |
|
|
|
15,806 |
|
|
Contract manufacturing
|
|
|
299 |
|
|
|
(3,822 |
) |
|
|
|
|
|
|
|
Total gross profit
|
|
$ |
391,831 |
|
|
$ |
296,409 |
|
|
|
|
|
|
|
|
The following table summarizes our gross to net sales deductions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Gross Sales
|
|
$ |
607,859 |
|
|
$ |
466,366 |
|
Returns
|
|
|
(702 |
) |
|
|
(4,438 |
) |
Chargebacks
|
|
|
29,390 |
|
|
|
18,558 |
|
Commercial Rebates
|
|
|
56,278 |
|
|
|
34,718 |
|
Medicaid Rebates
|
|
|
8,712 |
|
|
|
16,861 |
|
Medicare Part D Rebates
|
|
|
11,168 |
|
|
|
|
|
Trade Discounts/Other
|
|
|
19,028 |
|
|
|
27,360 |
|
|
|
|
|
|
|
|
|
|
|
483,985 |
|
|
|
373,307 |
|
Discontinued Operations
|
|
|
(250 |
) |
|
|
4,682 |
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
484,235 |
|
|
$ |
368,625 |
|
|
|
|
|
|
|
|
Gross sales were higher in 2006 compared to 2005 primarily due
to the effect of higher unit sales as a result of the effect of
wholesale inventory reductions of some of our branded
pharmaceutical products during 2005, particularly
Altace®,
and price increases.
30
Medicaid rebate expense was lower in 2006 than in 2005 primarily
due to the Government shifting persons who were covered by the
Medicaid Program to the Medicare Part D Program.
During January 2006, the Medicare Prescription Drug
Improvement and Modernization Act became effective, which
provides outpatient prescription drug coverage to senior
citizens and certain disabled citizens in the United States. We
have contracts with organizations that administer the Medicare
Part D Program which require us to pay rebates based on
contractual pricing and actual utilization under the plans.
The following tables provide the activity and ending balances
for our significant gross to net categories:
|
|
|
Accrual for Rebates (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance at January 1, net of prepaid amounts
|
|
$ |
119,914 |
|
|
$ |
172,161 |
|
Current provision related to sales made in current period
|
|
|
73,123 |
|
|
|
55,456 |
|
Current provision related to sales made in prior periods
|
|
|
(3,532 |
) |
|
|
(9,202 |
) |
Actual rebates
|
|
|
(109,492 |
) |
|
|
(77,083 |
) |
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$ |
80,013 |
|
|
$ |
141,332 |
|
|
|
|
|
|
|
|
|
|
|
Accrual for Returns (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
50,902 |
|
|
$ |
122,863 |
|
Current provision
|
|
|
(702 |
) |
|
|
(4,438 |
) |
Actual returns
|
|
|
(7,692 |
) |
|
|
(45,394 |
) |
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$ |
42,508 |
|
|
$ |
73,031 |
|
|
|
|
|
|
|
|
|
|
|
Accrual for Chargebacks (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Balance at January 1
|
|
$ |
13,153 |
|
|
$ |
27,953 |
|
Current provision
|
|
|
29,390 |
|
|
|
18,558 |
|
Actual chargebacks
|
|
|
(25,972 |
) |
|
|
(22,048 |
) |
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$ |
16,571 |
|
|
$ |
24,463 |
|
|
|
|
|
|
|
|
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 and
retail inventory levels of our products. Based on data received
from our inventory management agreements with our three key
wholesale customers, there was a significant reduction of
wholesale inventory levels of our products during the first
quarter of 2005. This reduction resulted in a change in estimate
during the first quarter of 2005 that decreased the reserve for
returns by approximately $20.0 million and increased net
sales from branded pharmaceuticals, excluding the adjustment to
sales classified as discontinued operations, by the same amount.
The Accrual for Returns, in the table above reflects
this adjustment.
As a result of the actual returns during the first quarter of
2006, the estimated rate of returns used in the calculation of
our returns reserve for some of our products continued to
improve. During the first quarter of 2006, we decreased our
reserve for returns by approximately $8.0 million and
increased our net sales from branded pharmaceuticals, excluding
the adjustment to sales classified as discontinued operations,
by the same amount. As a result of this increase in net sales,
the co-promotion expense related to net sales of
Altace®
in the first quarter of 2006 increased by approximately
$1.0 million and royalty
31
expense related to net sales of
Skelaxin®
increased by approximately $1.0 million. The effect of the
change in estimate on first quarter 2006 operating income was,
therefore, approximately $6.0 million. The Accrual
for Returns table above reflects this adjustment.
Branded Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
Change | |
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Branded Pharmaceutical revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
158,848 |
|
|
$ |
85,697 |
|
|
$ |
73,151 |
|
|
|
85.4 |
% |
|
Skelaxin®
|
|
|
98,626 |
|
|
|
71,888 |
|
|
|
26,738 |
|
|
|
37.2 |
|
|
Thrombin-JMI®
|
|
|
58,197 |
|
|
|
63,266 |
|
|
|
(5,069 |
) |
|
|
(8.0 |
) |
|
Levoxyl®
|
|
|
30,955 |
|
|
|
39,971 |
|
|
|
(9,016 |
) |
|
|
(22.6 |
) |
|
Sonata®
|
|
|
21,267 |
|
|
|
19,508 |
|
|
|
1,759 |
|
|
|
9.0 |
|
|
Other
|
|
|
49,727 |
|
|
|
41,439 |
|
|
|
8,288 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
417,620 |
|
|
|
321,769 |
|
|
|
95,851 |
|
|
|
29.8 |
|
Cost of Revenues
|
|
|
65,391 |
|
|
|
49,657 |
|
|
|
15,734 |
|
|
|
31.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
352,229 |
|
|
$ |
272,112 |
|
|
$ |
80,117 |
|
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from branded pharmaceutical products were higher in
2006 than in 2005 primarily due to the effect of higher unit
sales as a result of the effect of wholesale inventory
reductions of some of our branded pharmaceutical products,
particularly
Altace®,
during the first quarter of 2005, and price increases. These
factors were partially offset by the effect of a greater
reduction in the returns reserve during 2005, as described
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 March 31, 2006, are at normalized levels.
Accordingly, we do not believe net sales of branded
pharmaceutical products will continue to increase at the rate
experienced in the first quarter of 2006. We estimate that
wholesale and retail inventories of our products as of
March 31, 2006 represent gross sales of approximately
$155.0 million to $175.0 million. For a discussion
regarding the potential risk of generic competition for
Altace®,
Skelaxin®,
and
Sonata®,
please see Other Legal Proceedings included in
Note 9, Contingencies, in Item 1,
Financial Statements.
Net sales of
Altace®
were higher in 2006 than in 2005 primarily due to higher unit
sales as a result of the effects of wholesale inventory
reductions of
Altace®
in 2005, a reduction in the reserve for returns and other trade
discounts in 2006 and price increases. Since we believe that
wholesale inventory levels of
Altace®
are currently normalized, we do not believe
Altace®
net sales will continue to increase at the rate experienced in
the first quarter of 2006. Total prescriptions for
Altace®
decreased approximately 1% in 2006 from 2005 according to IMS
America, Ltd. (IMS) monthly prescription data. For a
discussion regarding the risk of potential generic competition
for
Altace®,
please see Other Legal Proceedings included in
Note 9, Contingencies, in Item 1,
Financial Statements.
Net sales of
Skelaxin®
increased in 2006 from 2005 primarily due to higher unit sales
as a result of the effects of wholesale inventory reductions of
Skelaxin®
in 2005, a reduction in the reserve for returns, government
rebates and other trade discounts in 2006, and price increases.
Since we believe that wholesale inventory levels of
Skelaxin®
are currently normalized, we do not believe
Skelaxin®
net sales will continue
32
to increase at the rate experienced in the first quarter of
2006. Total prescriptions for Skelaxin declined approximately 7%
in 2006 from 2005 according to IMS monthly prescription data.
The declining prescription trend may not continue at the current
rate due to enhanced promotional efforts.
As previously disclosed, the patents associated with
Skelaxin®
are the subject of multiple challenges. Under the current
circumstances, the continued exclusivity of
Skelaxin®
is unpredictable and we cannot be certain 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 Other Legal Proceedings
included in Note 9, Contingencies, in
Item 1, Financial Statements.
Net sales of
Thrombin-JMI®
decreased in 2006 compared to 2005 primarily due to timing of
shipments and to an increase in chargebacks and commercial
rebates during 2006. The first quarter of 2006 net sales were
greater than each of the three previous quarters.
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.
Net sales of
Levoxyl®
decreased in 2006 from 2005. During 2005, net sales of
Levoxyl®
benefited from the reduction in the reserve for returns
described above and a reduction in the reserve for rebates,
which benefits were partially offset by the effect of wholesale
inventory reductions. During 2006, net sales of
Levoxyl®
benefited from a favorable change in estimate in the
products reserve for Medicaid rebates as a result of the
Medicaid settlement which was final settled and paid during the
first quarter of 2006 of approximately $7.0 million. This
benefit was substantially offset by increases in Medicaid rebate
reserves for other products as a result of the Medicaid
settlement. We do not expect this benefit to continue and
therefore anticipate lower net sales of
Levoxyl®
in future quarters. Total prescriptions for
Levoxyl®
decreased approximately 21% in 2006 from 2005 according to IMS
monthly prescription data. We believe total prescriptions will
continue to decline due to generic competition.
Net sales of
Sonata®
were higher in 2006 than in 2005 primarily due to higher unit
sales as a result of the effects of wholesale inventory
reductions of
Sonata®
in 2005 and price increases. Total prescriptions for
Sonata®
decreased approximately 23% in 2006 from 2005 according to IMS
monthly prescription data. The decrease in prescriptions during
2006 was primarily due to increased new competitors that entered
the market in 2005. We believe the products total
prescriptions in 2006 may continue to decrease as another
potential new competitor may enter the market during 2006. For a
discussion regarding the risk of potential generic competition
for
Sonata®,
please see Other Legal Proceedings included in
Note 9, Contingencies, in Item 1,
Financial Statements.
Net sales of other branded pharmaceutical products were higher
in 2006 than in 2005 primarily due to the effects of wholesale
inventory reductions of other branded pharmaceutical products in
2005. Most of these products are not promoted through our sales
force and prescriptions for many of these products are
declining. We do not believe net sales of other branded
pharmaceutical products will grow from the level of net sales
achieved in 2006.
Cost of revenues from branded pharmaceutical products increased
in 2006 compared to 2005 primarily due to the cost of revenues
associated with higher unit sales of branded prescription
products in 2006.
33
As previously disclosed, we anticipate cost of revenues will
increase in 2006 compared to 2005 due to additional royalties we
will pay on
Skelaxin®
which began on January 1, 2006.
|
|
|
Meridian Medical Technologies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
Change | |
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Meridian Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies revenue
|
|
$ |
41,284 |
|
|
$ |
23,214 |
|
|
$ |
18,070 |
|
|
|
77.8 |
% |
|
Cost of Revenues
|
|
|
19,247 |
|
|
|
10,901 |
|
|
|
8,346 |
|
|
|
76.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
22,037 |
|
|
$ |
12,313 |
|
|
$ |
9,724 |
|
|
|
79.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues from Meridian Medical Technologies was
due to increases in revenues from both sales of
Epipen®
to Dey, L.P. and government sales.
Epipen®
sales are based on our supply agreement with Dey, L.P., which
markets, distributes and sells the product worldwide. Revenues
from Meridian Medical Technologies fluctuate based on buying
patterns of Dey, L.P. and the government. We do not believe net
sales of Meridian Medical Technologies will continue to grow at
the rate experienced in the first quarter of 2006. Total
prescriptions for
Epipen®
in the United States increased approximately 11% in 2006 from
2005 according to IMS monthly prescription data.
Cost of revenues from Meridian Medical Technologies increased in
2006 primarily due to the cost of revenues associated with
higher unit sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
Change | |
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Royalty revenue
|
|
$ |
19,636 |
|
|
$ |
18,055 |
|
|
$ |
1,581 |
|
|
|
8.8 |
% |
|
Cost of Revenues
|
|
|
2,370 |
|
|
|
2,249 |
|
|
|
121 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
17,266 |
|
|
$ |
15,806 |
|
|
$ |
1,460 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Other Legal Proceedings included in
Note 9 Contingencies in Item 1,
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change | |
|
|
|
|
| |
|
|
For the Three Months | |
|
|
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Contract manufacturing revenue
|
|
$ |
5,695 |
|
|
$ |
5,587 |
|
|
$ |
108 |
|
|
|
1.9 |
% |
|
Cost of Revenues
|
|
|
5,396 |
|
|
|
9,409 |
|
|
|
(4,013 |
) |
|
|
(42.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin
|
|
$ |
299 |
|
|
$ |
(3,822 |
) |
|
$ |
4,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
Change | |
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Total gross profit
|
|
$ |
391,831 |
|
|
$ |
296,409 |
|
|
$ |
95,422 |
|
|
|
32.2 |
% |
Selling, general and administrative
|
|
|
170,343 |
|
|
|
130,782 |
|
|
|
39,561 |
|
|
|
30.2 |
|
Research and development
|
|
|
114,882 |
|
|
|
11,472 |
|
|
|
103,410 |
|
|
|
>100.0 |
|
Depreciation and amortization
|
|
|
34,365 |
|
|
|
41,426 |
|
|
|
(7,061 |
) |
|
|
(17.0 |
) |
Merger, restructuring, and other nonrecurring charges
|
|
|
|
|
|
|
2,023 |
|
|
|
(2,023 |
) |
|
|
(100.0 |
) |
Gain on sale of products
|
|
|
|
|
|
|
(847 |
) |
|
|
847 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
72,241 |
|
|
$ |
111,553 |
|
|
$ |
(39,312 |
) |
|
|
(35.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
Change | |
|
|
Ended March 31, | |
|
2006 vs. 2005 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$ |
105,054 |
|
|
$ |
92,850 |
|
|
$ |
12,204 |
|
|
|
13.1 |
% |
Mylan transaction costs
|
|
|
|
|
|
|
3,277 |
|
|
|
(3,277 |
) |
|
|
(100.0 |
) |
Co-promotion fees
|
|
|
65,289 |
|
|
|
34,655 |
|
|
|
30,634 |
|
|
|
88.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$ |
170,343 |
|
|
$ |
130,782 |
|
|
$ |
39,561 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses increased in
2006 compared to 2005 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 2006 as compared to 2005 and an increase in operating
expenses associated with sales and marketing. For a discussion
regarding the increase in net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, using the
modified prospective application transition method. Our prior
period condensed consolidated financial statements have not been
restated and therefore do not reflect the recognition of
stock-based compensation costs. During the first quarter of
2006, we incurred stock-based compensation costs of
$3.9 million, $2.4 million of which is included in
selling, general and administrative expenses.
Selling, general and administrative expense includes the
following special items:
|
|
|
|
|
Charges of $3.0 million and $3.7 million in 2006 and
2005, 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 included in Note 9,
Contingencies, in Item 1, Financial
Statements. |
|
|
|
A charge in the amount of $3.3 million in 2005 for
professional fees and expenses related to the terminated merger
agreement with Mylan Laboratories, Inc. |
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
35
valuation adjustment charges; charges resulting from the early
extinguishments of debt; asset impairment charges; expenses of
drug recalls; and gains and losses resulting from the
divestiture of assets. We believe the identification of special
items enhances an analysis of our ongoing, underlying business
and an analysis of our financial results when comparing those
results to that of a previous or subsequent like period.
However, it should be noted that the determination of whether to
classify an item as a special charge involves judgments by us.
As a percentage of total revenues, total selling, general, and
administrative expenses were 35.2% in 2006 compared to 35.5% in
2005.
|
|
|
Research and Development Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
|
|
Ended March 31, | |
|
Change | |
|
|
| |
|
2006 vs. 2005 | |
|
|
2006 | |
|
2005 | |
|
$ | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Research and development
|
|
$ |
29,882 |
|
|
$ |
11,472 |
|
|
$ |
18,410 |
|
Research and development in process upon acquisition
|
|
|
85,000 |
|
|
|
|
|
|
|
85,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$ |
114,882 |
|
|
$ |
11,472 |
|
|
$ |
103,410 |
|
|
|
|
|
|
|
|
|
|
|
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.
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, as the projects
have not received regulatory approval and have no alternative
future use. During 2006 we incurred a charge of
$85.0 million for our acquisition of in-process research
and development associated with our collaboration with Arrow
International Limited and certain of its affiliates, not
including Cobalt Pharmaceuticals, Inc. (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. Arrow will have
responsibility for the manufacture and supply of new
formulations of ramipril for us; however, under certain
conditions, we may manufacture and supply the formulations of
ramipril instead. Additionally, Arrow will earn fees for the
manufacture and supply of the new formulations of ramipril.
Arrow filed an NDA for a novel formulation of ramipril in
January 2006. The success of the project will depend on
additional development activities and FDA approval. The
estimated costs to complete the project are approximately
$3.5 million. We currently anticipate obtaining FDA
approval for the novel formulation during 2007 or 2008.
|
|
|
Depreciation and Amortization Expense |
Depreciation and amortization expense decreased in 2006 from
2005 primarily due to completing our amortization of the
purchase price associated with the patents relating to
Skelaxin®
in the second quarter of 2005.
As of March 31, 2006, the net intangible assets associated
with
Intal®,
Tilade®,
and
Synercid®
totaled approximately $191.3 million. We believe that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if our estimates regarding future cash flows prove to be
incorrect or adversely change, we may have to reduce the
estimated remaining useful life and/or write-off a portion or
all of these intangible assets.
36
Certain generic pharmaceutical companies have challenged patents
on
Altace®,
Skelaxin®,
and
Sonata®.
For additional information, please see Other Legal
Proceedings included in Note 9,
Contingencies, in Item 1, Financial
Statements. If generic versions of
Altace®,
Skelaxin®
or
Sonata®
enter 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 March 31, 2006, the net
carrying value of the property, plant and equipment at the
Rochester facility, excluding that associated with the
production of
Bicillin®,
was $64.7 million. Overall production volume at this
facility declined in recent years. 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 decline further 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.
The net book value of some of our manufacturing facilities
currently exceeds fair market value. We currently believe that
the long-term assets associated with these facilities are not
impaired based on estimated undiscounted future cash flows.
However, if we were to approve a plan to sell or close any of
the facilities for which the carrying value exceeds fair market
value, we would have to write off a portion of the assets, or
reduce the estimated useful life of the assets, which would
accelerate depreciation.
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses
resulting in a net charge totaling $1.2 million during
2005. These other special items included the following:
|
|
|
|
|
Restructuring charges in the amount of $2.0 million in 2005
primarily due to a decision to discontinue some relatively
insignificant products associated with our Meridian Medical
Technologies business. |
|
|
|
Gain of $0.8 million in 2005 primarily due to the sale of
some of our assets. |
Non-Operating Items
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Interest income
|
|
$ |
5,960 |
|
|
$ |
2,277 |
|
Interest expense
|
|
|
(2,984 |
) |
|
|
(2,701 |
) |
Loss on investment
|
|
|
|
|
|
|
(6,853 |
) |
Gain on early extinguishment of debt
|
|
|
1,022 |
|
|
|
|
|
Other, net
|
|
|
(510 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
3,488 |
|
|
|
(7,526 |
) |
Income tax expense
|
|
|
24,894 |
|
|
|
36,922 |
|
Discontinued operations
|
|
|
(158 |
) |
|
|
2,950 |
|
Interest income increased during 2006 compared to 2005 primarily
due to an increase in interest rates and a higher total balance
of cash, cash equivalents and investments in debt securities
in 2006.
37
Special items affecting other income (expense) included the
following:
|
|
|
|
|
A charge of $6.9 million in 2005 related to our investment
in Novavax, Inc. We sold our investment in Novavax, Inc. during
the third quarter of 2005. |
|
|
|
Income of $1.0 million during 2006 resulting from the early
retirement of $165.0 million of our
23/4
% Convertible Debentures due November 15, 2021. |
During 2006, our effective income tax rate for continuing
operations was 32.9%. This rate differs from the federal
statutory rate of 35% due to tax benefits related to charitable
contributions of inventory, tax-exempt interest income, domestic
manufacturing and the effect of special items during the first
quarter 2006, which benefits were partially offset by state
taxes.
During 2005, our effective income tax rate for continuing
operations was 35.5%.
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 2006 and 2005.
Discontinued operations during 2006 and 2005 are primarily due
to changes in estimated reserves for returns and rebates.
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.
On March 1, 2006, we acquired the exclusive right to market
and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD. Under the terms of the agreements, the initial
purchase price was approximately $23.9 million, plus
acquisition costs of approximately $0.6 million. As an
additional component of the purchase price, we will pay Allerex
an earn-out equal to a percentage of future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, we will increase intangible assets by the
amount of the accrual. The aggregate of these payments will not
exceed $13.2 million. During the first quarter of 2006, the
accrued earn-out equaled $0.2 million and intangible assets
was increased by that same amount.
On February 12, 2006, we entered into a collaboration with
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 NDAs regarding novel
formulations of ramipril and intellectual property, including
patent rights and technology licenses relating to these novel
formulations. Arrow will be responsible for the manufacture and
supply of the new formulations of ramipril for us; however,
under certain conditions we may manufacture and supply the
formulations of ramipril instead.
38
Upon execution of the agreements, we made an initial 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 fulfillment of certain conditions. Additionally, Arrow
will earn fees for the manufacture and supply of the new
formulations of ramipril.
We entered into an agreement with Cobalt Pharmaceuticals, Inc.
(Cobalt) an affiliate of Arrow, whereby Cobalt will
have the non-exclusive right to distribute a generic version of
our currently marketed
Altace®
product in the U.S. market, which would be supplied by us.
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. As
of January 1, 2006, we began paying royalties on net sales
of products containing metaxalone to Mutual. 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, Inc. to develop and
commercialize
Remoxytm
and other abuse-deterrent 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 made an upfront
cash payment of $150.0 million to Pain Therapeutics. In
addition, 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-deterrent 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 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 Technologies, Inc. to jointly develop and, on obtaining
necessary regulatory approvals, commercialize Palatins
bremelanotide, which we formerly referred to as
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 bremelanotide, 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
Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of
Sonata®.
We believe these milestones have not been 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.
39
|
|
|
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 2005 State Settlement
Agreements). On March 6, 2006, we entered into a
definitive settlement agreement with the remaining state on
substantially the same terms as the other state settlements
(this most recent state settlement, the Federal Settlement
Agreement and the 2005 State Settlement Agreements are
collectively referred to as the Settlement
Agreements). Consummation of the Federal Settlement
Agreement and some state Settlement Agreements was subject to
court approval, which was granted by the United States District
Court for the Eastern District of Pennsylvania (District
Court) during the first quarter of 2006.
During the first quarter of 2006, we paid approximately
$129.3 million, comprising (i) all amounts due under
each of the Settlement Agreements and (ii) all our
obligations to reimburse other parties for expenses related to
the settlement, including the previously disclosed legal fees of
approximately $0.8 million and the previously disclosed
settlement costs of approximately $1.0 million.
The individual purportedly acting as a relator under
the False Claims Act has appealed certain decisions of the
District Court relating to the relators dispute with
certain states over a potential share award. Any share award
would be paid solely by the government and would not affect the
amount paid by us pursuant to the Settlement Agreements.
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.
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 our Current Report on
Form 8-K filed
November 4, 2005, which is incorporated herein by reference.
As previously reported, the Securities and Exchange Commission
(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.
40
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.
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 King, our directors, former directors, executive
officers, former executive officers, our 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. 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 our 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 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
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.
In November 2005, the parties agreed to submit the matter to
non-binding mediation. After an extensive mediation process, an
agreement in principle to settle the litigation was reached on
April 26, 2006. The parties have not yet completed the
negotiation and execution of a definitive settlement agreement,
and no assurance can be given that such an agreement will be
reached. Further, any such agreement will be subject to approval
by the court.
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, we previously recorded a liability and a receivable
for this amount, which are 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
41
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. On
March 14, 2006, plaintiff voluntarily dismissed the case.
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 flows could
be materially adversely affected. Responding to the government
investigations and defending us in the pending litigation has
resulted, and could continue to result, in a significant
diversion of managements attention and resources and the
payment of additional professional fees.
Certain manufacturers of generic pharmaceutical products have
challenged patents on
Altace®,
Skelaxin®,
Sonata®
and
Adenoscan®.
For additional information, please see Other Legal
Proceedings included in Note 9,
Contingencies, in Item 1, Financial
Statements. 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 Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash (used in) provided by operating activities
|
|
$ |
(5,592 |
) |
|
$ |
23,503 |
|
Our net cash from operations was lower in 2006 than in 2005
primarily due to changes in working capital which are outlined
below, and an increase in the co-promotion fees. These decreases
were partially offset by an increase in the gross profit margin
driven by an increase in net sales of branded pharmaceutical
products. The decrease caused by changes in working capital was
driven by the payment of $129.3 million associated with the
Settlement Agreements described in the section
entitled Settlement of Government Pricing
Investigation above. Please see the section entitled
Results of Operations for a discussion of net sales,
and co-promotion fees.
42
The following table summarizes the changes in operating assets
and liabilities and deferred taxes that occurred during the
three months ending March 31, 2006 and 2005 and the
corresponding effect on cash flows from operations:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Accounts receivable, net of allowance
|
|
$ |
(44,588 |
) |
|
$ |
(25,657 |
) |
Inventories
|
|
|
10,807 |
|
|
|
19,004 |
|
Prepaid expenses and other current assets
|
|
|
(22,750 |
) |
|
|
(2,844 |
) |
Accounts payable
|
|
|
(14,730 |
) |
|
|
(47,501 |
) |
Accrued expenses and other liabilities
|
|
|
(128,460 |
) |
|
|
(71,062 |
) |
Income taxes payable
|
|
|
53,021 |
|
|
|
13,168 |
|
Deferred revenue
|
|
|
(2,273 |
) |
|
|
(2,273 |
) |
Other assets
|
|
|
(3,579 |
) |
|
|
(98 |
) |
Deferred taxes
|
|
|
(27,295 |
) |
|
|
25,053 |
|
|
|
|
|
|
|
|
Total changes from operating assets and liabilities and deferred
taxes
|
|
$ |
(179,847 |
) |
|
$ |
(92,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in) investing activities
|
|
$ |
71,094 |
|
|
$ |
(167,641 |
) |
Investing activities in 2006 were driven by transfers from
restricted cash of $130.3 million due to the payment
associated with the Settlement Agreements noted
above in cash flows from operating activities. We made payments
totaling $58.9 million for our collaboration agreement with
Arrow and certain of its affiliates and our acquisition from
Allerex Laboratory LTD of the exclusive right to market
Epipen®
in Canada. Capital expenditures during 2006 totaled
$8.8 million which included property, plant and equipment
purchases, building improvements for facility upgrades and costs
associated with improving our production capabilities, as well
as costs associated with moving production of some of our
pharmaceutical products to our facilities in St. Louis,
Bristol and Rochester. Additionally in the first quarter 2006,
our net investments in debt securities were $8.5 million.
Investing activities in 2005 were driven by our net investments
in debt securities of $150.6 million. Capital expenditures
during 2005 totaled $9.1 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 2005, we transferred $8.0 million to
restricted cash primarily related to product liability insurance.
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.
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by financing activities
|
|
$ |
232,782 |
|
|
$ |
56 |
|
43
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 and repurchased a portion of our
outstanding
23/4
% Convertible Debentures due November 15, 2021 for
$163.4 million.
|
|
|
Certain Indebtedness and Other Matters |
During the first quarter of 2006, we issued $400.0 million
of
11/4%
Convertible Senior Notes due April 1, 2026
(Notes). The Notes are unsecured obligations and are
guaranteed by each of our domestic subsidiaries on a joint and
several basis. The Notes accrue interest at an initial rate of
11/4
%. Beginning with the six-month interest period that
commences on April 1, 2013, we will pay additional interest
during any six-month interest period if the average trading
price of the Notes during the five consecutive trading days
ending on the second trading day immediately preceding the first
day of such six-month period equals 120% or more of the
principal amount of the Notes. Interest is payable on
April 1 and October 1 of each year, beginning
October 1, 2006.
On or after April 5, 2013, we may redeem for cash some or
all of the Notes at any time at a price equal to 100% of the
principal amount of the Notes to be redeemed, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the date fixed for redemption. Holders may require us
to purchase for cash some or all of their Notes on April 1,
2013, April 1, 2016 and April 1, 2021, or upon the
occurrence of a fundamental change, at 100% of the principal
amount of the Notes to be purchased, plus any accrued and unpaid
interest, and liquidated damages, if any, to but excluding the
purchase date.
During the fourth quarter of 2001, we issued $345.0 million
of
23/4%
Convertible Debentures due November 15, 2021
(Debentures). On March 29, 2006, we repurchased
$165.0 million of the Debentures prior to maturity. As of
March 31, 2006, we had outstanding $180.0 million of
these Debentures. 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 March 31, 2006, 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. On April 28, 2006, we commenced a
tender offer to purchase any and all outstanding Debentures at a
purchase price of $996.25 for each $1,000.00 principal amount,
for an aggregate payment of approximately $179.3 million if
the maximum amount of Debentures is purchased. We anticipate
that we will purchase Debentures tendered in the tender offer by
utilizing our cash on hand, including a portion of the net
proceeds we received from the issuance of the Notes. The tender
offer is subject to customary conditions and will expire, unless
extended or terminated, on May 26, 2006. Alternatively, we
may elect to repurchase some or all of the Debentures by
negotiation with Debenture holders, or a buy-back program, prior
to 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 March 31, 2006 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 (earnings before
interest, taxes,
44
depreciation and amortization) 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
March 31, 2006, we were in compliance with these covenants.
As of March 31, 2006, 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 March 31, 2006, there was $616.3 million of
securities remaining registered for future offers and sales
under the shelf registration statement.
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.
|
|
|
Recently Issued Accounting Standards |
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard
No. 123(R), Share-based Payment, (SFAS
No. 123(R)) that requires us to expense costs related to
share-based payment transactions with employees. We implemented
SFAS No. 123(R) effective January 1, 2006 using
the modified prospective application transition method and
recorded expenses of approximately $3.9 million during the
first quarter of 2006 as a result of the implementation. See
Note 2
Stock-based
Compensation in Item 1, Financial
Statements, for additional information.
In November 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs, an
amendment of Accounting Research Bulletin No. 43.
SFAS No. 151 requires certain production overhead
costs to be allocated to inventory based upon the normal
capacity of the manufacturing facility. When our manufacturing
facilities are operating below their normal capacity,
unfavorable variances cannot be allocated to inventory and must
be expensed in the period in which they are incurred. Normal
capacity is not defined as full capacity by
SFAS No. 151. SFAS No. 151 provided guidance
that normal capacity refers to a range of production levels
expected to be achieved over a number of periods or seasons
under normal circumstances. We believe each of our operating
facilities are currently operating at levels considered to be
normal capacity as defined by SFAS No. 151
as these plants have operated at their current levels for a
number of periods and are expected to continue to operate within
a range of this normal capacity in the foreseeable future.
Accordingly, the adoption of SFAS No. 151, as of
January 1, 2006, did not have an effect on our financial
statements.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to
45
inherent imprecision. In the case of impairment testing, changes
in estimates of future cash flows could result in a material
impairment charge and, whether they result in an immediate
impairment charge, could result prospectively in a reduction in
the estimated remaining useful life of tangible or intangible
assets, which could be material to the financial statements.
Other significant estimates include accruals for Medicaid,
Medicare, and other rebates, returns and chargebacks, allowances
for doubtful accounts 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. |
46
The gross carrying amount and accumulated amortization as of
March 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Net Book | |
|
|
Cost | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
276,150 |
|
|
$ |
73,891 |
|
|
$ |
202,259 |
|
|
Other Cardiovascular/metabolic
|
|
|
80,770 |
|
|
|
39,953 |
|
|
|
40,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
356,920 |
|
|
|
113,844 |
|
|
|
243,076 |
|
|
Intal®
|
|
|
106,192 |
|
|
|
16,766 |
|
|
|
89,426 |
|
|
Other Hospital/acute care
|
|
|
191,393 |
|
|
|
48,103 |
|
|
|
143,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
297,585 |
|
|
|
64,869 |
|
|
|
232,716 |
|
|
Skelaxin®
|
|
|
203,015 |
|
|
|
36,518 |
|
|
|
166,497 |
|
|
Sonata®
|
|
|
23,146 |
|
|
|
23,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
226,161 |
|
|
|
59,664 |
|
|
|
166,497 |
|
|
|
Other
|
|
|
144,675 |
|
|
|
55,893 |
|
|
|
88,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
1,025,341 |
|
|
|
294,270 |
|
|
|
731,071 |
|
Meridian Medical Technologies
|
|
|
170,302 |
|
|
|
18,694 |
|
|
|
151,608 |
|
Royalties
|
|
|
2,470 |
|
|
|
2,093 |
|
|
|
377 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
1,198,113 |
|
|
$ |
315,057 |
|
|
$ |
883,056 |
|
|
|
|
|
|
|
|
|
|
|
The amounts for impairments and amortization expense and the
amortization period used for the three months ended
March 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
|
|
March 31, 2005 | |
|
|
| |
|
|
|
| |
|
|
|
|
Amortization | |
|
Life | |
|
|
|
Amortization | |
|
|
Impairments |
|
Expense | |
|
(Years) | |
|
Impairments |
|
Expense | |
|
|
|
|
| |
|
| |
|
|
|
| |
|
|
(In thousands) | |
|
|
|
(In thousands) | |
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$ |
|
|
|
$ |
3,677 |
|
|
|
21 |
|
|
$ |
|
|
|
$ |
3,225 |
|
|
Other Cardiovascular/metabolic
|
|
|
|
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
|
|
|
|
5,500 |
|
|
|
|
|
|
|
|
|
|
|
5,101 |
|
|
Intal®
|
|
|
|
|
|
|
1,902 |
|
|
|
15 |
|
|
|
|
|
|
|
1,361 |
|
|
Other Hospital/acute care
|
|
|
|
|
|
|
3,402 |
|
|
|
|
|
|
|
|
|
|
|
2,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
|
|
|
|
5,304 |
|
|
|
|
|
|
|
|
|
|
|
4,258 |
|
|
Skelaxin®
|
|
|
|
|
|
|
3,887 |
|
|
|
13.5 |
|
|
|
|
|
|
|
3,887 |
|
|
Sonata®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
3,887 |
|
|
|
|
|
|
|
|
|
|
|
6,880 |
|
|
|
Other
|
|
|
|
|
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
1,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
|
|
|
|
16,751 |
|
|
|
|
|
|
|
|
|
|
|
17,561 |
|
Meridian Medical Technologies
|
|
|
|
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
1,291 |
|
Royalties
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$ |
|
|
|
$ |
18,256 |
|
|
|
|
|
|
$ |
|
|
|
$ |
18,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
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 March 31, 2006 | |
|
|
| |
|
|
|
|
Trademark & | |
|
|
Patent | |
|
Product Rights | |
|
|
| |
|
| |
Altace®
|
|
|
3 years 1 month |
|
|
|
13 years 9 months |
|
Skelaxin®
|
|
|
|
|
|
|
10 years 9 months |
|
Sonata®
|
|
|
9 months |
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
11 years 9 months |
|
|
|
|
|
|
Inventories. Our inventories are valued at the lower of
cost or market value. We evaluate our entire inventory for short
dated or slow moving product and inventory commitments under
supply agreements based on projections of future demand and
market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we make
a provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time
such losses are evident rather than at the time goods are
actually sold. We maintain supply agreements with some of our
vendors which contain minimum purchase requirements. We estimate
future inventory requirements based on current facts and trends.
Should our minimum purchase requirements under supply agreements
or if our estimated future inventory requirements exceed actual
inventory quantities that we will be able to sell to our
customers, we record a charge in costs of revenues. |
|
|
|
Accruals for rebates, returns, and chargebacks. We
establish accruals for returns, chargebacks and Medicaid,
Medicare, and commercial rebates in the same period we recognize
the related sales. The accruals reduce revenues and are included
in accrued expenses. At the time a rebate or chargeback payment
is made or a product return is received, which occurs with a
delay after the related sale, we record a reduction to accrued
expenses and, at the end of each quarter, adjust accrued
expenses for differences between estimated and actual payments.
Due to estimates and assumptions inherent in determining the
amount of returns, chargebacks and rebates, the actual amount of
product returns and claims for chargebacks and rebates may be
different from our estimates. |
|
|
|
Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily on
historical sales and return rates. We also consider the level of
inventory of our products in the distribution channel. We base
our estimate of our Medicaid rebate, Medicare rebate, and
commercial rebate accruals on estimates of usage by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates, and the terms of our
commercial and regulatory rebate obligations. We base our
estimate of our chargeback accrual on our estimates of the level
of inventory of our products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
products in the distribution channel is based on data provided
by our three key wholesalers under inventory management
agreements. |
|
|
Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves. |
48
|
|
|
|
|
Revenue recognition. Revenue is recognized when title and
risk of loss are transferred to customers, collection of sales
is reasonably assured, and we have no further performance
obligations. This is generally at the time products are received
by the customer. Accruals for estimated returns, rebates and
chargebacks, determined based on historical experience, reduce
revenues at the time of sale and are included in accrued
expenses. Medicaid and certain other governmental pricing
programs involve particularly difficult interpretations of
relevant statutes and regulatory guidance, which are complex
and, in certain respects, ambiguous. Moreover, prevailing
interpretations of these statutes and guidance can change over
time. Royalty revenue is recognized based on a percentage of
sales (namely, contractually agreed-upon royalty rates) reported
by third parties. |
49
RISK FACTORS
You should carefully consider the risks described below and
the other information contained in this report, including our
unaudited consolidated financial statements and related notes.
You should also consider the information contained in our annual
report on
Form 10-K for the
year ended December 31, 2005, including our audited
consolidated financial statements and related notes. The risks
described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. If any
of the adverse events described in this Risk Factors
section or other sections of this report or our annual report on
Form 10-K for the
year ended December 31, 2005 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
|
|
|
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 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 (unless the patents are
held invalid, unenforceable, or not infringed) 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. The
parties submitted a joint stipulation of dismissal on
April 4, 2006, and the court granted dismissal.
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 (unless
the patents are held invalid, unenforceable, or not infringed)
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.
50
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 March 31, 2006, we had net intangible
assets related to
Altace®
of $240.1 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 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 (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
January 24, 2003. That 30 month stay expired in July
2005. 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 (unless the patents are
held invalid, unenforceable, or not infringed) from no earlier
than November 18, 2002 and November 3, 2004,
respectively. The 30 month stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg product expired May
2005. 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 their pending Citizen Petitions and responses. On
December 8, 2005, Mutual filed another supplement with the
FDA in which it withdrew its prior Petition for Stay,
supplement, and opposition to Kings 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
51
competition. However, we cannot provide any assurance regarding
the degree to which this strategy will be successful, if at all.
As of March 31, 2006, we had net intangible assets related
to
Skelaxin®
of $166.5 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-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Sicors ANDA for
30 months (unless the patents are held invalid,
unenforceable, or not infringed) 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 (unless the
patents are held invalid, unenforceable, or not infringed) from
no earlier than June 21, 2005. We intend to vigorously
enforce our rights under the 538 patent. As of
March 31, 2006, we had net intangible assets related to
Sonata®
of $9.5 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.
|
|
|
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 SEC Investigation included in
Note 9, Contingencies, in Item 1,
Financial Statements, 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
52
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., 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.
In November 2005, the parties agreed to submit the matter to
non-binding mediation. After an extensive mediation process, an
agreement in principle to settle the litigation was reached on
April 26, 2006. The parties have not yet completed the
negotiation and execution of a definitive settlement agreement,
and no assurance can be given that such an agreement will be
reached. Further, any such agreement will be subject to approval
by the court.
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, we previously recorded a liability and a receivable
for this amount, which are 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. 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. On
March 14, 2006, plaintiff voluntarily dismissed the case.
53
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 could continue to result, in a significant
diversion of managements attention and resources and is
likely to require the payment of additional professional fees.
|
|
|
We have entered into agreements with manufacturers and/or
distributors of generic pharmaceutical products with whom we are
presently engaged, or have previously been engaged in
litigation, and these agreements could subject us to claims that
we have violated federal and/or state anti-trust laws. |
We have negotiated and entered into a number of agreements with
manufacturers and/or distributors of generic pharmaceutical
products, some of whom are presently engaged or have previously
been engaged in litigation with us. Governmental and/or private
parties may allege that these arrangements violate applicable
state or federal anti-trust laws. Alternatively, courts could
interpret these laws in a manner contrary to current
understandings of such laws. If a court or other governmental
body were to conclude that a violation of these laws had
occurred, any liability based on such a finding could be
material and adverse and could be preceded or followed by
private litigation such as class action litigation.
|
|
|
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 Settlement of
Governmental Pricing Investigation in Note 9,
Contingencies, in Item 1, Financial
Statements, 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 conduct
periodic audits of our Medicaid Rebate calculations and our
automated systems, processes, policies and practices related to
government pricing calculations, and to provide periodic reports
to HHS/OIG.
Implementing the broad array of processes, policies, and
procedures necessary to comply with the CIA has required, and is
expected to continue to require a significant portion of
managements attention as well as the application of
significant resources.
Failing to meet the CIA obligations could have serious
consequences for us including stipulated monetary penalties for
each instance of 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.
54
|
|
|
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.
|
|
|
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
March 31, 2006 accounted for 33.2%, 19.7%, 11.4%, 6.9%,
4.5% and 4.2% of our total revenues from continuing operations,
respectively, or 79.9% 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 March 31, 2006, 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.
Development projects, including those in which we have
collaboration agreements with third parties, include the
following:
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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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Vanquixtm,
a diazepam-filled auto-injector; |
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bremelanotide, (which we previously referred to as
PT-141), an
investigational new drug for the treatment of erectile
dysfunction and female sexual dysfunction; |
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MRE0094, an investigational drug for the topical treatment of
chronic diabetic foot ulcers; |
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T-62, an investigational drug for the treatment of neuropathic
pain; |
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a new inhaler for
Intal®
using the alternative propellant hydrofluoroalkane
(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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a program to evaluate the safety and efficacy of
Altace®
in children. |
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 obtaining any
necessary FDA approvals, 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 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, 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,
57
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 or jointly manufacture with third parties many of
our products in facilities we own and operate. These products
include
Altace®,
Thrombin-JMI®
and
Levoxyl®,
which together represented approximately 51.5% of our revenues
for the last twelve months ended March 31, 2006. Many of
our production processes are complex and 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
58
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 affect 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 nearly completed 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 while 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 last twelve months ended March 31, 2006, net sales of
Bicillin®
were $48.7 million, representing 2.6% 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.
59
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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
60
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 gross sales 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 Pharmaceuticals Research
and Development, Inc., 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. |
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multi-district litigation (MDL) court has been
established in Philadelphia, Pennsylvania, In re Fen-Phen
Litigation. They seek, among other things, compensatory and
punitive damages and/or court-supervised medical monitoring of
persons who have ingested the product.
Our wholly-owned subsidiary King Pharmaceuticals Research and
Development, Inc. (King Research and Development) is
a defendant in approximately 140 multi-plaintiff (1,674
plaintiffs) lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine. These lawsuits
have been filed in various jurisdictions throughout the United
States and in each of these lawsuits King Research and
Development, as the successor to Jones Pharma, Inc.
(Jones), is one of many defendants, including
manufacturers and other distributors of these drugs. Although
Jones did not at any time manufacture dexfenfluramine,
fenfluramine, or phentermine, Jones was a distributor of a
generic phentermine product and, after its acquisition of Abana
Pharmaceuticals, was a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones has filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the above, claim injury as a result of
ingesting a combination of these weight-loss drugs and are
seeking compensatory and punitive damages as well as medical
care and court-supervised medical monitoring. The plaintiffs
claim liability based on a variety of theories, including, but
not limited to, product liability, strict liability, negligence,
breach of warranty, fraud and misrepresentation.
King Research and Development denies any liability incident to
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 lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of the manufacturers of the
fenfluramine and dexfenfluramine settlements, King Research and
Development has routinely received voluntarily dismissals
without the payment of settlement proceeds. In the event that
King Research and Developments insurance coverage is
inadequate to satisfy any resulting liability, King Research and
Development will have to 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 lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available.
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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.
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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 twelve months ended March 31, 2006, our product
Thrombin-JMI®
accounted for 11.4% 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).
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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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
62
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
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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.
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 may realize more operating income from the sale
of
Altace®
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 increase our marketing and sales expenditures
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to ensure that appropriate resources are devoted to
Altace®,
which would require substantial time, effort and resources.
Additionally, we may not be able to locate, contract, recruit
and/or retain appropriate sales and marketing resources or enter
into any necessary 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 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. |
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.
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The FDA has the authority and discretion to withdraw existing
marketing approvals and to review the regulatory status of
marketed products at any time. For example, the FDA may require
withdrawal of an approved marketing application for any drug
product marketed if new information reveals 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 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.
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Product recalls or product field alerts may be issued at our
discretion or at the discretion of the FDA, other government
agencies or other companies having regulatory authority for
pharmaceutical product sales. From time to time, we may recall
products for various reasons, including failure of our products
to maintain their stability through their expiration dates. Any
recall or product field alert has the potential of damaging the
reputation of the product or our reputation. To date, these
recalls have not been significant and have not had a material
adverse effect on our business, financial condition, results of
operations or cash flows. However, we cannot assure you that the
number and significance of recalls will not increase in the
future. Any significant recalls could materially affect our
sales and the prescription trends for the products and damage
the reputation of the products or our reputation. In these
cases, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
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Any reduction in reimbursement levels by managed care
organizations or other third-party payors may have an adverse
effect on our revenues. |
Commercial success in producing, marketing and selling branded
prescription pharmaceutical products depends, in part, on the
availability of adequate reimbursement from third-party health
care payors, such as the government, private health insurers and
managed care organizations. Third-party payors are increasingly
challenging whether to reimburse certain pharmaceutical products
and medical services. For example, many managed health care
organizations limit reimbursement of pharmaceutical products.
These limits may take the form of formularies with differential
co-pay tiers. The resulting competition among pharmaceutical
companies to maximize their product reimbursement has generally
reduced growth in average selling prices across the industry. We
cannot assure you that our products will be appropriately
reimbursed or included on the formulary lists of managed care
organizations or any or all Medicare Part D plans, or that
downward pricing pressures in the industry generally will not
negatively impact our operations.
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 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.
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 other
proposals, may exacerbate industry-wide pricing pressures and
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. 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
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pricing information. While we intend to comply with these
regulations, we are unable at this time to predict or estimate
the effect of these regulations, if any.
Changes in the Medicare, Medicaid or other governmental programs
or the amounts paid by those programs for our services may
adversely affect our earnings. These programs are highly
regulated and subject to frequent and substantial changes and
cost containment measures. In recent years, changes in these
programs have limited and reduced reimbursement to providers.
The Medicare Prescription Drug, Improvement and Modernization
Act of 2003, creates a voluntary prescription drug benefit under
the Social Security Act, which we refer to as Medicare
Drug Benefit. Beginning in 2006, Medicare beneficiaries
entitled to Part A or enrolled in Part B, as well as
certain other Medicare enrollees, 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.
The Deficit Reduction Act of 2005 added provisions to the
Medicaid Rebate Program that will modify the formulas used in
the rebate calculations, the frequency with which they must be
performed, the manner in which sales of authorized generic
products are considered in the calculations, and other matters.
These changes may have the effect of increasing our Medicaid
Rebate expense, but we cannot yet estimate the precise financial
effect.
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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.
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.
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
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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expectations regarding the repurchase of our
23/4
% Convertible Debentures due November 21, 2021; |
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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; bremelanotide, 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 3. |
Quantitative and Qualitative Disclosures about Market
Risk |
Certain of our financial instruments are subject to market
risks, including interest rate risk. Our financial instruments
are not currently subject to foreign currency risk or commodity
price risk. We have no financial instruments held for trading
purposes.
As of March 31, 2006, there were no significant changes in
our qualitative or quantitative market risk since the end of our
fiscal year ended December 31, 2005.
We have marketable securities which are carried at fair value
based on current market quotes. Gains and losses on securities
are based on the specific identification method.
The fair market value of long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value
of fixed interest rate debt will decrease as interest rates rise
and increase as interest rates fall. In addition, the fair value
of our convertible debentures is affected by our stock price.
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Item 4. |
Controls and Procedures |
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the Exchange Act)). Based on this
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective to reasonably ensure that information required to
be disclosed in our reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified, and that management will be timely alerted to
material information required to be included in our periodic
reports filed with the Securities and Exchange Commission.
During our most recent fiscal quarter, there has not occurred
any change in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
73
PART II OTHER INFORMATION
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Item 1. |
Legal Proceedings |
The information required by this Item is incorporated by
reference to Note 9 to the condensed consolidated financial
statements included elsewhere in this report.
The information required by this item is incorporated by
reference to Item 2 of Part I of this report,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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Exhibit |
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Number |
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Description |
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10 |
.1 |
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Generic Distribution Agreement by and between King
Pharmaceuticals, Inc. and Cobalt Pharmaceuticals, Inc., dated as
of February 12, 2006. |
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10 |
.2 |
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Product Supply Agreement by and among King Pharmaceuticals,
Inc., Selamine Limited, Robin Hood Holdings Limited and Arrow
Pharm Malta Limited, dated as of February 12, 2006. |
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10 |
.3 |
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Ramipril Application License Agreement by and among King
Pharmaceuticals, Inc., Arrow International Limited and Robin
Hood Holdings Limited, dated as of February 12, 2006. |
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10 |
.4 |
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Ramipril Patent License Agreement by and among King
Pharmaceuticals, Inc., Selamine Limited and Robin Hood Holdings
Limited, dated as of February 12, 2006. |
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10 |
.5 |
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Dismissal Agreement by and among King Pharmaceuticals, Inc.,
Cobalt Pharmaceuticals, Inc. and Aventis Pharma Deutschland
GmbH, dated as of February 27, 2006. |
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10 |
.6 |
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Amended and Restated U.S. Product Manufacturing Agreement by and
between King Pharmaceuticals, Inc. and Sanofi-Aventis
Deutschland GmbH, dated as of February 27, 2006. |
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10 |
.7 |
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First Amendment to the U.S. Product Agreement by and between
King Pharmaceuticals, Inc. and Sanofi-Aventis U.S. LLC, dated as
of February 27, 2006. |
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10 |
.8* |
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Form of Long-Term Performance Unit Award
Agreement One Year Performance Cycle |
|
10 |
.9* |
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Form of Long-Term Performance Unit Award
Agreement Three Year Performance Cycle |
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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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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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* |
Denotes management contract or compensatory plan or arrangement. |
74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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KING PHARMACEUTICALS, INC. |
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By: /s/ BRIAN A. MARKISON |
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Brian A. Markison |
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President and Chief Executive Officer |
Date: May 9, 2006
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By: /s/ JOSEPH SQUICCIARINO |
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Joseph Squicciarino |
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Chief Financial Officer |
Date: May 9, 2006
75