King Pharmaceuticals, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
no. 001-15875
King Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
(State or other jurisdiction
of
incorporation or organization)
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54-1684963
(I.R.S. Employer
Identification No.)
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501 Fifth Street, Bristol, TN
(Address of principal
executive offices)
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37620
(Zip Code)
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(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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Number of shares outstanding of Registrants common stock
as of May 6, 2008: 246,619,222
TABLE OF
CONTENTS
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Page
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Reference
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Part I
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Financial Information
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Item 1.
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Financial Statements
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3
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Condensed Consolidated Balance Sheets
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3
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Condensed Consolidated Statements of Operations
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4
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Condensed Consolidated Statements of Changes in
Shareholders Equity and Other Comprehensive Income
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5
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Condensed Consolidated Statements of Cash Flows
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6
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Notes to Condensed Consolidated Financial Statements
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7
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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27
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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48
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Item 4.
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Controls and Procedures
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49
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PART II
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Other Information
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Item 1.
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Legal Proceedings
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49
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Item 1A.
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Risk Factors
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49
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Item 6.
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Exhibits
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49
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Signatures
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50
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2
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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March 31,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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826,582
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$
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20,009
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Investments in debt securities
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589,107
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1,344,980
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Marketable securities
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1,589
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1,135
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Accounts receivable, net of allowance of $5,365 and $5,297
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186,787
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183,664
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Inventories
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110,561
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110,308
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Deferred income tax assets
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95,836
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100,138
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Income tax receivable
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20,175
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Prepaid expenses and other current assets
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40,311
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39,245
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Total current assets
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1,850,773
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1,819,654
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Property, plant and equipment, net
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264,789
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257,093
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Intangible assets, net
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733,847
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780,974
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Goodwill
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129,150
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129,150
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Deferred income tax assets
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351,983
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343,700
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Other assets (includes restricted cash of $16,336 and $16,480)
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88,827
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96,251
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Total assets
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$
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3,419,369
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$
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3,426,822
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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59,342
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$
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76,481
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Accrued expenses
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293,304
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376,604
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Income taxes payable
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17,180
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Total current liabilities
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369,826
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453,085
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Long-term debt
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400,000
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400,000
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Other liabilities
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62,331
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62,980
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Total liabilities
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832,157
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916,065
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Commitments and contingencies (Note 8)
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Shareholders equity
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2,587,212
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2,510,757
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Total liabilities and shareholdersequity
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$
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3,419,369
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$
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3,426,822
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See accompanying notes.
3
KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended
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March 31,
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2008
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2007
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Revenues:
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Net sales
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$
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412,910
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$
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495,706
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Royalty revenue
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19,123
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20,324
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Total revenues
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432,033
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516,030
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Operating costs and expenses:
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Cost of revenues, exclusive of depreciation and amortization
shown below
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91,461
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111,454
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Selling, general and administrative, exclusive of co-promotion
fees
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111,901
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122,354
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Co-promotion fees
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17,957
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45,958
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Total selling, general and administrative expense
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129,858
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168,312
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Research and development
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28,508
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32,271
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Depreciation and amortization
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59,698
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35,678
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Restructuring charges (Note 12)
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1,059
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460
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Total operating costs and expenses
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310,584
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348,175
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Operating income
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121,449
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167,855
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Other income (expense):
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Interest income
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13,629
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9,266
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Interest expense
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(1,804
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)
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(2,025
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)
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Other, net
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(704
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)
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(543
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)
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Total other income
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11,121
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6,698
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Income from continuing operations before income taxes
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132,570
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174,553
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Income tax expense
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44,937
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58,499
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Income from continuing operations
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87,633
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116,054
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Discontinued operations (Note 15):
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Loss from discontinued operations
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(220
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Income tax benefit
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(79
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)
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Total loss from discontinued operations, net
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(141
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)
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Net income
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$
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87,633
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$
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115,913
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Income per common share:
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Basic:
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Income from continuing operations
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$
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0.36
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$
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0.48
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Total loss from discontinued operations
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0.00
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0.00
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Net income
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$
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0.36
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$
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0.48
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Diluted:
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Income from continuing operations
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$
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0.36
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$
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0.48
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Total loss from discontinued operations
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0.00
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0.00
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Net income
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$
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0.36
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$
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0.48
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See accompanying notes.
4
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
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Accumulated
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Other
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Common Stock
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Retained
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Comprehensive
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Shares
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Amount
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Earnings
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Income (Loss)
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Total
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Balance at December 31, 2006
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|
|
243,151,223
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$
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1,244,986
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$
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1,043,902
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$
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(282
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)
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$
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2,288,606
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Comprehensive income:
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Net income
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115,913
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115,913
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Net unrealized loss on marketable securities, net of tax of $285
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(465
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)
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(465
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)
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Foreign currency translation
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52
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52
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Total comprehensive income
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115,500
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Adoption of Financial Accounting Standards Board Interpretation
No. 48
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(1,523
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)
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(1,523
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)
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Stock-based compensation expense
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4,596
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4,596
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Exercise of stock options
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156,385
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2,528
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2,528
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Issuance of share-based awards
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195,244
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Balance at March 31, 2007
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243,502,852
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$
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1,252,110
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$
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1,158,292
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$
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(695
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)
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$
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2,409,707
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Balance at December 31, 2007
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245,937,709
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$
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1,283,440
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$
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1,225,360
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$
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1,957
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|
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$
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2,510,757
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Comprehensive income:
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|
|
|
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Net income
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87,633
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87,633
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Net unrealized gain on marketable securities, net of tax of $172
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|
282
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|
|
|
282
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Net unrealized loss on investments in debt securities, net of
taxes of $10,799
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(17,619
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)
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|
|
(17,619
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)
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Foreign currency translation
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480
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)
|
|
|
(480
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)
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total comprehensive income
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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69,816
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Stock-based compensation expense
|
|
|
|
|
|
|
8,455
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|
|
|
|
|
|
|
|
|
|
|
8,455
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|
Exercise of stock options
|
|
|
6,435
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|
|
|
54
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|
|
|
|
|
|
|
|
|
|
|
54
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|
Issuance of share-based awards
|
|
|
600,291
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|
|
|
|
|
|
|
|
|
|
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|
|
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Other
|
|
|
|
|
|
|
(1,870
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)
|
|
|
|
|
|
|
|
|
|
|
(1,870
|
)
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance at March 31, 2008
|
|
|
246,544,435
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|
|
$
|
1,290,079
|
|
|
$
|
1,312,993
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|
|
$
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(15,860
|
)
|
|
$
|
2,587,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
See accompanying notes.
5
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows provided by operating activities
|
|
$
|
100,232
|
|
|
$
|
108,084
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
144
|
|
|
|
(148
|
)
|
Purchases of investments in debt securities
|
|
|
(279,175
|
)
|
|
|
(383,925
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
1,006,630
|
|
|
|
515,905
|
|
Purchases of property, plant and equipment
|
|
|
(19,914
|
)
|
|
|
(11,785
|
)
|
Proceeds from sale of property and equipment
|
|
|
13
|
|
|
|
3
|
|
Acquisition of
Avinza®
|
|
|
(34
|
)
|
|
|
(290,551
|
)
|
Loan repayment from Ligand
|
|
|
|
|
|
|
37,750
|
|
Purchases of intellectual property and product rights
|
|
|
(715
|
)
|
|
|
(31,452
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
706,949
|
|
|
|
(164,203
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
54
|
|
|
|
2,611
|
|
Other
|
|
|
(662
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(608
|
)
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
806,573
|
|
|
|
(53,566
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
20,009
|
|
|
|
113,777
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
826,582
|
|
|
$
|
60,211
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
KING
PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008 and 2007
(in thousands, except share and per share data)
(Unaudited)
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, 2008 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2008. These unaudited interim condensed
consolidated financial 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, 2007. The year-end
condensed consolidated balance sheet was derived from the
audited consolidated financial statements, but does not include
all disclosures required by generally accepted accounting
principles.
These unaudited interim condensed 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.
The basic and diluted income per common share was determined
using the following share data:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,290,375
|
|
|
|
242,390,241
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,290,375
|
|
|
|
242,390,241
|
|
Effect of stock options
|
|
|
34,750
|
|
|
|
483,922
|
|
Effect of dilutive share awards
|
|
|
1,363,413
|
|
|
|
796,410
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
244,688,538
|
|
|
|
243,670,573
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share, included
options to purchase 5,146,792 shares of common stock,
490,360 restricted stock awards (RSAs) and 267,295
long-term performance units (LPUs). For the three
months ended March 31, 2007, the weighted average shares
that were anti-dilutive, and therefore excluded from the
calculation of diluted income per share, included options to
purchase 1,979,835 shares of common stock, 21,903 RSAs and
72,871 LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into the
Companys common stock in the future, subject to certain
contingencies. Shares of the Companys common stock
associated with this right of conversion were excluded from the
calculation of diluted income per share because these notes are
anti-dilutive since the conversion price of the notes was
greater than the average market price of the Companys
common stock during the quarter.
7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
3.
|
Fair
Value Measurements
|
Marketable Securities. As of March 31,
2008 and December 31, 2007, the Companys investment
in marketable securities consisted solely of Palatin
Technologies, Inc. common stock with a cost basis of $1,135. The
cumulative unrealized holding gain in these investments as of
March 31, 2008 was $454. There was no cumulative unrealized
holding gain or loss as of December 31, 2007.
Investments in Debt Securities. Tax-exempt
auction rate securities are long-term variable rate bonds tied
to short-term interest rates that are reset through an auction
process generally every seven, 28 or 35 days. The Company
classifies auction rate securities as available-for-sale at the
time of purchase in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and any unrealized gains or losses are included
in accumulated other comprehensive income (loss) on the
Condensed Consolidated Balance Sheets.
As of March 31, 2008 and December 31, 2007, the par
value of the Companys investments in debt securities were
$617,525 and $1,344,980, respectively, and consisted solely of
tax-exempt auction rate securities. The Company has not invested
in any mortgage-backed securities or any securities backed by
corporate debt obligations. The Companys investment policy
requires it to maintain an investment portfolio with a high
credit quality. Accordingly, the Companys investments in
debt securities were limited to issues which were rated AA or
higher at the time of purchase.
On February 11, 2008, the Company began to experience
auction failures. In the event of an auction failure, the
interest rate on the security is set according to the
contractual terms in the underlying indenture. The funds
associated with failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the
underlying security, the underlying security matures or a buyer
outside the auction process emerges.
Although the Company has realized no loss of principal with
respect to its investments in debt securities, as of
March 31, 2008, there were cumulative unrealized holding
losses of $28,418 associated with these investments. The Company
believes the decline is temporary and has accordingly recorded
it in accumulated other comprehensive income on the Condensed
Consolidated Balance Sheet. There were no cumulative unrealized
holding gains or losses as of December 31, 2007.
The Company has classified its auction rate securities as
current assets as of March 31, 2008 because the Company believes
that it is reasonable to expect that these securities will be
realized in cash within its normal operating cycle of one year.
However, the investments may need to be reclassified as
long-term assets in the future if the liquidity of the
investments does not improve.
Effective January 1, 2008, the Company adopted Statement of
Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157), which
provides a framework for measuring fair value under Generally
Accepted Accounting Principles and expands disclosures about
fair value measurements. In February 2008, the Financial
Accounting Standards Board (FASB) issued FASB Staff
Position
No. 157-2,
Effective Date of FASB Statement No. 157, which
provides a one-year deferral on the effective date of
SFAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at least annually.
Therefore, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and
financial liabilities only. The Company also adopted Statement
of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159) on January 1,
2008. SFAS No. 159 allows an entity the irrevocable
option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract
basis. The Company did not elect the option under
SFAS No. 159 for any of its financial assets and
liabilities.
8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the Companys assets which
are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at 3/31/2008 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
3/31/2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Marketable Securities
|
|
$
|
1,589
|
|
|
$
|
1,589
|
|
|
$
|
|
|
|
$
|
|
|
Investments in Debt Securities
|
|
|
589,107
|
|
|
|
|
|
|
|
47,750
|
|
|
|
541,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
590,696
|
|
|
$
|
1,589
|
|
|
$
|
47,750
|
|
|
$
|
541,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of marketable securities within the Level 1
classification is based on the quoted price for identical
securities in an active market as of March 31, 2008.
The fair value of investments in debt securities within the
Level 2 classification is at par based on public call
notices from the issuer of the security.
The fair value of investments in debt securities within the
Level 3 classification is based on a trinomial discount
model. This model considers the probability of three potential
occurrences for each auction event through the maturity date of
the issue on a security-by-security basis. The three potential
outcomes for each auction are i) successful auction/early
redemption, ii) failed auction and iii) issuer
default. Inputs in determining the probabilities of the
potential outcomes include, but are not limited to, the
securitys collateral, credit rating, insurance,
issuers financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of
each security is determined by summing the present value of the
probability-weighted future principal and interest payments
determined by the model.
The following table provides a reconciliation of assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the first quarter
of 2008:
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable
|
|
|
|
Inputs (Level 3)
|
|
|
|
Investments in Debt Securities
|
|
|
Beginning balance, December 31, 2007
|
|
$
|
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
(28,418
|
)
|
Purchases, issuances and settlements
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
569,775
|
|
|
|
|
|
|
Ending balance, March 31, 2008
|
|
$
|
541,357
|
|
|
|
|
|
|
There were no realized or unrealized gains or losses included in
the Condensed Consolidated Statement of Operations for the
period ending March 31, 2008.
All of the debt securities within the Level 2
classification have been called by their issuers and the Company
has received cash payments equal to the par value of these
securities subsequent to March 31, 2008. Also, subsequent
to March 31, 2008, as a result of calls by issuers and
successful auctions, the Company has received cash payments
equal to par value for $27,800 and $17,625, respectively, of
debt securities within the Level 3 classification.
9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
125,514
|
|
|
$
|
129,781
|
|
Work-in-process
|
|
|
24,378
|
|
|
|
27,590
|
|
Finished goods (including $4,009 and $3,901 of sample inventory,
respectively)
|
|
|
68,952
|
|
|
|
61,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,844
|
|
|
|
218,695
|
|
Inventory valuation allowance
|
|
|
(108,283
|
)
|
|
|
(108,387
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
110,561
|
|
|
$
|
110,308
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property,
Plant and Equipment
|
During 2006, the Company decided to proceed with the
implementation of its plan to streamline manufacturing
activities in order to improve operating efficiency and reduce
costs, including the decision to transfer the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility, which the Company expects to complete in
2009. The Company believes that the assets associated with the
St. Petersburg facility are not currently impaired based on
estimated undiscounted cash flows associated with these assets.
However, during 2006, the Company shortened the estimated useful
lives of assets at the St. Petersburg facility and therefore
accelerated the depreciation of these assets. For additional
discussion, please see Note 12.
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.
|
|
6.
|
Acquisitions,
Dispositions, Co-Promotions and Alliances
|
In October 2007, the Company sold its Rochester, Michigan
sterile manufacturing facility, some of its legacy products that
are manufactured there and the related contract manufacturing
business to JHP Pharmaceuticals, LLC (JHP) for
$91,663, less selling costs of $5,387, resulting in a loss of
$46,354. The companies also entered into a manufacturing and
supply agreement pursuant to which JHP will provide certain fill
and finish manufacturing activities with respect to the
Companys hemostatic product
Thrombin-JMI®.
The Company retained its stand-alone
Bicillin®
(sterile penicillin products) manufacturing facility which is
also located in Rochester, Michigan.
In September 2006, the Company entered into a definitive asset
purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to Ligands product
Avinza®
(morphine sulfate extended release).
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time. The Company completed its acquisition of
Avinza®
on February 26, 2007, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289,732, consisting of $289,332 in cash consideration and $400
for the assumption of a short-term liability. Additionally, the
Company incurred acquisition costs of $6,765. Of the cash
payments made to Ligand, $15,000 was set aside in an escrow
account to fund potential
10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
liabilities Ligand could later owe the Company, of which $7,500
was released to Ligand in each the third quarter of 2007 and the
first quarter of 2008.
As part of the transaction, the Company has agreed to pay Ligand
an ongoing royalty and assume payment of Ligands royalty
obligations to third parties. The royalty the Company will pay
to Ligand consists of a 15% royalty during the first
20 months after the closing date. Subsequent royalty
payments to Ligand will be based upon calendar year net sales of
Avinza®
as follows:
|
|
|
|
|
If calendar year net sales are less than $200,000 the royalty
payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200,000 then the
royalty payment will be 10% of all net sales up to $250,000,
plus 15% of net sales greater than $250,000.
|
In connection with the transaction, in October 2006, the Company
entered into a loan agreement with Ligand for the amount of
$37,750. The principal amount of the loan was to be used solely
for the purpose of paying a specific liability related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. In January 2007, Ligand repaid the principal amount of
the loan of $37,750 and accrued interest of $883. Pursuant to
the terms of the loan agreement with Ligand, the Company forgave
the interest on the loan and repaid Ligand the interest at the
time of closing the transaction to acquire
Avinza®.
Accordingly, the Company has not recognized interest income on
the related note receivable.
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
Intangible assets
|
|
$
|
285,700
|
|
Goodwill
|
|
|
7,997
|
|
Inventory
|
|
|
2,800
|
|
|
|
|
|
|
|
|
$
|
296,497
|
|
|
|
|
|
|
At the time of the acquisition, the intangible assets were
assigned useful lives of 10.75 years. The acquisition is
allocated to the branded pharmaceuticals segment. The goodwill
recognized in this transaction is expected to be fully
deductible for tax purposes. The Company financed the
acquisition using available cash on hand.
In January 2007, the Company obtained an exclusive license to
certain hemostatic products owned by Vascular Solutions, Inc.
(Vascular Solutions), including products which the
Company markets as
Thrombi-PadTM
and
Thrombi-Gel®.
The license also includes a product the Company expects to
market as
Thrombi-PasteTM,
which is currently in development. Each of these products
includes the Companys
Thrombin-JMI®
topical hemostatic agent product as a component. Vascular
Solutions will manufacture the products for the Company. Upon
acquisition of the license, the Company made an initial payment
to Vascular Solutions of $6,000, a portion of which is
refundable in the event U.S. Food and Drug Administration
(FDA) approval for certain of these products is not
received. During the second quarter of 2007, the Company made an
additional milestone payment of $1,000. In addition, the Company
could make additional milestone payments of up to a total of
$1,000.
11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
7.
|
Intangible
Assets and Goodwill
|
The following table reflects the components of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Trademarks and product rights
|
|
$
|
893,887
|
|
|
$
|
450,030
|
|
|
$
|
890,091
|
|
|
$
|
407,264
|
|
Patents
|
|
|
447,825
|
|
|
|
158,111
|
|
|
|
447,821
|
|
|
|
149,959
|
|
Other intangibles
|
|
|
1,345
|
|
|
|
1,069
|
|
|
|
1,345
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,343,057
|
|
|
$
|
609,210
|
|
|
$
|
1,339,257
|
|
|
$
|
558,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2008 and 2007 was $50,927 and $24,769, respectively.
As of March 31, 2008, the net intangible assets associated
with
Synercid®
totaled approximately $73,994. 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, 2008 and December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
|
|
Meridian
|
|
|
|
|
Segment
|
|
Segment
|
|
Total
|
|
Goodwill
|
|
$
|
20,740
|
|
|
$
|
108,410
|
|
|
$
|
129,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
Intellectual
Property Matters
The Company was previously involved in patent infringement
litigation with Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, regarding an Abbreviated New Drug
Application (ANDA) it filed with the FDA seeking
permission to market a generic version of
Altace®.
The parties submitted a joint stipulation of dismissal on
April 4, 2006, and the Court granted dismissal. Following
the courts decision in the Companys litigation with
Lupin Ltd. (Lupin), described below, Cobalt launched
a generic substitute for
Altace®
in December 2007.
The Company has received civil investigative demands
(CIDs) for information from the U.S. Federal
Trade Commission (FTC). The CIDs required the
Company to provide information related to the Companys
collaboration with Arrow International Limited
(Arrow) to develop novel formulations of
Altace®,
the dismissal without prejudice of the Companys patent
infringement litigation against Cobalt under the Hatch-Waxman
Act of 1984 and other information. Arrow and Cobalt are
affiliates of one another. The Company is cooperating with the
FTC in this investigation.
Lupin filed an ANDA with the FDA seeking permission to market a
generic version of
Altace®.
In addition to its ANDA, Lupin filed a Paragraph IV
certification challenging the validity and infringement of
United States Patent No. 5,061,722 (the 722
patent), a composition of matter patent covering
Altace®,
and seeking to market its generic version of
Altace®
before expiration of the 722 patent. The companies
litigated the matter and the court ultimately invalidated the
Companys 722 patent.
12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Several other companies have filed with the FDA ANDAs with
Paragraph IV certifications seeking permission to market
generic versions of
Altace®.
Except Cobalt, no other ANDA filer is expected to receive final
approval from the FDA prior to 180 days from
December 10, 2007.
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 each filed
Paragraph IV certifications against the 128 and
102 patents alleging noninfringement, invalidity and
unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the 102 patent
alleging noninfringement and invalidity of that patent. A patent
infringement suit was filed against Eon Labs on January 2,
2003 in the 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
Skelaxin®
product. On May 17, 2006, the District Court for the
Eastern District of Pennsylvania placed the Mutual case on the
Civil Suspense Calendar pending the outcome of the FDA activity
described below. On June 16, 2006, the District Court for
the Eastern District of New York consolidated the Eon Labs cases
with the CorePharma case. In January 2008, the Company entered
into an agreement with CorePharma providing, among other things,
CorePharma with the right to launch an authorized generic
version of
Skelaxin®
pursuant to a license in December 2012 or earlier under certain
conditions. On January 8, 2008, the parties in the
CorePharma case stipulated to substitute the Company for Elan,
and the Company and CorePharma submitted a joint stipulation of
dismissal without prejudice. On January 15, 2008, the Court
entered the orders.
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 and Eon subsequently
withdrew its 400 mg ANDA in September 2006. The
30-month
stay of FDA approval for Eon Labs 800 mg product was
tolled by the Court on January 10, 2005 and has not
expired. The Court lifted the tolling of the
30-month
stay as of April 30, 2007. Although the Court has reserved
judgment on the length of the tolling period, the stay should
not expire until early August 2009 unless the Court rules
otherwise. Eon asked for a determination of the length of the
tolling period in a March 14, 2008 letter to the Court. The
Court declined to make any determination. On April 30,
2007, Eon Labs 400 mg case was dismissed without
prejudice, although Eon Labs claim for fees and expenses
was severed and consolidated with Eon Labs 800 mg
case. On August 27, 2007, Eon served a motion for summary
judgment on the issue of infringement. The Court granted the
Company discovery for purposes of responding to Eons
motion until March 14, 2008 and set a briefing schedule. On
March 7, 2008, the Company filed a letter with the Court
regarding Eons inability to adhere to the discovery
schedule and the Court took Eons motion for summary
judgment on the issue of infringement off the calendar.
Subsequently, Eon filed an amended motion for summary judgment
on the issue of infringement on April 4, 2008. Eon also
filed a motion for summary judgment on the issue of validity on
April 16, 2008. The parties are currently waiting for the
Court to set schedules for briefing as well as discovery. 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
13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ANDA applicants product labeling. The Company believes
that this decision is arbitrary, capricious and inconsistent
with the FDAs previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent and
prohibit the removal of information corresponding to the use
listed in the Orange Book. The Company concurrently filed a
petition for stay of action requesting the FDA to stay approval
of any generic 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 the Companys proposed labeling revision
for
Skelaxin®,
which includes references to additional clinical studies
relating to food, age and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a petition
for stay of action requesting the FDA to stay approval of the
Companys proposed labeling revision until the FDA has
fully evaluated and ruled upon the Companys Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual have filed
responses and supplements to their pending Citizen Petitions and
responses. On December 8, 2005, Mutual filed another
supplement with the FDA in which it withdrew its prior petition
for stay, supplement and opposition to the Companys
Citizen Petition. On November 24, 2006, the FDA approved
the revision to the
Skelaxin®
labeling. On February 13, 2007, the Company filed another
supplement to the Companys Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling. On May 2, 2007, Mutual filed comments in
connection with the Companys supplemental submission. On
July 27, 2007 and January 24, 2008, Mutual filed two
other Citizen Petitions in which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the previously submitted
data in its earlier submissions.
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. Net sales of
Skelaxin®
were $440,003 in 2007. As of March 31, 2008, the Company
had net intangible assets related to
Skelaxin®
of $134,767. If demand for
Skelaxin®
declines below current expectations, the Company may have to
write off a portion or all of these intangible assets.
Actavis, Inc. (Actavis) filed an ANDA with the FDA,
seeking permission to market a generic version of
Avinza®.
U.S. Patent No. 6,066,339 (the 339 patent)
is a formulation patent relating to
Avinza®
that is listed in the Orange Book and expires on
November 25, 2017. Actavis filed a paragraph IV
certification challenging the validity and alleging
non-infringement of the 339 patent, and the Company and
Elan Pharma International LTD (EPI), the owner of
the 339 patent, filed suit on October 18, 2007 in the
United States District Court for the District of New Jersey to
enforce the rights under the patent. Pursuant to the
Hatch-Waxman Act, the filing of the lawsuit against Actavis
provided the Company with an automatic stay of FDA approval of
Actavis ANDA for up to 30 months (unless the patent
is held invalid, unenforceable or not infringed) from no earlier
than September 4, 2007. On November 18, 2007, Actavis
answered the Complaint and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on December 7, 2007. The initial scheduling
conference was held on March 11, 2008, and fact discovery
has formally begun.
The Company intends to vigorously enforce its rights under the
339 patent to the full extent of the law. Net sales of
Avinza®
were $108,546 in 2007. As of March 31, 2008, the Company
had net intangible assets related to
Avinza®
of $256,682. If a generic form of
Avinza®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Companys
business, financial condition, results of operations and cash
flows could be otherwise materially adversely affected.
14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Average
Wholesale Price Litigation
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of the Company,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in Federal Court in the state of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (AWP) and fraudulently failed to
accurately report their best prices and their
average manufacturers prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits and
treble and punitive damages. The United States District Court
for the District of Massachusetts has been established as the
MDL Court for the case, In re: Pharmaceutical Industry
Average Wholesale Pricing Litigation (the MDL).
Since the filing of the New York City case, 48 New York counties
have filed lawsuits against the pharmaceutical industry,
including the Company and Monarch. All of these lawsuits are
currently pending in the MDL Court in the District of
Massachusetts except for the Erie, Oswego and Schenectady cases,
which were removed in October 2006 and remanded to State Court
in September 2007. The allegations in all of these cases are
virtually the same as the allegations in the New York City case.
A First Amended Consolidated Complaint was filed for most of the
New York counties. Motions to dismiss were granted in part and
denied in part for all defendants in all New York City and
County cases pending in the MDL. The Erie motion to dismiss was
granted in part and denied in part by the state court before
removal. Motions to dismiss were filed in October 2007 in the
Oswego and Schenectady cases.
In January 2005, the State of Alabama filed a lawsuit in State
Court against 79 defendants including the Company and Monarch.
The four causes of action center on the allegation that all
defendants fraudulently inflated the AWPs of their products. A
motion to dismiss was filed and denied by the Court, but the
Court did require an amended complaint to be filed. The Company
filed an answer and counter-claim for return of rebates overpaid
to the state. Alabama filed a motion to dismiss the
counter-claim which was granted. The Company perfected its
appeal of that ruling. Briefing in the appeal to the Alabama
Supreme Court is complete. No oral argument date has been set.
In a separate appeal of a motion to sever denied by the trial
court, the Alabama Supreme Court severed all defendants into
single-defendant cases. The trial court consolidated AstraZeneca
International, Novartis Pharmaceuticals and SmithKline Beecham
Corporation for trial set to begin on February 11, 2008.
The Alabama Supreme Court stayed the consolidation order. Trial
against AstraZeneca only proceeded and a jury verdict against
AstraZeneca resulted. AstraZeneca stated it would appeal the
verdict. The Company and Monarch have requested a stay pending
their appeal. Several other defendants have had their cases set
for trial this year.
In October 2005, the State of Mississippi filed a lawsuit in
State Court against the Company, Monarch and 84 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 of their products. A motion to
dismiss the criminal statute counts and a motion for more
definite statement were granted. Mississippi was required to
file an amended complaint and in doing so dismissed the Company
and Monarch from the lawsuit without prejudice. These claims
could be refiled.
A co-defendant removed the Alabama and Mississippi cases to
Federal Court on October 11, 2006. The Alabama case was
remanded to State Court on November 2, 2006. The
Mississippi case was remanded to State Court on
September 17, 2007. Discovery is proceeding in the Alabama
case and has begun in New York. Over half of the states have
filed similar lawsuits but the Company has not been named in any
other case except Iowas. The Company has filed a motion to
dismiss the Iowa complaint. On February 20, 2008, the Iowa
case was transferred to the MDL. The relief sought in all of
these cases is similar to the relief sought in the New York City
lawsuit. The Company does not expect any of its trials to be set
in the next year. The
15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company intends to defend all of the AWP lawsuits vigorously but
is currently unable to predict the outcome or reasonably
estimate the range of potential loss, if any.
Governmental
Pricing Investigation and Related Matters
As previously reported, during the first quarter of 2006, the
Company paid approximately $129,268 related to underpayment of
rebates owed to Medicaid and other governmental pricing programs
during the period from 1994 to 2002. On October 31, 2005,
the Company also entered into a five-year corporate integrity
agreement with HHS/OIG.
Also as previously reported, the Securities and Exchange
Commission (the SEC) conducted an investigation
relating to the Companys underpayments to governmental
programs and to the Companys previously disclosed errors
relating to reserves for product returns. On December 12,
2007, the Company received notice from the Staff of the SEC that
the investigation was closed.
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 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, a nonprofit
organization affiliated with certain former members of the
Companys senior management. These 22 complaints were
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.
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. On July 31, 2006, the parties entered
into a stipulation of settlement and a supplemental agreement
(together, the Settlement Agreement) to resolve the
litigation. On January 9, 2007, the Court granted final
approval of the Settlement Agreement. The Settlement Agreement
provides for a settlement amount of $38,250 which has been fully
funded by the Companys insurance carriers on the
Companys behalf.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee State Court alleging a
breach of fiduciary duty, among other things, by some of the
Companys current and former officers and directors, with
respect to the same events at issue in the federal securities
litigation described above. These cases have been consolidated.
In June 2007, plaintiffs filed a motion to amend the complaint,
seeking to name as defendants additional current and former
officers and directors and the Companys independent
auditor and to add additional claims. Following negotiations
among the parties, this motion was granted in part, but it was
denied with respect to naming as defendants additional current
and former officers and directors of the Company. Trial is
scheduled to begin on September 22, 2008. The parties
engaged in non-binding mediation in January 2008 but were unable
to reach a resolution. Discussions between the parties continue.
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.
16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the third quarter of 2006 and the second quarter of 2007,
the Company recorded an anticipated insurance recovery of legal
fees in the amount of $6,750 and $3,398, respectively, for the
class action and derivative suits described above. In November
of 2006 and July of 2007, the Company received payment for the
recovery of these legal fees.
The Company is currently unable to predict the outcome of the
pending litigation. If the Company were not to prevail in the
pending litigation, its business, financial condition, results
of operations and cash flows could be materially adversely
affected.
Fen/Phen
Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multidistrict litigation court has been established in
Philadelphia, Pennsylvania, In re Fen-Phen Litigation.
The plaintiffs seek, among other things, compensatory and
punitive damages
and/or
court-supervised medical monitoring of persons who have ingested
these products.
The Companys wholly-owned subsidiary, King Research and
Development, is a defendant in approximately 60 multi-plaintiff
(approximately 1,100 plaintiffs) lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine. These lawsuits have been filed in various
jurisdictions throughout the United States and in each of these
lawsuits King Research and Development, as the successor to
Jones Pharma Incorporated (Jones), is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine or phentermine, Jones was a
distributor of a generic phentermine product and, after its
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones distribution and sale of
Obenix®
or Jones generic phentermine product. King Research and
Developments insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntary
dismissals without the payment of settlement proceeds. In the
event that King Research and Developments insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
17
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 its 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 pursue all defenses available to it. The Company is being
indemnified in the six lawsuits by GlaxoSmithKline, for which
the Company manufactured phentermine, 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,
fees and expenses, 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.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 24 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other pharmaceutical companies have also
been sued. The Company was sued by approximately 800 plaintiffs,
but most of those claims were voluntarily dismissed or dismissed
by the Court for lack of product identification. These remaining
24 lawsuits were filed in Alabama, Arkansas, Missouri,
Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation (MDL)
court has been established in Little Rock, Arkansas, In re:
Prempro Products Liability Litigation, and all of the
plaintiffs claims have been transferred and are pending in
that Court except for one lawsuit pending in Philadelphia,
Pennsylvania State Court. Many of these plaintiffs allege that
the Company and other defendants failed to conduct adequate
research and testing before the sale of the products and
post-sale monitoring to establish the safety and efficacy of the
long-term hormone therapy regimen and, as a result, misled
consumers when marketing their products. Plaintiffs also allege
negligence, strict liability, design defect, breach of implied
warranty, breach of express warranty, fraud and
misrepresentation. Discovery of the plaintiffs claims
against the Company has begun but is limited to document
discovery. No trial has occurred in the hormone replacement
therapy litigation against the Company or any other defendants
except Wyeth and Pfizer. The trials against Wyeth have resulted
in verdicts for and against Wyeth, with several verdicts against
Wyeth reversed on
post-trial
motions. Pfizer has lost two jury verdicts. The Company does not
expect to have any trials set in the next year. The Company
intends to defend these lawsuits vigorously but is currently
unable to predict the outcome or to reasonably estimate the
range of potential loss, if any. The Company may have limited
insurance for these claims. The Company would have to assume
defense of the lawsuits and be responsible for damages, fees and
expenses, if any, that are awarded against it or for amounts in
excess of the Companys product liability coverage.
Other
Contingencies
The Company has supply agreements with two third parties to
produce metaxalone, the active ingredient in
Skelaxin®.
These supply agreements require the Company to purchase certain
minimum levels of metaxalone and expire in 2008 and 2010. If
sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments for
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
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.
18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Accounting
Developments
|
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies
for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. SFAS No. 161 also requires entities to
disclose additional information about the amounts and location
of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied and the impact
that hedges have on an entitys financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after
November 15, 2008. The Company does not anticipate
SFAS No. 161 will have a material effect on its
financial statements and is planning to adopt the standard in
the first quarter of 2009.
In December 2007, the Emerging Issues Task Force issued EITF
Issue 07-01,
Accounting for Collaborative Arrangements (Issue
07-01).
Issue 07-01
requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable Generally Accepted Accounting Principles
(GAAP) or, in the absence of other applicable GAAP,
based on analogy to authoritative accounting literature or a
reasonable, rational and consistently applied accounting policy
election. Issue
07-01 is
effective for fiscal years beginning after December 15,
2008. The Company is in the process of evaluating the effect of
Issue 07-01
on its financial statements and is planning to adopt this
standard in the first quarter of 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business
Combinations (SFAS No. 141(R)). This
statement establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase. SFAS No. 141(R) also
sets forth the disclosures required to be made in the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
Accordingly, SFAS No. 141(R) will be applied by the
Company to business combinations occurring on or after
January 1, 2009.
During 2008 and 2007, the Companys effective income tax
rate for continuing operations was 33.9% and 33.5%,
respectively. This rate varied from the statutory rate of 35% in
2008 and 2007 primarily due to tax benefits related to
tax-exempt interest income and domestic manufacturing
deductions, which benefits were partially offset by state taxes.
The Companys business is classified into five reportable
segments: branded pharmaceuticals, Meridian Auto-Injector,
royalties, contract manufacturing and all other. Branded
pharmaceuticals include a variety of branded prescription
products that are separately categorized into neuroscience,
hospital, acute care and legacy products. These branded
prescription products are aggregated because of the similarity
in regulatory environment, manufacturing processes, methods of
distribution and types of customer. Meridian Auto-Injector
products are sold to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen®
product, an epinephrine filled auto-injector, which is primarily
prescribed for the treatment of severe allergic reactions and
which is primarily marketed, distributed and sold by Dey, L.P.
Government revenues are principally derived from the sale of
nerve agent antidotes and other emergency medicine auto-injector
products marketed to the U.S. Department of Defense and
other federal, state and local
19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, amortization
and impairments) and total assets. Revenues among the segments
are presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment. The
Companys revenues are substantially all derived from
activities within the United States. The Companys assets
are substantially all located within the United States.
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
369,372
|
|
|
$
|
449,087
|
|
Meridian Auto-Injector
|
|
|
42,912
|
|
|
|
43,015
|
|
Royalties
|
|
|
19,123
|
|
|
|
20,324
|
|
Contract manufacturing
|
|
|
133,826
|
|
|
|
158,386
|
|
Other
|
|
|
313
|
|
|
|
396
|
|
Eliminations
|
|
|
(133,513
|
)
|
|
|
(155,178
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated total net revenues
|
|
$
|
432,033
|
|
|
$
|
516,030
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
297,003
|
|
|
$
|
362,213
|
|
Meridian Auto-Injector
|
|
|
26,305
|
|
|
|
24,575
|
|
Royalties
|
|
|
16,805
|
|
|
|
17,881
|
|
Contract manufacturing
|
|
|
151
|
|
|
|
204
|
|
Other
|
|
|
308
|
|
|
|
(297
|
)
|
Other operating costs and expense
|
|
|
(219,123
|
)
|
|
|
(236,721
|
)
|
Other income
|
|
|
11,121
|
|
|
|
6,698
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax
|
|
$
|
132,570
|
|
|
$
|
174,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
3,084,938
|
|
|
$
|
3,097,153
|
|
Meridian Auto-Injector
|
|
|
305,937
|
|
|
|
299,098
|
|
Royalties
|
|
|
27,957
|
|
|
|
30,562
|
|
Contract manufacturing
|
|
|
537
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
3,419,369
|
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following represents branded pharmaceutical revenues by the
Companys target markets:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
$
|
164,617
|
|
|
$
|
145,370
|
|
Hospital
|
|
|
70,917
|
|
|
|
70,160
|
|
Acute care
|
|
|
19,789
|
|
|
|
24,770
|
|
Legacy:
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
109,547
|
|
|
|
194,390
|
|
Other
|
|
|
4,502
|
|
|
|
14,397
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$
|
369,372
|
|
|
$
|
449,087
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Restructuring
Activities
|
Following the Circuit Courts decision in September 2007
regarding the Companys 722 Patent that covered the
Companys
Altace®
product, the Company developed a restructuring initiative
designed to accelerate a planned strategic shift emphasizing its
focus in neuroscience, hospital and acute care medicine. This
initiative included a reduction in personnel, staff leverage,
expense reductions and additional controls over spending,
reorganization of sales teams and a realignment of research and
development priorities.
The Company incurred total costs of approximately $67,000
associated with this initiative, including approximately $65,000
in restructuring charges, $1,000 in accelerated depreciation
associated with general support assets and approximately $1,000
for implementation costs of reorganizing the sales teams.
Expenses related to this initiative were primarily incurred in
the third and fourth quarters of 2007.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 440 people in
our sales force. Restructuring charges also include contract
termination costs, including the termination of the promotion
agreement for
Glumetzatm
and other exit costs associated with this initiative.
Specifically, the restructuring charges associated with this
initiative included employee termination costs, contract
termination costs, and other exit costs of $32,065, $31,232, and
$1,206, respectively. Substantially all of the restructuring
charges were paid by the end of the first quarter of 2008.
During 2006, the Company decided to streamline manufacturing
activities in order to improve operating efficiency and reduce
costs, including the decision to transfer the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility, which the Company expects to complete in
2009. As a result of these steps, the Company expects to incur
restructuring charges totaling approximately $15,000 through the
end of 2009, of which approximately $11,500 is associated with
accelerated depreciation and approximately $3,500 is associated
with employee termination costs. The employee termination costs
are expected to be paid by 2009.
21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The types of costs accrued and incurred are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Impact
|
|
|
Payments
|
|
|
Costs
|
|
|
2008
|
|
|
Third quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
21,144
|
|
|
$
|
1,530
|
|
|
$
|
21,428
|
|
|
$
|
|
|
|
$
|
1,246
|
|
Contract termination
|
|
|
|
|
|
|
(101
|
)
|
|
|
(297
|
)
|
|
|
196
|
|
|
|
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
Other
|
|
|
880
|
|
|
|
179
|
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
First quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
1,061
|
|
|
|
(1,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter of 2006 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
3,475
|
|
|
|
30
|
|
|
|
170
|
|
|
|
37
|
|
|
|
3,298
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
711
|
|
|
|
|
|
|
|
711
|
|
|
|
|
|
Fourth quarter of 2005 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
774
|
|
|
|
482
|
|
|
|
570
|
|
|
|
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,334
|
|
|
$
|
1,682
|
|
|
$
|
22,930
|
|
|
$
|
856
|
|
|
$
|
5,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Consolidated
Statements of Operations. |
The restructuring charges in 2008 and 2007 primarily relate to
the branded pharmaceutical segment. The accrued employee
separation payments as of March 31, 2008 are expected to be
paid by 2009.
|
|
13.
|
Stock-Based
Compensation
|
During the first quarter of 2008, the Company granted to certain
employees 529,430 RSAs, 412,200 LPUs with a one-year performance
cycle, 176,630 LPUs with a three-year performance cycle and
2,125,990 nonqualified stock options under its Incentive Plan.
The RSAs are grants of shares of common stock restricted from
sale or transfer for three years from grant date.
The 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. LPUs with a one-year
performance cycle, followed by a two-year restriction period,
will be earned based on 2008 operating targets. LPUs with a
three-year performance cycle will be earned based on
market-related performance targets over the years 2008 through
2010. At the end of the applicable performance period, the
number of shares of common stock awarded is determined by
adjusting upward or downward from the performance target in a
range between 0% and 200%. The final performance percentage on
which the number of shares of common stock issued is based,
considering performance metrics established for the performance
period, will be determined by the Companys Board of
Directors or a committee of the Board at its sole discretion.
The nonqualified stock options were granted at option prices
equal to the fair market value of the common stock at the date
of grant and vest approximately in one-third increments on each
of the first three anniversaries of the grant date.
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
22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
inventory levels of the Companys products. Because actual
returns related to sales in prior periods were lower than the
Companys original estimates, it recorded a decrease in its
reserve for returns in the first quarter of 2007. During the
first quarter of 2007, 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. The
effect of the change in estimate on first quarter 2007 operating
income was an increase of approximately $5,000.
|
|
15.
|
Discontinued
Operations
|
On March 30, 2004, the Companys Board of Directors
approved managements decision to market for divestiture
some of the Companys womens health products. On
November 22, 2004, the Company sold all of its rights in
Prefest®
for approximately $15,000. On December 23, 2004, the
Company sold all of its rights in
Nordette®
for approximately $12,000.
The
Prefest®
and
Nordette®
product rights had identifiable cash flows that were largely
independent of the cash flows of other groups of assets and
liabilities and are classified as discontinued operations in the
accompanying financial statements.
Prefest®
and
Nordette®
formerly were included in the Companys branded
pharmaceuticals segment.
Summarized financial information for the discontinued operations
is as follows:
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31, 2007
|
|
|
Total revenues
|
|
$
|
(222
|
)
|
Operating loss
|
|
|
(220
|
)
|
Net loss
|
|
$
|
(141
|
)
|
Discontinued operations during 2007 are primarily due to changes
in estimated reserves for returns and rebates.
|
|
16.
|
Guarantor
Financial Statements
|
Each of the Companys subsidiaries, except Monarch
Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), guaranteed on a full, unconditional and
joint and several basis the Companys performance under the
$400,000 aggregate principal amount of the
11/4%
Convertible Senior Notes due April 1, 2026 (the
Notes).
There are no restrictions under the Companys current
financing arrangements on the ability of the Guarantor
Subsidiaries to distribute funds to the Company in the form of
cash dividends, loans or advances. The following combined
financial data provides information regarding the financial
position, results of operations and cash flows of the Guarantor
Subsidiaries for the $400,000 aggregate principal amount of the
Notes (condensed consolidating financial data). Separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented because management has
determined that such information would not be material to the
holders of the debt.
23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING BALANCE SHEETS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
815,728
|
|
|
$
|
4,641
|
|
|
$
|
6,213
|
|
|
$
|
|
|
|
$
|
826,582
|
|
|
$
|
9,718
|
|
|
$
|
4,645
|
|
|
$
|
5,646
|
|
|
$
|
|
|
|
$
|
20,009
|
|
Investments in debt securities
|
|
|
589,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
589,107
|
|
|
|
1,344,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344,980
|
|
Marketable Securities
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,589
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,135
|
|
Accounts receivable, net
|
|
|
537
|
|
|
|
185,174
|
|
|
|
1,076
|
|
|
|
|
|
|
|
186,787
|
|
|
|
9
|
|
|
|
182,575
|
|
|
|
1,080
|
|
|
|
|
|
|
|
183,664
|
|
Inventories
|
|
|
69,318
|
|
|
|
41,054
|
|
|
|
272
|
|
|
|
(83
|
)
|
|
|
110,561
|
|
|
|
76,981
|
|
|
|
33,361
|
|
|
|
269
|
|
|
|
(303
|
)
|
|
|
110,308
|
|
Deferred income tax assets
|
|
|
54,600
|
|
|
|
41,197
|
|
|
|
39
|
|
|
|
|
|
|
|
95,836
|
|
|
|
54,917
|
|
|
|
45,182
|
|
|
|
39
|
|
|
|
|
|
|
|
100,138
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,721
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
20,175
|
|
Prepaid expenses and other current assets
|
|
|
28,662
|
|
|
|
11,634
|
|
|
|
15
|
|
|
|
|
|
|
|
40,311
|
|
|
|
28,315
|
|
|
|
10,926
|
|
|
|
4
|
|
|
|
|
|
|
|
39,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,559,541
|
|
|
|
283,700
|
|
|
|
7,615
|
|
|
|
(83
|
)
|
|
|
1,850,773
|
|
|
|
1,534,776
|
|
|
|
278,143
|
|
|
|
7,038
|
|
|
|
(303
|
)
|
|
|
1,819,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
136,366
|
|
|
|
128,423
|
|
|
|
|
|
|
|
|
|
|
|
264,789
|
|
|
|
125,847
|
|
|
|
131,246
|
|
|
|
|
|
|
|
|
|
|
|
257,093
|
|
Intangible assets, net
|
|
|
|
|
|
|
731,181
|
|
|
|
2,666
|
|
|
|
|
|
|
|
733,847
|
|
|
|
|
|
|
|
778,248
|
|
|
|
2,726
|
|
|
|
|
|
|
|
780,974
|
|
Goodwill
|
|
|
|
|
|
|
129,150
|
|
|
|
|
|
|
|
|
|
|
|
129,150
|
|
|
|
|
|
|
|
129,150
|
|
|
|
|
|
|
|
|
|
|
|
129,150
|
|
Deferred income tax assets
|
|
|
13,960
|
|
|
|
338,023
|
|
|
|
|
|
|
|
|
|
|
|
351,983
|
|
|
|
4,529
|
|
|
|
339,107
|
|
|
|
64
|
|
|
|
|
|
|
|
343,700
|
|
Other assets
|
|
|
39,046
|
|
|
|
49,781
|
|
|
|
|
|
|
|
|
|
|
|
88,827
|
|
|
|
42,315
|
|
|
|
53,936
|
|
|
|
|
|
|
|
|
|
|
|
96,251
|
|
Investments in subsidiaries
|
|
|
1,748,705
|
|
|
|
|
|
|
|
|
|
|
|
(1,748,705
|
)
|
|
|
|
|
|
|
1,671,776
|
|
|
|
|
|
|
|
|
|
|
|
(1,671,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,497,618
|
|
|
$
|
1,660,258
|
|
|
$
|
10,281
|
|
|
$
|
(1,748,788
|
)
|
|
$
|
3,419,369
|
|
|
$
|
3,379,243
|
|
|
$
|
1,709,830
|
|
|
$
|
9,828
|
|
|
$
|
(1,672,079
|
)
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
37,936
|
|
|
$
|
21,317
|
|
|
$
|
89
|
|
|
$
|
|
|
|
$
|
59,342
|
|
|
$
|
52,664
|
|
|
$
|
23,408
|
|
|
$
|
409
|
|
|
$
|
|
|
|
$
|
76,481
|
|
Accrued expenses
|
|
|
46,302
|
|
|
|
246,996
|
|
|
|
6
|
|
|
|
|
|
|
|
293,304
|
|
|
|
69,849
|
|
|
|
306,732
|
|
|
|
23
|
|
|
|
|
|
|
|
376,604
|
|
Income taxes payable
|
|
|
18,716
|
|
|
|
(1,660
|
)
|
|
|
124
|
|
|
|
|
|
|
|
17,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
102,954
|
|
|
|
266,653
|
|
|
|
219
|
|
|
|
|
|
|
|
369,826
|
|
|
|
122,513
|
|
|
|
330,140
|
|
|
|
432
|
|
|
|
|
|
|
|
453,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Other liabilities
|
|
|
56,167
|
|
|
|
6,164
|
|
|
|
|
|
|
|
|
|
|
|
62,331
|
|
|
|
55,227
|
|
|
|
7,753
|
|
|
|
|
|
|
|
|
|
|
|
62,980
|
|
Intercompany payable (receivable)
|
|
|
351,285
|
|
|
|
(352,059
|
)
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
290,443
|
|
|
|
(291,114
|
)
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
910,406
|
|
|
|
(79,242
|
)
|
|
|
993
|
|
|
|
|
|
|
|
832,157
|
|
|
|
868,183
|
|
|
|
46,779
|
|
|
|
1,103
|
|
|
|
|
|
|
|
916,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,587,212
|
|
|
|
1,739,500
|
|
|
|
9,288
|
|
|
|
(1,748,788
|
)
|
|
|
2,587,212
|
|
|
|
2,511,060
|
|
|
|
1,663,051
|
|
|
|
8,725
|
|
|
|
(1,672,079
|
)
|
|
|
2,510,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,497,618
|
|
|
$
|
1,660,258
|
|
|
$
|
10,281
|
|
|
$
|
(1,748,788
|
)
|
|
$
|
3,419,369
|
|
|
$
|
3,379,243
|
|
|
$
|
1,709,830
|
|
|
$
|
9,828
|
|
|
$
|
(1,672,079
|
)
|
|
$
|
3,426,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
119,137
|
|
|
$
|
412,242
|
|
|
$
|
338
|
|
|
$
|
(118,807
|
)
|
|
$
|
412,910
|
|
|
$
|
127,762
|
|
|
$
|
495,261
|
|
|
$
|
49
|
|
|
$
|
(127,366
|
)
|
|
$
|
495,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
|
|
|
|
|
19,123
|
|
|
|
|
|
|
|
|
|
|
|
19,123
|
|
|
|
|
|
|
|
20,324
|
|
|
|
|
|
|
|
|
|
|
|
20,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
119,137
|
|
|
|
431,365
|
|
|
|
338
|
|
|
|
(118,807
|
)
|
|
|
432,033
|
|
|
|
127,762
|
|
|
|
515,585
|
|
|
|
49
|
|
|
|
(127,366
|
)
|
|
|
516,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
34,999
|
|
|
|
175,460
|
|
|
|
30
|
|
|
|
(119,028
|
)
|
|
|
91,461
|
|
|
|
47,186
|
|
|
|
191,442
|
|
|
|
192
|
|
|
|
(127,366
|
)
|
|
|
111,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
72,905
|
|
|
|
56,912
|
|
|
|
41
|
|
|
|
|
|
|
|
129,858
|
|
|
|
70,867
|
|
|
|
97,574
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
168,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
582
|
|
|
|
27,926
|
|
|
|
|
|
|
|
|
|
|
|
28,508
|
|
|
|
788
|
|
|
|
31,483
|
|
|
|
|
|
|
|
|
|
|
|
32,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,166
|
|
|
|
55,472
|
|
|
|
60
|
|
|
|
|
|
|
|
59,698
|
|
|
|
4,797
|
|
|
|
30,821
|
|
|
|
60
|
|
|
|
|
|
|
|
35,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
(344
|
)
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
1,059
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
112,308
|
|
|
|
317,173
|
|
|
|
131
|
|
|
|
(119,028
|
)
|
|
|
310,584
|
|
|
|
124,098
|
|
|
|
351,320
|
|
|
|
123
|
|
|
|
(127,366
|
)
|
|
|
348,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
6,829
|
|
|
|
114,192
|
|
|
|
207
|
|
|
|
221
|
|
|
|
121,449
|
|
|
|
3,664
|
|
|
|
164,265
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
167,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,595
|
|
|
|
29
|
|
|
|
5
|
|
|
|
|
|
|
|
13,629
|
|
|
|
9,223
|
|
|
|
39
|
|
|
|
4
|
|
|
|
|
|
|
|
9,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,790
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,804
|
)
|
|
|
(2,003
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(376
|
)
|
|
|
(873
|
)
|
|
|
545
|
|
|
|
|
|
|
|
(704
|
)
|
|
|
(559
|
)
|
|
|
(45
|
)
|
|
|
61
|
|
|
|
|
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
77,713
|
|
|
|
|
|
|
|
|
|
|
|
(77,713
|
)
|
|
|
|
|
|
|
108,944
|
|
|
|
|
|
|
|
|
|
|
|
(108,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(3,566
|
)
|
|
|
3,573
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,937
|
)
|
|
|
4,995
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
85,576
|
|
|
|
2,715
|
|
|
|
543
|
|
|
|
(77,713
|
)
|
|
|
11,121
|
|
|
|
110,668
|
|
|
|
4,967
|
|
|
|
7
|
|
|
|
(108,944
|
)
|
|
|
6,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
92,405
|
|
|
|
116,907
|
|
|
|
750
|
|
|
|
(77,492
|
)
|
|
|
132,570
|
|
|
|
114,332
|
|
|
|
169,232
|
|
|
|
(67
|
)
|
|
|
(108,944
|
)
|
|
|
174,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
4,772
|
|
|
|
39,977
|
|
|
|
188
|
|
|
|
|
|
|
|
44,937
|
|
|
|
(1,581
|
)
|
|
|
60,104
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
58,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
87,633
|
|
|
|
76,930
|
|
|
|
562
|
|
|
|
(77,492
|
)
|
|
|
87,633
|
|
|
|
115,913
|
|
|
|
109,128
|
|
|
|
(43
|
)
|
|
|
(108,944
|
)
|
|
|
116,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
87,633
|
|
|
$
|
76,930
|
|
|
$
|
562
|
|
|
$
|
(77,492
|
)
|
|
$
|
87,633
|
|
|
$
|
115,913
|
|
|
$
|
108,987
|
|
|
$
|
(43
|
)
|
|
$
|
(108,944
|
)
|
|
$
|
115,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
Cash flows provided by operating activities
|
|
$
|
32,908
|
|
|
$
|
66,860
|
|
|
$
|
464
|
|
|
$
|
100,232
|
|
|
$
|
10,345
|
|
|
$
|
96,714
|
|
|
$
|
1,025
|
|
|
$
|
108,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
(148
|
)
|
Purchases of investments in debt securities
|
|
|
(279,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(279,175
|
)
|
|
|
(383,925
|
)
|
|
|
|
|
|
|
|
|
|
|
(383,925
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
1,006,630
|
|
|
|
|
|
|
|
|
|
|
|
1,006,630
|
|
|
|
515,905
|
|
|
|
|
|
|
|
|
|
|
|
515,905
|
|
Purchases of property, plant and equipment
|
|
|
(16,434
|
)
|
|
|
(3,480
|
)
|
|
|
|
|
|
|
(19,914
|
)
|
|
|
(8,105
|
)
|
|
|
(3,680
|
)
|
|
|
|
|
|
|
(11,785
|
)
|
Proceeds from sale of property and equipment
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Acquisition of
Avinza®
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(23
|
)
|
|
|
(290,528
|
)
|
|
|
|
|
|
|
(290,551
|
)
|
Loan repayment from Ligand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
Purchases of intellectual property and product rights
|
|
|
|
|
|
|
(715
|
)
|
|
|
|
|
|
|
(715
|
)
|
|
|
|
|
|
|
(31,452
|
)
|
|
|
|
|
|
|
(31,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
711,144
|
|
|
|
(4,195
|
)
|
|
|
|
|
|
|
706,949
|
|
|
|
161,454
|
|
|
|
(325,657
|
)
|
|
|
|
|
|
|
(164,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
2,611
|
|
Other
|
|
|
(662
|
)
|
|
|
|
|
|
|
|
|
|
|
(662
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
Intercompany
|
|
|
62,566
|
|
|
|
(62,669
|
)
|
|
|
103
|
|
|
|
|
|
|
|
(227,048
|
)
|
|
|
226,725
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
61,958
|
|
|
|
(62,669
|
)
|
|
|
103
|
|
|
|
(608
|
)
|
|
|
(224,495
|
)
|
|
|
226,725
|
|
|
|
323
|
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
806,010
|
|
|
|
(4
|
)
|
|
|
567
|
|
|
|
806,573
|
|
|
|
(52,696
|
)
|
|
|
(2,218
|
)
|
|
|
1,348
|
|
|
|
(53,566
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
9,718
|
|
|
|
4,645
|
|
|
|
5,646
|
|
|
|
20,009
|
|
|
|
101,210
|
|
|
|
8,749
|
|
|
|
3,818
|
|
|
|
113,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
815,728
|
|
|
$
|
4,641
|
|
|
$
|
6,213
|
|
|
$
|
826,582
|
|
|
$
|
48,514
|
|
|
$
|
6,531
|
|
|
$
|
5,166
|
|
|
$
|
60,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
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 in our Annual Report on
Form 10-K
for the year ended December 31, 2007, 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, 2007; 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.
Our
Business
We are a vertically integrated pharmaceutical company that
performs basic research and 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 specialty-driven markets,
particularly neuroscience, hospital and acute care. We believe
each of our targeted markets 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 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 various stages of development and technologies that
have significant market potential that complement our
neuroscience, hospital and acute care medicine platforms. We may
also seek company acquisitions which add products or products in
development, technologies or sales and marketing capabilities in
our target markets 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 developing and commercializing innovative,
clinically-differentiated therapies and technologies in our
target, specialty-driven markets.
Our business consists of five segments which include branded
pharmaceuticals, Meridian Auto-Injector, royalties, contract
manufacturing and other. Our branded pharmaceutical products are
divided into the following categories:
|
|
|
|
|
neuroscience (including
Skelaxin®,
Avinza®
and
Sonata®),
|
|
|
|
hospital (including
Thrombin-JMI®
and
Synercid®),
|
|
|
|
acute care (including
Bicillin®
and
Intal®), and
|
|
|
|
legacy products (including
Altace®,
Levoxyl®
and
Cytomel®).
|
Our Meridian Auto-Injector segment includes
EpiPen®,
a commercial product, and nerve gas antidotes which we provide
to the U.S. Military. Our royalties segment relates to
revenues we derive from successfully developed products that we
have licensed to third parties.
Recent
Developments
We have completed patient enrollment for the pivotal
Phase III clinical trial evaluating
Acuroxtm
Tablets for relief of moderate to severe pain. We expect to
report top-line results from this pivotal trial by July 2008
and, if these results are positive, submit a New Drug
Application (NDA) for
Acuroxtm
Tablets to the FDA before the end of 2008.
Acuroxtm
Tablets, an immediate-release tablet, is a proprietary
composition of oxycodone HCI, niacin and functional inactive
ingredients intended to relieve moderate to severe pain and
resist or deter common methods of prescription drug abuse,
including intravenous injection of dissolved tablets, nasal
snorting of crushed tablets and intentional swallowing of
excessive numbers of tablets.
27
We recently learned that Purdue Pharma L.P. (Purdue)
has submitted an NDA for a reformulated version of its
long-acting oxycodone product. Purdue claims that the
reformulated product is less susceptible to some common methods
of abuse than its currently marketed formulation. If approved,
this product would compete with
Remoxytm,
our novel formulation of long-acting oxycodone that we are
developing for the treatment of moderate to severe chronic pain
that is designed to resist common methods of prescription drug
misuse and abuse. An FDA advisory committee recently considered
some aspects of Purdues NDA at a public meeting and
expressed a variety of concerns. We are uncertain as to whether
or when the FDA will approve Purdues reformulated product.
|
|
II.
|
RESULTS
OF OPERATIONS
|
Three
Months Ended March 31, 2008 and 2007
The following table summarizes total revenues and cost of
revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
369,372
|
|
|
$
|
449,087
|
|
Meridian Auto-Injector
|
|
|
42,912
|
|
|
|
43,015
|
|
Royalties
|
|
|
19,123
|
|
|
|
20,324
|
|
Contract manufacturing
|
|
|
313
|
|
|
|
3,208
|
|
Other
|
|
|
313
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
432,033
|
|
|
$
|
516,030
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments Branded pharmaceuticals
|
|
$
|
72,369
|
|
|
$
|
86,874
|
|
Meridian Auto-Injector
|
|
|
16,607
|
|
|
|
18,440
|
|
Royalties
|
|
|
2,318
|
|
|
|
2,443
|
|
Contract manufacturing
|
|
|
162
|
|
|
|
3,004
|
|
Other
|
|
|
5
|
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
91,461
|
|
|
$
|
111,454
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our deductions from gross sales:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Gross Sales
|
|
$
|
549,419
|
|
|
$
|
634,839
|
|
Commercial Rebates
|
|
|
41,676
|
|
|
|
48,938
|
|
Medicare Part D Rebates
|
|
|
16,197
|
|
|
|
14,966
|
|
Medicaid Rebates
|
|
|
12,264
|
|
|
|
8,718
|
|
Chargebacks
|
|
|
20,212
|
|
|
|
23,645
|
|
Returns
|
|
|
4,450
|
|
|
|
(1,254
|
)
|
Trade Discounts/Other
|
|
|
22,587
|
|
|
|
24,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432,033
|
|
|
|
515,808
|
|
Discontinued Operations
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
432,033
|
|
|
$
|
516,030
|
|
|
|
|
|
|
|
|
|
|
28
Gross sales were lower in 2008 compared to 2007 primarily due to
a decrease in gross sales of
Altace®,
partially offset by an increase in gross sales of
Avinza®,
which we acquired on February 26, 2007. During December
2007 a competitor entered the market with a generic substitute
for
Altace®.
Based on inventory data provided to us by our customers, we
believe that wholesale inventory levels of our key products,
Skelaxin®,
Altace®,
Thrombin-JMI®,
Avinza®,
and
Levoxyl®
are at or below normalized levels as of March 31, 2008. We
estimate that wholesale and retail inventories of our products
as of March 31, 2008 represent gross sales of approximately
$155.0 million to $165.0 million.
The following tables provide the activity and ending balances
for our significant deductions from gross sales.
Accrual
for Rebates, including Administrative Fees:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1, net of prepaid amounts
|
|
$
|
65,301
|
|
|
$
|
53,765
|
|
Current provision related to sales made in current period
|
|
|
67,155
|
|
|
|
72,088
|
|
Current provision related to sales made in prior periods
|
|
|
2,982
|
|
|
|
534
|
|
Rebates paid
|
|
|
(83,660
|
)
|
|
|
(67,255
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$
|
51,778
|
|
|
$
|
59,132
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial rebates and Medicaid and Medicare
rebates.
Accrual
for Returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
32,860
|
|
|
$
|
42,001
|
|
Current provision
|
|
|
4,450
|
|
|
|
(1,254
|
)
|
Actual returns
|
|
|
(4,135
|
)
|
|
|
(6,295
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
33,175
|
|
|
$
|
34,452
|
|
|
|
|
|
|
|
|
|
|
Our calculation for product returns reserves is based on
historical sales and return rates over the period during which
customers have a right of return. We also consider current
wholesale inventory levels of our products. Because actual
returns related to sales in prior periods were lower than our
original estimates, we recorded a decrease in our reserve for
returns in the first quarter of 2007. During the first quarter
of 2007, 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. The effect of the
change in estimate on first quarter 2007 operating income was an
increase of approximately $5.0 million.
Accrual
for Chargebacks (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
11,120
|
|
|
$
|
13,939
|
|
Current provision
|
|
|
20,212
|
|
|
|
23,645
|
|
Actual chargebacks
|
|
|
(21,080
|
)
|
|
|
(26,557
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
10,252
|
|
|
$
|
11,027
|
|
|
|
|
|
|
|
|
|
|
29
Branded
Pharmaceuticals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Branded pharmaceutical revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skelaxin®
|
|
$
|
115,884
|
|
|
$
|
112,118
|
|
|
$
|
3,766
|
|
|
|
3.4
|
%
|
Altace®
|
|
|
79,811
|
|
|
|
156,620
|
|
|
|
(76,809
|
)
|
|
|
(49.0
|
)
|
Thrombin-JMI®
|
|
|
67,151
|
|
|
|
63,975
|
|
|
|
3,176
|
|
|
|
5.0
|
|
Avinza®
|
|
|
32,023
|
|
|
|
9,399
|
|
|
|
22,624
|
|
|
|
>100.0
|
|
Levoxyl®
|
|
|
15,658
|
|
|
|
22,057
|
|
|
|
(6,399
|
)
|
|
|
(29.0
|
)
|
Other
|
|
|
58,845
|
|
|
|
84,918
|
|
|
|
(26,073
|
)
|
|
|
(30.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
369,372
|
|
|
$
|
449,087
|
|
|
$
|
(79,715
|
)
|
|
|
(17.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
$
|
72,369
|
|
|
$
|
86,874
|
|
|
$
|
(14,505
|
)
|
|
|
(16.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of Key Products
Skelaxin®
Net sales of
Skelaxin®
increased in 2008 from 2007 primarily due to a price increase
taken in the fourth quarter of 2007 and changes in wholesale
inventory levels partially offset by a decrease in
prescriptions. During 2007, net sales of
Skelaxin®
benefited from a favorable change in estimate in the
products reserve for returns as discussed above. Due to
increased competition, total prescriptions for
Skelaxin®
decreased approximately 8.5% in 2008 from 2007 according to IMS
America, Ltd. (IMS) monthly prescription data. The
effect of this decrease in prescriptions is partially offset by
an increase in the average number of pills dispensed with each
prescription over the same time period. We do not believe net
sales of
Skelaxin®
will continue to increase at the rate experienced in the first
quarter of 2008.
For a discussion regarding the risk of potential generic
competition for
Skelaxin®,
please see Note 8, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Altace®
Net sales of
Altace®
decreased significantly in 2008 from 2007 due to a competitor
entering the market in December 2007 with a generic substitute
for
Altace®
capsules. As a result of the entry of generic competition, we
expect net sales of
Altace®
to continue declining throughout 2008. Total prescriptions for
Altace®
decreased approximately 47.8% in 2008 from 2007 according to IMS
monthly prescription data.
For a discussion regarding the generic competition for
Altace®,
please see Note 8, Commitments and
Contingencies in Part I, Item 1, Financial
Statements.
Thrombin-JMI®
Net sales of
Thrombin-JMI®
increased in 2008 compared to 2007 primarily due to a price
increase taken in the fourth quarter of 2007. A competing
product entered the market in the fourth quarter of 2007 and
another entered the market in the first quarter of 2008. Net
sales of
Thrombin-JMI®
may decrease as a result of the entry of these competing
products.
Avinza®
We acquired all rights to
Avinza®
in the United States, its territories and Canada on
February 26, 2007. Net sales of
Avinza®
in 2007 reflect sales occurring from February 26, 2007
through March 31, 2007. Total prescriptions for
Avinza®
decreased approximately 5.4% in the first quarter of 2008
compared to the first
30
quarter of 2007 according to IMS monthly prescription data.
While total prescriptions for
Avinza®
increased approximately 1.5% in the first quarter of 2008
compared to the fourth quarter of 2007, it may not be indicative
of future performance.
On March 24, 2008, we received a letter from the United
States Food and Drug Administration, Division of Drug Marketing,
Advertising, and Communications (DDMAC) regarding
promotional material for
Avinza®
that was created and submitted to the DDMAC by Ligand
Pharmaceuticals (the company from whom we acquired
Avinza®).
The letter expressed concern with the balance of the described
risks and benefits associated with the use of the product and
the justification for certain statements made in the promotional
material. Although the Company does not currently use
promotional materials created by Ligand, including the specific
material referred to in the letter, we have requested a meeting
with the DDMAC to discuss this matter. We plan to address the
points raised in the letter as well as the applicability of
those points to the marketing materials we currently use, in an
effort to fully and expeditiously resolve this matter.
Separately, we have reviewed our sales and marketing practices
related to
Avinza®
and found no violations of law. We are nonetheless initiating a
program to improve the sales and marketing practices associated
with all of our products.
For a discussion regarding the risk of potential generic
competition for
Avinza®,
please see Note 8, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Levoxyl®
Net sales of
Levoxyl®
decreased in 2008 compared to 2007 primarily due to decreases in
wholesale inventory levels in 2008, partially offset by price
increases taken in the fourth quarter of 2007. While net sales
for this product may continue to decline in 2008, we believe the
rate of any decline will be lower than that experienced in the
first quarter of 2008.
Other
Net sales of other branded pharmaceutical products were lower in
2008 compared to 2007 primarily due to the sale of several of
our other branded pharmaceutical products to JHP
Pharmaceuticals, lower net sales of
Sonata®
and
Bicillin®
and a decrease in prescriptions.
Net sales of
Sonata®
were lower in 2008 than in 2007 primarily due to a decrease in
prescriptions and changes in wholesale inventory levels
partially offset by a price increase taken in the fourth quarter
of 2007. We have granted CorePharma LLC a license to market an
authorized generic of our
Sonata®
product. CorePharma began selling an authorized generic of
Sonata®
in May 2008. We will receive a royalty on all net sales of the
authorized generic of
Sonata®.
With the expiration of the composition of matter patent covering
Sonata®,
we expect that new competitors will enter the market with
unauthorized generic substitutes for
Sonata®
in June 2008. We will not receive any royalties on sales of
these unauthorized generics. We expect net sales of
Sonata®
to begin declining even more significantly during the last three
quarters of 2008 than it has over the past year as a result of
these authorized and unauthorized generic substitutes entering
the market.
We completed construction of facilities to produce
Bicillin®
at our Rochester, Michigan location, began commercial production
in the fourth quarter of 2006 and replenished wholesale
inventories of the product during the first quarter of 2007.
Prior to the first quarter of 2007,
Bicillin®
was in short supply. Accordingly, we believe that net sales of
Bicillin during the first quarter of 2008 are more indicative of
demand for the product than net sales during the first quarter
of 2007. Our other branded pharmaceutical products are not
promoted through our sales force and prescriptions for many of
our products included in this category are declining.
31
Cost
of Revenues
Cost of revenues from branded pharmaceutical products decreased
in 2008 from 2007 primarily due to a decrease in unit sales of
Altace®
and the sale of several of our other branded pharmaceutical
products to JHP Pharmaceuticals LLC on October 1, 2007,
partially offset by an increase in unit sales of
Avinza®
due to the acquisition of this product on February 26, 2007.
Meridian
Auto-Injector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Meridian Auto-Injector revenue
|
|
$
|
42,912
|
|
|
$
|
43,015
|
|
|
$
|
(103
|
)
|
|
|
(0.2
|
)%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
16,607
|
|
|
|
18,440
|
|
|
|
(1,833
|
)
|
|
|
(9.9
|
)
|
Most of our
Epipen®
sales are based on our supply agreement with Dey, L.P., which
markets, distributes and sells the product worldwide, except for
Canada where it is marketed, distributed and sold by us.
Revenues from the Meridian Auto-Injector segment fluctuate based
on the buying patterns of Dey, L.P. and government customers.
Demand for
Epipen®
is seasonal as a result of its use in the emergency treatment of
allergic reactions to insect stings or bites, more of which
occur in the warmer months. With respect to auto-injector
products sold to government entities, demand for these products
is affected by the cyclical nature of procurements as well as
response to domestic and international events. Total
prescriptions for
Epipen®
in the United States increased approximately 3.8% in 2008
compared to 2007 according to IMS monthly prescription data.
Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Royalty revenue
|
|
$
|
19,123
|
|
|
$
|
20,324
|
|
|
$
|
(1,201
|
)
|
|
|
(5.9
|
)%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
2,318
|
|
|
|
2,443
|
|
|
|
(125
|
)
|
|
|
(5.1
|
)
|
Revenues from royalties are derived primarily from payments we
receive based on sales of
Adenoscan®.
On April 10, 2008 CV Therapeutics, Inc. and Astellas Pharma
US, Inc. announced that the FDA approved regadenoson injection,
an A2A adenosine receptor agonist product that will compete with
Adenoscan®.
Regadenoson will be commercialized by Astellas. Astellas is also
responsible for the marketing and sale of
Adenoscan®
pursuant to agreements we have with them. It is anticipated that
following the commercial launch of regadenoson, sales of
Adenoscan may decline. However, our agreements with Astellas
provide for minimum royalty payments to King of
$40.0 million per year for three years (beginning
June 1, 2008 and ending May 31, 2011). King will
continue to receive royalties on the sale of
Adenoscan®
through expiration of the patents covering the product, but the
minimum guaranteed portion of the royalty payments terminates
upon certain events, including a finding of invalidity or
unenforceability of the patents. In October 2007, we entered
into an agreement with Astellas and a subsidiary of Teva
Pharmaceutical Industries Ltd. providing Teva with the right to
launch a generic version of
Adenoscan®
pursuant to a license in September 2012 or earlier under certain
conditions.
32
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
$
|
91,461
|
|
|
$
|
111,454
|
|
|
$
|
(19,993
|
)
|
|
|
(17.9
|
)%
|
Selling, general and administrative
|
|
|
129,858
|
|
|
|
168,312
|
|
|
|
(38,454
|
)
|
|
|
(22.8
|
)
|
Research and development
|
|
|
28,508
|
|
|
|
32,271
|
|
|
|
(3,763
|
)
|
|
|
(11.7
|
)
|
Depreciation and amortization
|
|
|
59,698
|
|
|
|
35,678
|
|
|
|
24,020
|
|
|
|
67.3
|
|
Restructuring charges
|
|
|
1,059
|
|
|
|
460
|
|
|
|
599
|
|
|
|
> 100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
310,584
|
|
|
$
|
348,175
|
|
|
$
|
(37,591
|
)
|
|
|
(10.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$
|
111,901
|
|
|
$
|
122,354
|
|
|
$
|
(10,453
|
)
|
|
|
(8.5
|
)%
|
Co-promotion fees
|
|
|
17,957
|
|
|
|
45,958
|
|
|
|
(28,001
|
)
|
|
|
(60.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
129,858
|
|
|
$
|
168,312
|
|
|
$
|
(38,454
|
)
|
|
|
(22.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 30.1% and 32.6% in 2008 and 2007,
respectively.
Total selling, general and administrative expenses decreased in
2008 compared to 2007 primarily due to a decrease in
co-promotion expenses for fees that we pay to Wyeth under our
Amended and Restated Co-Promotion Agreement (the Amended
Co-Promotion Agreement) and a decrease in operating
expenses. The decrease in co-promotion expense is due to a
decrease in
Altace®
net sales and the lower percentage of net sales of
Altace®
that we paid Wyeth in 2008 compared to 2007 under the Amended
Co-Promotion Agreement. For additional discussion regarding the
Amended Co-Promotion Agreement, please see General
within the Liquidity and Capital Resources section
below. For a discussion regarding net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
Following the Circuit Courts decision in September 2007
invalidating our 722 Patent that covered
Altace®,
our senior management team conducted an extensive examination of
our company and developed a restructuring initiative designed to
accelerate a planned strategic shift emphasizing our focus in
neuroscience, hospital and acute care. This initiative included
a reduction in personnel, staff leverage, expense reductions and
additional controls over spending, reorganization of sales teams
and a realignment of research and development priorities. As a
result of these actions we have reduced selling, general and
administrative expenses, exclusive of co-promotion fees, in the
first quarter of 2008 and expect these expenses to decline by
approximately $75.0 million to $90.0 million for the
full year of 2008 compared to the full year of 2007.
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 inventory valuation adjustment charges;
charges resulting from the early extinguishments of debt; asset
impairment charges; expenses of drug recalls; and gains and
losses resulting from the divestiture of assets. We believe the
identification of special items enhances an analysis of our
ongoing, underlying business and an analysis of our financial
results when comparing those results to that of a previous or
subsequent like period. However, it should be noted that the
determination of whether to classify an item as a special item
involves judgments by us.
33
Selling, general and administrative expense includes special
items of $2.9 million and $1.1 million during 2008 and
2007, respectively, primarily due to professional fees related
to the previously completed investigations of our company by the
HHS/OIG and the SEC, and the on-going private plaintiff
securities litigation. For additional information, please see
Note 8, Commitments and Contingencies, in
Part I, Item 1, Financial Statements.
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
|
Ended March 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Research and development
|
|
$
|
28,508
|
|
|
$
|
32,271
|
|
|
$
|
(3,763
|
)
|
|
|
(11.7
|
)%
|
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 decreased due to the timing of costs
incurred on our current research and development projects. We
anticipate research and development expense to increase in 2008
compared to 2007. For a discussion regarding recent research and
development activities, please see Recent
Developments above.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased in 2008 from
2007 primarily due to amortization associated with
Altace®
and
Avinza®,
partially offset by a decrease in depreciation and amortization
expense associated with the sale of the Rochester, Michigan
sterile manufacturing facility. Following the Circuit
Courts decision in September 2007 invalidating our
722 patent that covered
Altace®,
we undertook an analysis of its potential effect on future net
sales of the product. Based upon this analysis, we reduced the
estimated remaining useful life of
Altace®.
Accordingly, amortization of the remaining intangibles
associated with
Altace®
was completed during the first quarter of 2008. The amortization
expense associated with
Altace®
during the first quarter of 2008 was $29.7 million.
Additionally, on February 26, 2007, we completed our
acquisition of
Avinza®
and began amortizing the associated intangible assets as of that
date. We completed the sale of the Rochester, Michigan sterile
manufacturing facility to JHP Pharmaceuticals LLC on
October 1, 2007. For additional information, please see
Note 6, Acquisitions, Dispositions, Co-Promotions and
Alliances, in Part I, Item 1, Financial
Statements. Due to the completed amortization of
intangible assets related to
Altace®
in the first quarter of 2008, we expect depreciation and
amortization expense to decrease substantially during the
remaining quarters of 2008. Depreciation and amortization
expense in 2008 and 2007 include special items of
$0.6 million and $1.5 million, respectively, due to
accelerated depreciation on certain assets, including those
associated with our decision to transfer the production of
Levoxyl®
from our St. Petersburg, Florida facility to our Bristol,
Tennessee facility by 2009.
As of March 31, 2008, the net intangible assets associated
with
Synercid®
totaled approximately $74.0 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.
In addition, certain generic companies have challenged patents
on
Skelaxin®
and
Avinza®.
For additional information, please see Note 8,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. If a generic
version of
Skelaxin®
or
Avinza®
enters the market, we may have to write off a portion or all of
the intangible assets associated with these products.
34
Non-Operating
Items
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
13,629
|
|
|
$
|
9,266
|
|
Interest expense
|
|
|
(1,804
|
)
|
|
|
(2,025
|
)
|
Other, net
|
|
|
(704
|
)
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
11,121
|
|
|
|
6,698
|
|
Income tax expense
|
|
|
44,937
|
|
|
|
58,499
|
|
Discontinued operations
|
|
|
|
|
|
|
(141
|
)
|
Interest
Income
Interest income increased during 2008 compared to 2007 primarily
due to an increase in interest rates and a higher total balance
of cash, cash equivalents and investments in debt securities in
the first quarter of 2008. We believe interest income will
decrease in 2008 compared to 2007 due to a diversification of
our investments in 2008. For additional information related to
the diversification of our investments in 2008, please see
Liquidity and Capital Resources below.
Income
Tax Expense
During 2008 and 2007, our effective income tax rate for
continuing operations was 33.9% and 33.5%, respectively. This
rate differs from the federal statutory rate of 35% in 2008 and
2007 primarily due to tax benefits related to tax-exempt
interest income and domestic manufacturing deductions, which
benefits were partially offset by state taxes.
Liquidity
and Capital Resources
General
We believe that existing balances of cash, cash equivalents,
investments in debt securities and marketable securities, cash
generated from operations, 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 under various
circumstances, which could include a significant acquisition of
a business or assets, new product development projects,
expansion opportunities or other factors that may require us to
raise additional funds in the future. We cannot provide
assurance that funds will be available to us when needed on
favorable terms, or at all.
As of March 31, 2008, our investments in debt securities
consisted solely of tax-exempt auction rate securities, and did
not include any mortgage-backed securities or any securities
backed by corporate debt obligations. The tax-exempt auction
rate securities that we hold are long-term variable rate bonds
tied to short-term interest rates that are reset through an
auction process generally every seven, 28 or 35 days. Our
investment policy requires us to maintain an investment
portfolio with a high credit quality. Accordingly, our
investments in debt securities are limited to issues which were
rated AA or higher at the time of purchase.
In the event that we attempt to liquidate a portion of our
holdings through an auction and are unable to do so, we term it
an auction failure. On February 11, 2008, we
began to experience auction failures and as of March 31,
2008, our investments in auction rate securities, with a total
par value of $617.5 million have all experienced one or more
failed auctions. In the event of an auction failure, the
interest rate on the security is reset according to the
contractual terms in the underlying indenture. As of May 6,
2008, we have received all scheduled interest payments
associated with these securities.
The current instability in the credit markets may continue to
affect our ability to liquidate these securities. The funds
associated with failed auctions will not be accessible until a
successful auction occurs, the issuer
35
calls or restructures the underlying security, the underlying
security matures or a buyer outside the auction process emerges.
Based on the frequency of auction failures and the lack of
market activity, current market prices are not available for
determining the fair value of these investments. As a result, we
have measured $569.8 million in par value of our
investments in debt securities using unobservable inputs which
are classified as Level 3 measurements under Statement of
Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157). We
have measured $47.7 million of investments in debt securities at
par value based on public call notices from the issuer of the
security. For additional information regarding
SFAS No. 157, please see Note 3, Fair Value
Measurements, in Part I, Item 1, Financial
Statements.
Although we have realized no loss of principal with respect to
these investments, as of March 31, 2008, we recorded
unrealized losses on our investments in auction rate securities
of $28.4 million. We believe the decline is temporary and
have accordingly recorded it in accumulated other comprehensive
income on our Condensed Consolidated Balance Sheet.
As of March 31, 2008, we had approximately $617.5 million,
in par value, invested in tax-exempt auction rate securities
which consisted of $319.1 million associated with student
loans backed by the federal family education loan program
(FFELP), $265.8 million associated with municipal bonds in
which performance is supported by bond insurers and
$32.6 million associated with student loans collateralized
by loan pools which equal at least 200% of the bond issue.
We have classified our auction rate securities as current assets
as of March 31, 2008 because we believe that it is
reasonable to expect that these securities will be realized in
cash within our normal operating cycle of one year. However, the
investments may need to be reclassified as long-term assets in
the future if the liquidity of the investments does not improve.
We have continued to diversify our portfolio of short-term
investments. Since March 31, 2008 through May 6, 2008
we have received, at par, $75.5 million in cash associated with
our investments in debt securities that have been called and
funded by the issuer and have received $17.6 million in cash
associated with successful auctions.
On April 23, 2002, we established a $400.0 million
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new
$475.0 million five-year Senior Secured Revolving Credit
Facility which matures in April 2012.
In October 2007, we entered into a License, Development and
Commercialization Agreement with Acura to develop and
commercialize certain opioid analgesic products utilizing
Acuras proprietary
Aversion®
(abuse-deterrent/abuse-resistant) Technology in the United
States, Canada and Mexico. The agreement provides us with an
exclusive license for
Acuroxtm
(oxycodone HCl, niacin and a unique combination of other
ingredients) Tablets, formerly known as OxyADF, and another
opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides us with an
option to license all future opioid analgesic products developed
utilizing Acuras
Aversion®
Technology.
In December 2007, we made a non-refundable cash payment of
$30.0 million to Acura. Under the terms of the agreement,
we will reimburse Acura for all research and development
expenses incurred beginning from September 19, 2007 for
Acuroxtm
Tablets and all research and development expenses related to
future products after the exercise of our option to an exclusive
license for each future product. During January 2008, we made an
additional payment of $2.0 million to Acura, which was
accrued as of December 31, 2007, for certain research and
development expenses incurred by Acura prior to the closing
date. We may make additional non-refundable cash milestone
payments to Acura based on the successful achievement of certain
clinical and regulatory milestones for
Acuroxtm
Tablets and for each other product developed under the
agreement. We may also make an additional $50.0 million
non-refundable cash milestone payment to Acura when the
aggregate net sales of all products developed under the
agreement exceeds $750.0 million. In addition, we will make
royalty payments to Acura ranging from 5% to 25% based on the
combined annual net sales of all products developed under the
agreement.
In December 2007, a third party launched a generic substitute
for
Altace®
capsules. As a result of the entry of generic competition,
Altace®
net sales have decreased and we expect net sales of
Altace®
will continue
36
to decline significantly during 2008. For a discussion regarding
the generic competition for
Altace®,
please see Note 8, Commitments and
Contingencies, in Part I,
Item 1, Financial Statements.
Following the Circuit Courts decision in September 2007
invalidating our 722 Patent that covered
Altace®,
our senior management team conducted an extensive examination of
our company and developed a restructuring initiative designed to
accelerate a planned strategic shift emphasizing its focus in
neuroscience, hospital and acute care. This initiative includes
a reduction in personnel, staff leverage, expense reductions and
additional controls over spending, reorganization of sales teams
and a realignment of research and development priorities. We
incurred total costs of approximately $67.0 million in
connection with this initiative. This total included the
contract termination payment paid to Depomed, Inc. in October of
2007 of approximately $29.7 million, as discussed below. We
made additional cash payments of $22.2 million during the first
quarter of 2008 primarily related to employee termination costs.
The restructuring was substantially completed in the first
quarter of 2008. We estimate that the 2008 selling, general and
administrative expense savings from these actions will range
from $75.0 million to $90.0 million. For additional
information, please see Note 12, Restructuring
Activities, in Part I, Item 1, Financial
Statements.
In October 2007, we sold our Rochester, Michigan sterile
manufacturing facility, some of our legacy products that are
manufactured there and the related contract manufacturing
business to JHP Pharmaceuticals, LLC for $91.7 million,
less fees of $5.4 million. We retained our stand-alone
Bicillin (sterile penicillin products) manufacturing facility
which is also located in Rochester, Michigan. For additional
information, please see Note 6, Acquisitions,
Dispositions, Co-Promotions and Alliances, in Part I,
Item 1, Financial Statements.
In May 2007, we entered into a Product Development Agreement
with Mutual Pharmaceutical Company (Mutual) and
United Research Laboratories (United) to jointly
research and develop one or more improved formulations of
metaxalone. Under this agreement, we sought Mutuals
expertise in developing improved formulations of metaxalone,
including certain improved formulations Mutual developed prior
to execution of this agreement and access to Mutuals and
Uniteds rights in intellectual property pertaining to such
formulations. We paid $3.1 million to Mutual for
development expenses, and this was recorded as in-process
research and development. Development activities under this
agreement ceased in December 2007.
In September 2006, we entered into a definitive asset purchase
agreement and related agreements with Ligand Pharmaceuticals
Incorporated (Ligand) to acquire rights to
Avinza®
(morphine sulfate extended release).
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time. We completed the acquisition of
Avinza®
on February 26, 2007, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289.7 million, consisting of $289.3 million in cash
consideration and $0.4 million for the assumption of a
short-term liability. Additionally, we incurred acquisition
costs of $6.8 million. Of the cash payments made to Ligand,
$15.0 million was set aside in an escrow account to fund
potential liabilities that Ligand could later owe us, of which
$7.5 million was released to Ligand in each of the third
quarter of 2007 and the first quarter of 2008.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty and assume payment of Ligands royalty
obligations to third parties. The royalty we will pay to Ligand
consists of a 15% royalty during the first 20 months after
the closing date. Subsequent royalty payments to Ligand will be
based upon calendar year net sales of
Avinza®
as follows:
|
|
|
|
|
If calendar year net sales are less than $200.0 million,
the royalty payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200.0 million,
then the royalty payment will be 10% of all net sales up to
$250.0 million, plus 15% of net sales greater than
$250.0 million.
|
In connection with the transaction, in October 2006, we entered
into a loan agreement with Ligand for the amount of
$37.8 million. The principal amount of the loan was to be
used solely for the purpose of paying a specific liability
related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. On January 8, 2007, Ligand repaid the principal
amount of the loan of $37.8 million and
37
accrued interest of $0.9 million. Pursuant to the terms of
the loan agreement with Ligand, we forgave the interest on the
loan and repaid Ligand the interest at the time of closing the
transaction to acquire
Avinza®.
Accordingly, we have not recognized interest income on the note
receivable.
In January 2007, we obtained an exclusive license to certain
hemostatic products owned by Vascular Solutions, Inc.
(Vascular Solutions), including products which we
market as
Thrombi-Padtm
and
Thrombi-Gel®.
The license also includes a product we expect to market as
Thrombi-Pastetm,
which is currently in development. Each of these products
includes our
Thrombin-JMI®
topical hemostatic agent as a component. Vascular Solutions will
manufacture and supply the products for us. Upon execution of
the agreements, we made an initial payment to Vascular Solutions
of $6.0 million, a portion of which is refundable in the
event FDA approval for certain of these products is not
received. During the second quarter of 2007, we made an
additional milestone payment of $1.0 million. We could make
additional milestone payments of up to $1.0 million in cash.
In June 2000, we entered into a Co-Promotion Agreement with
Wyeth to promote
Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee to us
of $75.0 million. In connection with the Co-Promotion
Agreement, we agreed to pay Wyeth a promotional fee based on
annual net sales of
Altace®.
In July 2006, we entered into an Amended and Restated
Co-Promotion Agreement with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
For all of 2006, the Wyeth sales force promoted the product with
us and Wyeth shared marketing expenses. We have paid or will pay
Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178.5 million.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134.0 million.
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84.5 million.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5.0 million.
|
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year.
In June 2006, we entered into a co-exclusive agreement with
Depomed, Inc. (Depomed) to commercialize
Depomeds
Glumetzatm
product. On October 29, 2007, we announced the termination
of this agreement. We paid Depomed a termination fee of
approximately $29.7 million and Depomed was not required to
pay us a promotion fee for the fourth quarter of 2007. We
fulfilled our promotion obligations through the end of 2007.
In March 2006, we acquired the exclusive right to market,
distribute and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD (Allerex). Under the terms of the
agreements, the initial purchase price was approximately
$23.9 million, plus acquisition costs of approximately
$0.7 million. As an additional component of the purchase
price, we pay Allerex an earn-out equal to a percentage of
future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, we will increase intangible assets by the
amount of the accrual. The aggregate amount of these payments
will not exceed $13.2 million.
In February 2006, we entered into a collaboration with Arrow to
commercialize one or more novel formulations of ramipril, the
active ingredient in our
Altace®
product. Under a series of agreements, Arrow granted us rights
to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. On
February 27, 2007, the FDA approved an NDA arising from
this collaboration for an
Altace®
tablet formulation. Arrow granted us an exclusive option to
acquire their entire right, title and interest to the Ramipril
Application or any future filed amended ramipril application for
the amount of $5.0 million. In April 2007, we exercised
this option and paid $5.0 million to Arrow. As a result, we
own the entire right, title and interest in and to the Ramipril
Application. Arrow will have responsibility for the manufacture
and supply of
38
the new formulations of ramipril for us. However, under certain
conditions we may manufacture and supply new formulations of
ramipril. We launched a tablet formulation of
Altace®
in February 2008.
Upon execution of the agreements, we made an initial payment to
Arrow of $35.0 million. During the fourth quarter of 2006
and the first and second quarters of 2007, we made additional
payments of $25.0 million in each of the three quarters to
Arrow. We classified these payments as in-process research and
development expense in 2006. Additionally, Arrow will earn fees
for the manufacture and supply of the new formulations of
ramipril.
In December 2005, we entered into a cross-license agreement with
Mutual. Under the terms of the agreement, each of the parties
has granted the other a worldwide license to certain
intellectual property, including patent rights and know-how,
relating to metaxalone. As of January 1, 2006, we began
paying royalties on net sales of products containing metaxalone
to Mutual. This royalty increased in the fourth quarter of 2006
due to the achievement of a certain milestone and may continue
to increase depending on the achievement of certain regulatory
and commercial milestones in the future. The royalty we pay to
Mutual is in addition to the royalty we pay to Elan Corporation,
plc (Elan) on our current formulation of metaxalone,
which we refer to as
Skelaxin®.
During the fourth quarter of 2005, we entered into a strategic
alliance with Pain Therapeutics, Inc. to develop and
commercialize
Remoxytm
and other opioid painkillers.
Remoxytm,
an investigational novel formulation of extended release
oxycodone for the treatment of moderate to severe chronic pain,
is designed to resist common methods of abuse, such as crushing,
heating or dissolution in alcohol that are reported with respect
to other long-acting opioids. Under the strategic alliance, we
made an upfront cash payment of $150.0 million in December
2005 and made a milestone payment of $5.0 million in July
2006 to Pain Therapeutics. In addition, we may pay additional
milestone payments of up to $145.0 million in cash based on
the successful clinical and regulatory development of
Remoxytm
and other 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. 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.
Elan was working to develop a modified release formulation of
Sonata®,
which we refer to as
Sonata®
MR, pursuant to an agreement we had with them which we refer to
as the
Sonata®
MR Development Agreement. In early 2005, we advised Elan that we
considered the
Sonata®
MR Development Agreement terminated for failure to satisfy the
target product profile required by us. Elan disputed the
termination and initiated an arbitration proceeding. During
December of 2006, the arbitration panel reached a decision in
favor of Elan and ordered us to pay Elan certain milestone
payments and other research and development-related expenses of
approximately $49.8 million, plus interest from the date of
the decision. In January 2007, we paid Elan $50.1 million,
which included interest of $0.4 million.
Governmental Pricing Investigation and Related
Matters
For information on these matters, please see Note 8,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements.
We are currently unable to predict the outcome of the pending
litigation. If we were not to prevail in the pending litigation,
our business, financial condition, results of operations and
cash flows could be materially adversely affected.
Patent
Challenges
Certain generic companies have challenged patents on
Skelaxin®
and
Avinza®.
For additional information, please see Note 8,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. If a generic
version of
Skelaxin®
or
Avinza®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
39
Cash
Flows
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
|
$
|
100,232
|
|
|
$
|
108,084
|
|
Our net cash from operations was lower in 2008 than in 2007
primarily due to a decrease in net sales of branded
pharmaceutical products. Branded pharmaceutical product net
sales decreased in 2008 from 2007 primarily as a result of the
market entry of a generic substitute for
Altace®
in late 2007. The decrease in net sales was partially offset by
a decrease in selling, general and administration expenses and
co-promotion fees. Please see the section entitled Results
of Operations for a discussion of net sales, selling,
general and administrative expenses and co-promotion fees. Our
net cash flows from operations in 2007 includes a payment of
$50.1 million resulting from a binding arbitration
proceeding with Elan in 2006.
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the three months ended
March 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, net of allowance
|
|
$
|
(3,539
|
)
|
|
$
|
1,663
|
|
Inventories
|
|
|
(253
|
)
|
|
|
10,373
|
|
Prepaid expenses and other current assets
|
|
|
(1,066
|
)
|
|
|
(12,446
|
)
|
Accounts payable
|
|
|
(14,418
|
)
|
|
|
(8,888
|
)
|
Accrued expenses and other liabilities
|
|
|
(84,201
|
)
|
|
|
(92,037
|
)
|
Income taxes payable
|
|
|
38,907
|
|
|
|
47,498
|
|
Deferred revenue
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
Other assets
|
|
|
3,649
|
|
|
|
(7,008
|
)
|
Deferred taxes
|
|
|
5,438
|
|
|
|
12,367
|
|
|
|
|
|
|
|
|
|
|
Total changes from operating assets and liabilities and deferred
taxes
|
|
$
|
(56,653
|
)
|
|
$
|
(49,648
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Net cash provided by (used in) investing activities
|
|
$
|
706,949
|
|
|
$
|
(164,203
|
)
|
Our cash flows from investing activities for 2008 were primarily
due to net sales of our investments in debt securities of
$727.5 million, partially offset by capital expenditures of
$19.9 million.
Investing activities in 2007 were driven by the acquisition of
Avinza®
during the first quarter of 2007 for $290.6 million,
payments of $25.0 million under our collaboration agreement
with Arrow and $6.0 million associated with the exclusive
licenses acquired from Vascular Solutions. Capital expenditures
during 2007 totaled $11.8 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. These
payments were partially offset by net sales of our investments
in debt securities of $132.0 million and the collection of
the loan to Ligand of $37.8 million.
40
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2008 of
approximately $55.0 to $65.0 million, which will be funded
with cash from operations. The principal capital expenditures
are anticipated to include property and equipment purchases,
information technology systems and hardware, 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
facility in Bristol.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Three Months
|
|
|
Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(608
|
)
|
|
$
|
2,553
|
|
Our cash flows from financing activities for 2008 and 2007
primarily related to activities associated with our stock
compensation plans, including the exercise of employee stock
options.
Certain
Indebtedness and Other Matters
During 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.
In April 2002, we established a $400.0 million five-year
senior secured revolving credit facility that was scheduled to
mature in April 2007. On April 19, 2007, this facility was
terminated and replaced with a new $475.0 million five-year
Senior Secured Revolving Credit Facility which is scheduled to
mature in April 2012 (the 2007 Credit Facility). As
of March 31, 2008, up to $474.0 million is available
to us under the 2007 Credit Facility.
The 2007 Credit Facility is collateralized by a pledge of 100%
of the equity of most of our domestic subsidiaries and by a
pledge of 65% of the equity of our foreign subsidiaries. Our
obligations under this facility are unconditionally guaranteed
on a senior basis by four of our subsidiaries, King
Pharmaceuticals Research and Development, Inc., Monarch
Pharmaceuticals, Inc., Meridian Medical Technologies, Inc., and
Parkedale Pharmaceuticals, Inc. The 2007 Credit Facility accrues
interest at either, at our option, (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 0.5% (based on a leverage
ratio) or (b) the applicable LIBOR rate plus an applicable
spread ranging from 0.875% to 1.50% (based on a leverage ratio).
In addition, the lenders under the 2007 Credit Facility are
entitled to customary facility fees based on (x) unused
commitments under the facility and (y) letters of credit
outstanding. The facility provides availability for the issuance
of up to $30.0 million in letters of credit. We incurred
$1.5 million of deferred financing costs in connection with
the establishment of this facility, which we will amortize over
five years, the life of the facility. This facility requires us
to maintain a minimum net worth of no less than
$1.5 billion plus 50% of our consolidated net income for
each fiscal quarter after April 19, 2007, excluding any
fiscal quarter for which consolidated income is negative; an
EBITDA (earnings before interest, taxes, depreciation and
amortization) to interest expense
41
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. As of March 31,
2008, we were in compliance with these covenants. As of
March 31, 2008, we had $1.0 million outstanding for
letters of credit.
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, 2008, there was $616.3 million of securities
remaining registered for future offers and sales under the shelf
registration statement.
Impact
of Inflation
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 March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies
for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. SFAS No. 161 also requires entities to
disclose additional information about the amounts and location
of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied, and the impact
that hedges have on an entitys financial position,
financial performance and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after
November 15, 2008. We do not anticipate that
SFAS No. 161 will have a material effect on our
financial statements and are planning to adopt this standard in
the first quarter of 2009.
In December 2007, the Emerging Issues Task Force issued EITF
Issue 07-01,
Accounting for Collaborative Arrangements (Issue
07-01).
Issue 07-01
requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable Generally Accepted Accounting Principles
(GAAP) or, in the absence of other applicable GAAP,
based on analogy to authoritative accounting literature or a
reasonable, rational, and consistently applied accounting policy
election. Issue
07-01 is
effective for fiscal years beginning after December 15,
2008. We are in the process of evaluating the effect of Issue
07-01 on our
financial statements, and we plan to adopt this standard in the
first quarter of 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business Combinations
(SFAS No. 141(R)). This statement
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase. SFAS No. 141(R) also
sets forth the disclosures required to be made in the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We are
planning to adopt this standard in the first quarter of 2009.
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.
42
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to inherent imprecision.
In the case of impairment testing, changes in estimates of
future cash flows could result in a material impairment charge
and, whether 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.
We are subject to risks and uncertainties that may cause actual
results to differ from the related estimates, and our estimates
may change from time to time in response to actual developments
and new information.
The significant accounting estimates that we believe are
important to aid in fully understanding our reported financial
results include the following:
|
|
|
|
|
Intangible assets, goodwill and other long-lived
assets. When we acquire product rights in
conjunction with either business or asset acquisitions, we
allocate an appropriate portion of the purchase price to
intangible assets, goodwill and other long-lived assets. The
purchase price is allocated to product rights and trademarks,
patents, acquired research and development, if any, and other
intangibles using the assistance of valuation consultants. We
estimate the useful lives of the assets by factoring in the
characteristics of the products such as: patent protection,
competition by products prescribed for similar indications,
estimated future introductions of competing products and other
issues. The factors that drive the estimate of the life of the
asset are inherently uncertain. However, patents have specific
legal lives over which they are amortized. Conversely,
trademarks and product rights have no specific legal lives.
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.
43
We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture or supply of materials,
the publication of negative results of studies or clinical
trials, new legislation or regulatory proposals.
The gross carrying amount and accumulated amortization as of
March 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
285,700
|
|
|
$
|
29,018
|
|
|
$
|
256,682
|
|
Skelaxin®
|
|
|
278,832
|
|
|
|
144,065
|
|
|
|
134,767
|
|
Sonata®
|
|
|
61,961
|
|
|
|
61,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
626,493
|
|
|
|
235,044
|
|
|
|
391,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
110,589
|
|
|
|
36,595
|
|
|
|
73,994
|
|
Other hospital
|
|
|
8,442
|
|
|
|
6,199
|
|
|
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
119,031
|
|
|
|
42,794
|
|
|
|
76,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intal®
|
|
|
34,033
|
|
|
|
29,655
|
|
|
|
4,378
|
|
Bicillin®
|
|
|
92,350
|
|
|
|
28,493
|
|
|
|
63,857
|
|
Other acute care
|
|
|
5,992
|
|
|
|
5,746
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care
|
|
|
132,375
|
|
|
|
63,894
|
|
|
|
68,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
|
156,744
|
|
|
|
156,744
|
|
|
|
|
|
Other legacy products
|
|
|
128,517
|
|
|
|
73,733
|
|
|
|
54,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
285,261
|
|
|
|
230,477
|
|
|
|
54,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
1,163,160
|
|
|
|
572,209
|
|
|
|
590,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
176,175
|
|
|
|
34,379
|
|
|
|
141,796
|
|
Royalties
|
|
|
3,722
|
|
|
|
2,622
|
|
|
|
1,100
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,343,057
|
|
|
$
|
609,210
|
|
|
$
|
733,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The net book value by type of intangible asset as of
March 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, Product
|
|
|
Net Book
|
|
|
|
Patents
|
|
|
Rights and Other
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
256,682
|
|
|
$
|
|
|
|
$
|
256,682
|
|
Skelaxin®
|
|
|
|
|
|
|
134,767
|
|
|
|
134,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
256,682
|
|
|
|
134,767
|
|
|
|
391,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
32,226
|
|
|
|
41,768
|
|
|
|
73,994
|
|
Other hospital
|
|
|
|
|
|
|
2,243
|
|
|
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
32,226
|
|
|
|
44,011
|
|
|
|
76,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
4,378
|
|
|
|
4,378
|
|
Bicillin®
|
|
|
|
|
|
|
63,857
|
|
|
|
63,857
|
|
Other acute care
|
|
|
|
|
|
|
246
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care
|
|
|
|
|
|
|
68,481
|
|
|
|
68,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
|
|
|
|
|
|
|
|
|
|
|
Other legacy products
|
|
|
|
|
|
|
54,784
|
|
|
|
54,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
|
|
|
|
54,784
|
|
|
|
54,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
288,908
|
|
|
|
302,043
|
|
|
|
590,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
141,796
|
|
|
|
141,796
|
|
Royalties
|
|
|
806
|
|
|
|
294
|
|
|
|
1,100
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
289,714
|
|
|
$
|
444,133
|
|
|
$
|
733,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
The amounts for impairments and amortization expense for the
three months ended March 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
|
|
|
$
|
6,638
|
|
|
$
|
|
|
|
$
|
2,230
|
|
Skelaxin®
|
|
|
|
|
|
|
5,811
|
|
|
|
|
|
|
|
3,887
|
|
Sonata®
|
|
|
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
12,764
|
|
|
|
|
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
|
|
|
|
2,375
|
|
|
|
|
|
|
|
2,375
|
|
Other hospital
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
|
|
|
|
2,451
|
|
|
|
|
|
|
|
2,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
1,459
|
|
|
|
|
|
|
|
1,402
|
|
Bicillin®
|
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
926
|
|
Other acute care
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acute care
|
|
|
|
|
|
|
2,467
|
|
|
|
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
|
|
|
|
|
29,687
|
|
|
|
|
|
|
|
7,465
|
|
Other legacy products
|
|
|
|
|
|
|
1,456
|
|
|
|
|
|
|
|
3,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
|
|
|
|
31,143
|
|
|
|
|
|
|
|
11,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
|
|
|
|
48,825
|
|
|
|
|
|
|
|
22,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
1,920
|
|
|
|
|
|
|
|
1,966
|
|
Royalties
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
11
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
|
|
|
$
|
50,927
|
|
|
$
|
|
|
|
$
|
24,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008
|
|
|
|
|
|
|
Trademark &
|
|
|
|
Patent
|
|
|
Product Rights
|
|
|
Altace®
|
|
|
|
|
|
|
|
|
Skelaxin®
|
|
|
|
|
|
|
5 years 9 months
|
|
Avinza®
|
|
|
9 years 8 months
|
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
9 months
|
|
Synercid®
|
|
|
7 years 9 months
|
|
|
|
7 years 9 months
|
|
Bicillin®
|
|
|
|
|
|
|
17 years 3 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
|
46
|
|
|
|
|
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.
|
|
|
|
|
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.
|
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
Managements
47
Discussion and Analysis of Financial Condition and Results of
Operations section, as well as other sections of this
report.
Forward-looking statements in this report include, but are not
limited to, those regarding:
|
|
|
|
|
the potential of, including anticipated net sales and
prescription trends for, our branded pharmaceutical products,
particularly
Altace®,
Skelaxin®,
Avinza®,
Thrombin-JMI®,
Levoxyl®
and
Sonata®;
|
|
|
|
expectations regarding the enforceability and effectiveness of
product-related patents, including in particular patents related
to
Skelaxin®,
Avinza®,
Sonata®
and
Adenoscan®;
|
|
|
|
expected trends and projections with respect to particular
products, reportable segment and income and expense line items;
|
|
|
|
the adequacy of our liquidity and capital resources;
|
|
|
|
anticipated capital expenditures;
|
|
|
|
the development, approval and successful commercialization of
Remoxytm,
Acuroxtm
Tablets,
CorVuetm
and other products;
|
|
|
|
the successful execution of our growth and restructuring
strategies, including our accelerated strategic shift;
|
|
|
|
anticipated developments and expansions of our business;
|
|
|
|
our plans for the manufacture of some of our products, including
products manufactured by third parties;
|
|
|
|
the potential costs, outcomes and timing of research, clinical
trials and other development activities involving pharmaceutical
products, including, but not limited to, the magnitude and
timing of potential payments to third parties in connection with
development activities;
|
|
|
|
the development of product line extensions;
|
|
|
|
the expected timing of the initial marketing of certain products;
|
|
|
|
products developed, acquired or in-licensed that may be
commercialized;
|
|
|
|
our intent, beliefs or current expectations, primarily with
respect to our future operating performance;
|
|
|
|
expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates;
|
|
|
|
expectations regarding the outcome of various pending legal
proceedings including the
Skelaxin®
and
Avinza®
patent challenges, securities litigation and other legal
proceedings described in this report; and
|
|
|
|
expectations regarding the NDA that Purdue submitted to the FDA
for a reformulated version of its long-acting oxycodone product;
|
|
|
|
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.
|
|
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, 2008, there were no significant changes in
our qualitative or quantitative market risk since the end of our
fiscal year ended December 31, 2007. For information
related to our investments in debt securities, please see
Liquidity and Capital Resources above.
We have marketable securities which are carried at fair value
based on the quoted price for identical securities in an active
market. Gains and losses on securities are based on the specific
identification method.
48
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.
|
|
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 and 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 SEC.
There were no changes 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 occurred during the quarter ended
March 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
The information required by this Item is incorporated by
reference to Note 8, Commitments and
Contingencies in Part I, Item 1, Financial
Statements.
We have disclosed a number of material risks under Item 1A
of our annual report on
Form 10-K
for the year ended December 31, 2007 which we filed with
the Securities and Exchange Commission on February 29, 2008.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1*
|
|
2008 Executive Management Incentive Award
|
|
10
|
.2
|
|
Compensation Policy for Non-Employee Directors
|
|
10
|
.3(1)
|
|
Termination of Litigation Agreement, dated as of January 2,
2008, by and among King Pharmaceuticals, Inc., King
Pharmaceuticals Research and Development, Inc. and CorePharma
LLC.
|
|
10
|
.4(1)
|
|
Metaxalone 800 mg Product Agreement, dated as of January 2,
2008, by and among King Pharmaceuticals, Inc., King
Pharmaceuticals Research and Development, Inc. and CorePharma
LLC.
|
|
10
|
.5(2)*
|
|
Form of Option Certificate and Nonstatutory Stock Option
Agreement
|
|
10
|
.6(2)*
|
|
Form of Restricted Stock Certificate and Restricted Stock Grant
Agreement
|
|
10
|
.7(2)*
|
|
Form of Long-Term Performance Unit Award Agreement
One-Year Performance Cycle
|
|
10
|
.8(2)*
|
|
Form of Long-Term Performance Unit Award Agreement
Three-Year Performance Cycle
|
|
31
|
.1
|
|
Certificate of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certificate of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certificate of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certificate of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
|
|
|
Pursuant to
Rule 24b-2
of the Securities Exchange Act of 1934, as amended, confidential
portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission (SEC)
pursuant to a Confidential Treatment Request filed with the SEC. |
|
(1) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed January 8, 2008. |
|
(2) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed April 1, 2008. |
49
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.
KING PHARMACEUTICALS, INC.
|
|
|
|
By:
|
/s/ BRIAN
A. MARKISON
|
Brian A. Markison
President and Chief Executive Officer
Date: May 8, 2008
|
|
|
|
By:
|
/s/ JOSEPH
SQUICCIARINO
|
Joseph Squicciarino
Chief Financial Officer
Date: May 8, 2008
50