ViroPharma Incorporated is a global biotechnology company dedicated to the
development and commercialization of products that address serious diseases,
with a focus on products used by physician specialists or in hospital settings.
We intend to grow through sales of our marketed products, through continued
development of our product pipeline, expansion of sales into additional
territories outside the United States, through potential acquisition or
licensing of products and product candidates and the acquisition of companies.
We expect future growth to be driven by sales of Cinryze, both domestically and
internationally, sales of Buccolam and Plenadren in Europe, and by our core
development programs, including C1 esterase inhibitor and a non-toxigenic strain
of C. difficile (VP20621).
On August 6, 2012, FDA approved our supplement to the Cinryze Biologics License
Application (BLA) for industrial scale manufacturing which increases our
manufacturing capacity of Cinryze. We expect vials previously produced on this
industrial scale line to enter into the trade during the third quarter of 2012.
We market and sell Cinryze in the United States for routine prophylaxis against
angioedema attacks in adolescent and adult patients with hereditary angioedema
(HAE). Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis
against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely
debilitating, life-threatening genetic disorder. Cinryze was acquired in
October 2008 and in January 2010, we acquired expanded rights to commercialize
Cinryze and future C1-INH derived products in certain European countries and
other territories throughout the world as well as rights to develop future
C1-INH derived products for additional indications. In June 2011, the European
Commission granted us Centralized Marketing Authorization for Cinryze® in adults
and adolescents with HAE for routine prevention, pre-procedure prevention and
acute treatment of angioedema attacks. The approval also includes a self
administration option for appropriately trained patients. We have begun to
commercialize Cinryze in Europe and continue to evaluate our commercialization
opportunities in countries where we have distribution rights.
We also sell branded and authorized generic Vancocin HCl capsules, the oral
capsule formulation of vancomycin hydrochloride, in the U.S. and its
territories. Vancocin is indicated for the treatment of C. difficile-associated
diarrhea (CDAD). Vancocin capsules are also used for the treatment of
enterocolitis caused by Staphylococcus aureus, including methicillin-resistant
strains.
On April 9, 2012, the FDA denied the citizen petition we filed on March 17, 2006
related to the FDA's proposed in vitro method for determining bioequivalence of
abbreviated new drug applications (ANDAs) referencing Vancocin (vancomycin
hydrochloride, USP) capsules. The FDA also informed us in the same
correspondence that the recent supplemental new drug application (sNDA) for
Vancocin which was approved on December 14, 2011 would not qualify for three
additional years of exclusivity, as the agency interpreted Section 505(v) of the
FD&C Act to require a showing of a significant new use (such as a new
indication) for an old antibiotic such as Vancocin in order for such old
antibiotic to be eligible for a grant of exclusivity. FDA also indicated that it
approved three ANDA's for generic vancomycin capsules and the companies holding
these ANDA approvals indicated that they began shipping generic vancomycin
hydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for generic
vancomycin capsules.
Pursuant to the terms of a previously entered distribution agreement, we granted
a third party a license under our NDA for Vancocin ® (vancomycin hydrochloride
capsules, USP) to distribute and sell vancomycin hydrochloride capsules as an
authorized generic product. We are also obligated to pay Genzyme royalties of
10 percent, 10 percent and 16 percent of our net sales of Vancocin for the three
year period following the approval of the sNDA as well as a lower royalty on
sales of our authorized generic version of Vancocin in connection with our
purchase of exclusive rights to two studies of Vancocin.
On November 15, 2011, we acquired a 100% ownership interest in DuoCort Pharma AB
(DuoCort), a private company based in Helsingborg, Sweden focused on developing
Plenadren® (hydrocortisone, modified release tablet) for treatment of adrenal
insufficiency (AI). The acquisition of Plenadren further expands our orphan
disease commercial product portfolio. On November 3, 2011, the European
Commission (EC) granted European Marketing Authorization for Plenadren, an
orphan drug for treatment of adrenal insufficiency in adults, which will bring
these patients their first pharmaceutical innovation in
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over 50 years. We anticipate commercial launch of Plenadren in the EU in late
2012 or early 2013. A named patient program is currently available to patients
in Europe, which we expect to continue until commercial launch. We are currently
conducting an open label trial with Plenadren in Sweden and will initiate a
registry study as a condition of approval in the EU.
We acquired Buccolam® (Oromucosal Solution, Midazolam [as hydrochloride]) in May
2010. In September of 2011, the European Commission granted a Centralized
Pediatric Use Marketing Authorization (PUMA) for Buccolam, for treatment of
prolonged, acute, convulsive seizures in infants, toddlers, children and
adolescents, from 3 months to less than 18 years of age. We have begun to
commercialize Buccolam in Europe.
Our product development portfolio is primarily focused on the following
programs: C1 esterase inhibitor [human], VP20621 (preventing of CDAD), VP20629
(treatment of Friedreich's Ataxia) and maribavir for cytomegalovirus (CMV).
We are currently undertaking studies on the viability of subcutaneous
administration of Cinryze. In May 2011, Halozyme Therapeutics (Halozyme) granted
us an exclusive worldwide license to use Halozyme's proprietary Enhanze™
technology, a proprietary drug delivery platform using Halozyme's recombinant
human hyaluronidase enzyme (rHuPH20) technology, in combination with a C1
esterase inhibitor which we intend to apply initially to develop a subcutaneous
formulation of Cinryze for routine prophylaxis against attacks of HAE. In the
first quarter of 2012, we completed a Phase 2 study to evaluate the safety, and
pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze
in combination with rHuPH20 and announced the presentation of positive data.
On August 1, 2012 we were notified by the Center for Biologics Evaluation and
Research (CBER) division of the FDA that studies of the combination of Cinryze
and rHuPH20 were being placed on temporary clinical hold. Halozyme informed us
that they must provide results from additional pre-clinical studies to CBER
before clinical investigations in combination with rHuPH20 can resume. FDA
stated that the issues are not specific to Cinryze and that we could continue to
evaluate subcutaneous administration of Cinryze without rHuPH20.
In light of this FDA action, we are preparing to commence a Phase 2 study that
will evaluate the safety and efficacy of two different doses of the subcutaneous
administration of Cinryze as a standalone therapy for which we received FDA
clearance in 2011 of our Investigational New Drug (IND) application and the
related Phase 2 clinical protocol to study subcutaneous administration of
Cinryze without rHuPH20.
Additionally, we are working on developing our C1 esterase inhibitor in further
therapeutic uses and potential additional indications in other C1 mediated
diseases, as well as in alternative modes of administration. We intend to
conduct ViroPharma sponsored studies and investigator-initiated studies (IIS) to
identify further therapeutic uses and potentially expand the labeled indication
for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated
Rejection (AMR) and Delayed Graft Function (DGF).
During the second quarter 2012, we announced the initiation of a Phase 2 program
to evaluate maribavir for the treatment of CMV infections in transplant
recipients. The planned program will consist of two independent Phase 2 clinical
studies that will include subjects who have asymptomatic CMV, and those who have
failed therapy with other anti-CMV agents.
We are also developing VP20621 for the prevention of CDAD. In May 2011, we
initiated a Phase 2 dose-ranging clinical study to evaluate the safety,
tolerability, and efficacy of VP20621 for prevention of recurrence of CDAD in
adults previously treated for CDAD.
On September 30, 2011, we entered into a license agreement for the worldwide
rights of Intellect Neurosciences, Inc. (INS) to its clinical stage drug
candidate, VP20629, which we expect to develop for the treatment of Friedreich's
Ataxia (FA), a rare, hereditary, progressive neurodegenerative disease. VP20629,
or indole-3-propionic acid, is a naturally occurring, small molecule that has
potent anti-oxidant properties that can protect against neurodegenerative
disease. In a recent Phase 1 safety and tolerability study conducted in the
Netherlands, VP20629 was demonstrated to be safe and well tolerated at all dose
levels tested. We expect to initiate a phase 1 study by the end of the first
half of 2013. We intend to file for Orphan Drug Designation upon review of the
phase 2 proof of concept data.
In addition to these programs, we have several other assets in which we may make
additional investments. These investments will be limited and dependent on our
assessment of the potential future commercial success of or benefits from the
asset. These assets include recombinant C1-INH and other compounds.
On December 22, 2011, we entered into an exclusive development and option
agreement with Meritage Pharma, Inc. (Meritage) , a private company based in San
Diego, CA focused on developing oral budesonide suspension (OBS) as a treatment
for eosinophilic esophagitis (EoE). EoE is a newly recognized chronic disease
that is increasingly being diagnosed in children and adults. It is characterized
by inflammation and accumulation of a specific type of immune cell, called an
eosinophil, in the esophagus. EoE patients may have persistent or relapsing
symptoms, which include dysphagia (difficulty in swallowing), nausea, stomach
pain, chest pain, heartburn, loss of weight and food impaction.
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We intend to continue to evaluate in-licensing or other opportunities to acquire
products in development, or those that are currently on the market. We plan to
seek products that treat serious or life threatening illnesses with a high unmet
medical need, require limited commercial infrastructure to market, and which we
believe will provide both revenue and earnings growth over time.
Executive Summary
Since March 31, 2012, we experienced the following:
Business Activities
Cinryze:
• Shipped approximately 19,000 doses of Cinryze to U.S. specialty pharmacy/specialty distributors (SP/SD's) and approximately 800 doses to
wholesalers in the EU; and
• On August 6, 2012, FDA approved our Prior Approval Supplement for
industrial scale manufacturing of Cinryze;
C. difficile infection (CDAD):
• Announced that FDA denied the citizen petition we filed on March 17, 2006,
determined the (sNDA) for Vancocin approved December 14, 2011 would not
qualify for three years of exclusivity and approved several ANDA's for
generic vancomycin capsules; and
• Based upon data reported by IMS Health Incorporated, Vancocin branded
product had approximately a 14% share of the total vancomycin
prescriptions as of June 30, 2012;
CMV:
• Announced the initiation of a Phase 2 program to evaluate maribavir for
the treatment of CMV infections in transplant recipients;
Financial Results
• Increased net sales of Cinryze to $76.6 million as compared to $62.5
million in the second quarter of 2011;
• Net sales of Vancocin decreased to $15.9 million from $65.2 million in the
second quarter of 2011;
• Generated net sales of approximately $3.8 million in Europe; and
• Reported net loss of $4.2 million in the second quarter of 2012;
Liquidity
• Generated net cash from operations of $74.9 million;
• Ended the second quarter of 2012 with working capital of $424.8 million,
which includes cash and cash equivalents of $357.2 million and short-term
investments of $114.7 million; and
• Repurchased approximately 1.1 million shares of our common stock at a cost of approximately $21.5 million, or an average price of $19.90 per share.
During the remainder of 2012 and going forward, we expect to face a number of
challenges, which include the following:
The commercial sale of approved pharmaceutical products is subject to risks and
uncertainties. There can be no assurance that future sales will meet or exceed
the historical rate of sales for the product, for reasons that include, but are
not limited to, competition and/or changes in prescribing habits or disease
incidence.
On April 9, 2012, FDA denied the citizen petition filed on March 17, 2006
related to the FDA's proposed in vitro method for determining bioequivalence of
abbreviated new drug applications (ANDAs) referencing Vancocin Capsules. In the
FDA's response to the citizen petition, the agency denied our citizen petition
and also informed us that a final guidance for vancomycin bioequivalence
consistent with the FDA's citizen petition response is forthcoming.
The FDA also informed us in the same correspondence that the recent supplemental
new drug application (sNDA) for Vancocin which was approved on December 14, 2011
would not qualify for three additional years of exclusivity, as the agency
interpreted Section 505(v) of the FD&C Act to require a showing of a significant
new use (such as a new indication) for an old antibiotic such as Vancocin in
order for such old antibiotic to be eligible for a grant of exclusivity. FDA
also indicated that it has approved three ANDA's for generic vancomycin
capsules. In June, 2012, FDA approved a fourth ANDA for generic vancomycin
capsules.
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The approval of generic copies of Vancocin has and will continue to adversely
impact our revenues, operating results and cash flows during the remainder of
2012 and in future periods. We tested the Vancocin intangible assets for
impairment as of March 31, 2012. There was no impairment to these intangible
assets as of March 31, 2012. Vancocin will continue to be utilized and sold as a
branded drug product and we are selling an authorized generic version of
Vancocin in competition with generics of other companies that have entered the
market. There have been no events during the quarter ended June 30, 2012 that
would indicate we must re-test these assets for impairment. However, should
future events occur that may cause further reductions in revenue or operating
results we may be required to test the recoverability of these assets and may
incur an impairment.
In addition, we have received a notification that the Federal Trade Commission
(FTC) is conducting an investigation into whether we engaged in unfair methods
of competition with respect to Vancocin. The existence of an investigation does
not indicate that the FTC has concluded that we have violated the law and we do
not believe that we have engaged in unfair methods of competition with respect
to Vancocin. We intend to cooperate with the FTC investigation; however, at this
time we cannot assess potential outcomes of this investigation.
The FDA approved Cinryze for routine prophylaxis against angioedema attacks in
adolescent and adult patients with hereditary angioedema on October 10, 2008.
Cinryze became commercially available for routine prophylaxis against HAE in
December 2008. The commercial success of Cinryze depends on several factors,
including: the number of patients with HAE that may be treated with Cinryze;
manufacturing or supply interruptions and capacity which could impair our
ability to acquire an adequate supply of Cinryze to meet demand for the product;
our ability to maintain manufacturing capabilities in the capacities and
timeframes currently anticipated; acceptance by physicians and patients of
Cinryze as a safe and effective treatment; our ability to effectively market and
distribute Cinryze in the United States; cost effectiveness of HAE treatment
using Cinryze; relative convenience and ease of administration of Cinryze;
potential advantages of Cinryze over alternative treatments; the timing of the
approval of competitive products including another C1 esterase inhibitor for the
acute treatment of HAE; the market acceptance of competing approved products
such as Berinert; patients' ability to obtain sufficient coverage or
reimbursement by third-party payors; variations in dosing arising from physician
preferences and patient compliance; and sufficient supply and reasonable pricing
of raw materials necessary to manufacture Cinryze. In addition, our ability to
develop life cycle management plans for Cinryze, including designing and
commencing clinical studies for additional indications and pursuing regulatory
approvals in additional indications or territories will impact our ability to
generate future revenues from Cinryze. In Europe, the European Commission has
granted us Centralized Marketing Authorization for Cinryze in adults and
adolescents with HAE for routine prevention, pre-procedure prevention and acute
treatment of angioedema attacks. The approval also includes a self
administration option for appropriately trained patients.
Since the first quarter of 2012, Cinryze inventory in the channel has been below
normal levels. However, on August 6, 2012, FDA approved our supplement to the
Cinryze Biologics License Application (BLA) for industrial scale manufacturing
which increases our manufacturing capacity of Cinryze. We expect vials
previously produced on this industrial scale line to enter into the trade during
the third quarter of 2012.
The licensing and availability of Buccolam follows its central approval in the
European Union through the Pediatric Use Marketing Authorization (PUMA) in the
fourth quarter of 2011. Buccolam is the first product approved using a PUMA,
which is a type of centralized marketing authorization procedure requested for
medicines already authorized but no longer covered by intellectual property
rights and exclusively developed for use in children. In most European markets,
the key competitors for Buccolam are typically either availably generically or
are used off label. There are a number of potential future competitors in the
same or similar medical areas.
The commercial success of Cinryze and Buccolam in Europe will depend on a number
of factors, including the impact of the loss of orphan designation on Cinryze,
market acceptance of each of the products and our ability to manufacture
sufficient quantities of product to meet patient needs.
In March 2010, President Obama signed into law the Patient Protection and
Affordable Care Act (PPACA), which was amended by the Health Care and Education
Reconciliation Act of 2010. PPACA, as amended, is a sweeping measure intended to
expand healthcare coverage within the United States, primarily through the
imposition of health insurance mandates on employers and individuals and
expansion of the Medicaid program. Several provisions of the new law, which have
varying effective dates, will affect us. We continue to evaluate PPACA to
determine not only the immediate effects on our business, but also the trends
and changes that may be encouraged by the legislation that may potentially
impact our business over time.
We will face intense competition in acquiring additional products to further
expand our product portfolio. Many of the companies and institutions that we
will compete with in acquiring additional products to further expand our product
portfolio have substantially
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greater capital resources, research and development staffs and facilities than
we have, and greater resources to conduct business development activities. We
may need additional financing in order to acquire new products in connection
with our plans as described in this report. Upon completion of business
development transactions, we will face risks related to the integration of the
acquired asset or business which could result in delays in development
timelines, increased expenses or assumption of undisclosed liabilities, and
disruption from the transaction making it more difficult to maintain
relationships with manufacturers, employees or other suppliers.
The outcome of our clinical development programs is subject to considerable
uncertainties.
We are currently undertaking studies on the viability of subcutaneous
administration of Cinryze. In May 2011, Halozyme Therapeutics (Halozyme) granted
us an exclusive worldwide license to use Halozyme's proprietary Enhanze™
technology, a proprietary drug delivery platform using Halozyme's recombinant
human hyaluronidase enzyme (rHuPH20) technology, in combination with a C1
esterase inhibitor which we intend to apply initially to develop a subcutaneous
formulation of Cinryze for routine prophylaxis against attacks of HAE. In the
first quarter of 2012, we completed a Phase 2 study to evaluate the safety, and
pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze
in combination with rHuPH20 and announced the presentation of positive data.
On August 1, 2012 we were notified by the Center for Biologics Evaluation and
Research (CBER) division of the FDA that studies of the combination of Cinryze
and rHuPH20 were being placed on temporary clinical hold. Halozyme informed us
that they must provide results from additional pre-clinical studies to CBER
before clinical investigations in combination with rHuPH20 can resume. FDA
stated that the issues are not specific to Cinryze and that we could continue to
evaluate subcutaneous administration of Cinryze without rHuPH20.
In light of this FDA action, we are preparing to commence a Phase 2 study that
will evaluate the safety and efficacy of two different doses of the subcutaneous
administration of Cinryze as a standalone therapy for which we received FDA
clearance in 2011 of our Investigational New Drug (IND) application and the
related Phase 2 clinical protocol to study subcutaneous administration of
Cinryze without rHuPH20.
Additionally, we are working on developing our C1 esterase inhibitor in further
therapeutic uses and potential additional indications in other C1 mediated
diseases, as well as in alternative modes of administration. We intend to
conduct ViroPharma sponsored studies and investigator-initiated studies (IIS) to
identify further therapeutic uses and potentially expand the labeled indication
for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated
Rejection (AMR) and Delayed Graft Function (DGF).
We are also undertaking studies to identify additional therapeutic uses and
potentially expand the labeled indication for Cinryze to include other C1
mediated diseases, such as AMR and DGF. In addition, we are also developing
VP20621 for the treatment and prevention of CDAD, and in May 2011 we initiated a
Phase 2 dose-ranging clinical study. We anticipate that we will commence
pre-clinical and clinical studies with VP20629 for the treatment of Friedreich's
Ataxia. There can be no assurance that our clinical programs with Cinryze,
VP20621 and VP20629 will yield positive results or support further development.
There can also be no assurance that the OBS development efforts at Meritage will
yield positive results or support further development. During the second quarter
2012, we announced the initiation of a Phase 2 program to evaluate maribavir for
the treatment of CMV infections in transplant recipients. The planned program
will consist of two independent Phase 2 clinical studies, one that will include
subjects who have asymptomatic CMV, and one in subjects who have failed therapy
with other anti-CMV agents. There can be no assurance that our clinical program
with maribavir will yield positive results or support further development as we
were not successful in previous studies to prevent CMV disease in transplant
patients.
We cannot be certain that we will be successful in developing and ultimately
commercializing any of our product candidates, that the FDA or other regulatory
authorities will not require additional or unanticipated studies or clinical
trial outcomes before granting regulatory approval, or that we will be
successful in obtaining regulatory approval of any of our product candidates in
the timeframes that we expect, or at all.
We cannot assure you that our current cash and cash equivalents and investments
or cash flows from product sales will be sufficient to fund all of our ongoing
development and operational costs, as well as the interest payable on our
outstanding senior convertible notes, over the next several years, that planned
clinical trials can be initiated, or that planned or ongoing clinical trials can
be successfully concluded or concluded in accordance with our anticipated
schedule and costs. Moreover, the results of our business development efforts
could require considerable investments.
Our actual results could differ materially from those results expressed in, or
implied by, our expectations and assumptions described in this Quarterly Report
on Form 10-Q. The risks described in this report, our Form 10-Q for the quarter
ended June 30, 2012, are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results. Please also see our discussion of the "Risk
Factors" as described in our Form 10-Q for the Quarter ended March 31, 2012 and
our Form 10-K for the year ended December 31, 2011 in Item 1A, which describe
other important matters relating to our business.
Results of Operations
Three and Six Months Ended June 30, 2012 and 2011
For the three months ended For the six months ended
(in thousands, except per share data) June 30, June 30,
2012 2011 2012 2011
Net product sales $ 94,639 $ 128,808 $ 230,439 $ 255,843
Cost of sales (excluding amortization
of product rights) $ 24,721 $ 21,309 $ 56,799 $ 40,179
Operating income $ 2,769 $ 42,308 $ 42,906 $ 102,366
Net income (loss) $ (4,203 ) $ 22,796 $ 15,788 $ 59,242
Net income (loss) per share:
Basic $ (0.06 ) $ 0.30 $ 0.23 $ 0.77
Diluted $ (0.06 ) $ 0.28 $ 0.22 $ 0.70
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The $2.8 million in operating income for the three months ended June 30, 2012
decreased $39.5 million as compared to the same period in 2011. The decrease in
operating income is driven primarily by the following: a decrease in net sales
of $34.2 million period over period due to lower Vancocin revenues as a result
of the entrance of generic vancomycin and the relative increase in the sales of
our branded Vancocin into lower priced governmental programs; an increase of
$3.4 million in cost of sales due to the mix effect of increased Cinryze volume
coupled with reduced Vancocin volume and the royalty due to Genzyme for sales of
Vancocin (including branded and authorized generic sales) and reduced margins
from authorized generic vancomycin sales; and, an increase of $8.8 million in
selling, general and administrative expenses primarily related to the growth of
our global organization and our European commercialization efforts. Operating
income in the prior period was impacted by the payment of a $9.0 million upfront
fee related to our license arrangement with Halozyme paid in the second quarter
of 2011, partially offset by increased spending associated with our Cinryze
programs, our Phase 2 study of subcutaneous administration of Cinryze in
combination with rHuPH20, our VP20621 development and the costs associated with
a Phase 2 program to evaluate maribavir for the treatment of CMV infections in
transplant recipients during the second quarter of 2012. As a result, research
and development expenses were $3.8 million less in the second quarter of 2012 as
compared to the same period in 2011.
The $42.9 million in operating income for the six months ended June 30, 2012
decreased $59.5 million compared to the same period in 2011. The primary drivers
of this were lower net sales of $25.4 million due to lower Vancocin revenues;
increased cost of sales of $16.6 million due to increased Cinryze volume; and
increased selling, general and administrative expenses of $18.7 million due to
our European commercialization efforts and the growth of our global
organization.
We sell Diamorphine in the UK, primarily to hospitals, through approved
wholesalers. We began commercial sales of Cinryze and Buccolam in Europe during
the fourth quarter of 2011. The revenues and operating income from these sales
are not material to our consolidated revenues and operating income for 2012 or
2011.
Revenues
Revenues consisted of the following:
For the three months ended For the six months ended
(in thousands) June 30,
June 30,
2012 2011 2012 2011
Net product sales
Cinryze $ 76,642 $ 62,459 $ 144,805 $ 119,048
Vancocin 15,908 65,191 82,078 134,474
Other 2,089 1,158 3,556 2,321
Total revenues $ 94,639 $ 128,808 $ 230,439 $ 255,843
Net product sales
On April 9, 2012, we announced the FDA denied the citizen petition we filed on
March 17, 2006 related to the FDA's proposed in vitro method for determining
bioequivalence of abbreviated new drug applications (ANDAs) referencing Vancocin
(vancomycin hydrochloride, USP) capsules. FDA also indicated that it is
approving three ANDA's for generic vancomycin capsules. In June 2012, FDA
approved a fourth ANDA.
Pursuant to the terms of a previously entered distribution agreement, we granted
a third party a license under our NDA for Vancocin ® (vancomycin hydrochloride
capsules, USP) to distribute and sell vancomycin hydrochloride capsules as an
authorized generic product. We also continue to sell branded Vancocin. We are
also obligated to pay Genzyme royalties of 10 percent, 10 percent and 16 percent
of net sales of Vancocin for the three year period following the approval of the
sNDA as well as a lower royalty on sales of our authorized generic version of
Vancocin in connection with our purchase of exclusive rights to two studies of
Vancocin.
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The approval of generic copies of Vancocin has and will continue to adversely
impact our sales of our Vancocin brand prescription products and have a negative
impact on our financial condition and results of operations, including causing a
significant decrease in our revenues, operating income and cash flows compared
to historical levels.
In the US, we sell Cinryze to specialty pharmacy/specialty distributors
(SP/SD's) who then distribute to physicians, hospitals and patients, among
others. In Europe, we sell Cinryze to wholesalers who then distribute the
product principally to pharmacies and hospitals. We continue to work to expand
our manufacturing capacity to ensure the availability of Cinryze to meet growing
patient needs and believe our efforts will allow us to continue to meet this
growing patient demand for the foreseeable future. In order to meet anticipated
longer term demand, we submitted to the FDA a Prior Approval Supplement (PAS) in
the second quarter of 2010. The PAS involves a larger scale manufacturing
project to significantly increase the Cinryze production capabilities at
Sanquin. In October 2010, the FDA issued a complete response letter regarding
the Cinryze industrial scale manufacturing expansion activities. In the complete
response letter the FDA has requested additional information related to
observations from the pre-approval inspection and review of the technical
processes. In February 2012, the FDA issued a second complete response letter
which included three comments related to a portion of the cleaning validation
for industrial scale manufacturing. On August 6, 2012, FDA approved our PAS to
the Cinryze Biologics License Application (BLA) for industrial scale
manufacturing which increases our manufacturing capacity of Cinryze.
Since the first quarter of 2012, Cinryze inventory in the channel has been below
normal levels. However, with the approval of our PAS we expect vials previously
produced on this industrial scale line to enter into the trade during the third
quarter of 2012.
Our net sales of Cinryze during the three and six months ended June 30, 2012
increased 22.7% and 21.6%, respectively, over the same periods in the prior year
due to increased volume arising from an increased number of patients treated
with Cinryze in the U.S. Also affecting the increase was approximately $1.2
million and $1.7 million of the Cinryze revenue in the EU during the three and
six months ended June 30, 2012, respectively. We had no European Cinryze revenue
during the three and six months ended June 30, 2011.
During the three month period ended June 30, 2012, net sales of Vancocin
decreased 75.6% compared to the same period in 2011 due to the introduction of
authorized generic vancomycin. During the six months ended June 30, 2012, net
sales of Vancocin decreased 39.0% compared to the same period in 2011 due to the
introduction of authorized generic vancomycin.
Based upon data reported by IMS Health Incorporated, Vancocin branded product
had approximately a 14% share of the total vancomycin prescriptions as of
June 30, 2012.
We receive inventory data from our three largest wholesalers through our fee for
service agreements and our two SP/SD's through service agreements. We do not
independently verify this data. Based on this inventory data and our estimates,
we believe that for the three and six months ended June 30, 2012, the
wholesalers and SP/SD's did not have excess channel inventory of our products.
Cost of sales (excluding amortization of product rights)
Cost of sales increased for the three months ended June 30, 2012 as compared to
the three months ended June 30, 2011 by $3.4 million and increased for the six
months ended June 30, 2012 by $16.6 million compared to the six months ended
June 30, 2011. These increases are primarily due to the effect of the shift in
product mix from decreased sales of higher margin Vancocin to increased sales of
lower margin Cinryze, and the royalty due to Genzyme for Vancocin sales which
was not payable in 2011. We anticipate that our cost of sales will remain higher
than historical levels due to the introduction of generic vancomycin and the
reduction of our sales of Vancocin relative to our Cinryze sales along with the
royalty due to Genzyme.
Vancocin and Cinryze cost of sales includes the cost of materials and
distribution costs and excludes amortization of product rights.
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Research and development expenses
For each of our research and development programs, we incur both direct and
indirect expenses. Direct expenses include third party costs related to these
programs such as contract research, consulting, cost sharing payments or
receipts and clinical and development costs. Indirect expenses include
personnel, facility, stock compensation and other overhead costs.
Due to advancements in our VP20621 clinical program, our Cinryze life cycle
management programs, our study of subcutaneous administration of Cinryze in
combination with rHuPH20 and our study of potential alternative development
strategies for maribavir, we expect costs in these programs to increase in the
future.
Research and development expenses were divided between our research and
development programs in the following manner:
For the three months ended For the six months ended
(in thousands) June 30, June 30,
2012 2011 2012 2011
Direct - Core programs
Non-toxigenic strain of C. difficle
(VP20621) $ 2,254 $ 2,269 $ 5,008 $ 4,169
Cinryze & C1 esterase inhibitor 4,863 11,123 9,262 13,344
VP-20629 251 - 263 -
CMV 1,712 80 2,446 261
Direct - Other Assets
Plenadren 358 - 434 -
Vancocin 40 49 50 50
New Initiatives 576 700 1,319 1,181
Other assets 140 221 306 317
Indirect
Development 6,427 5,975 12,932 11,521
Total $ 16,621 $ 20,417 $ 32,020 $ 30,843
Direct Expenses-Core Development Programs
The costs of VP20621 in the three and six months ended June 30, 2012 remained
flat compared to the same periods in 2011 due to the cost of our Phase 2
clinical trial initiated during the second quarter of 2011, while the three and
six months in 2011 reflect the costs associated with our Phase 1 clinical trial.
Our costs associated with our Cinryze program decreased during the three and six
months ended June 30, 2012, as the costs associated with our Phase 2 study of
subcutaneous administration of Cinryze in combination with rHuPH20 and the
continuation of our life cycle programs was offset by the $9.0 million upfront
payment we made in the second quarter of 2011 related to our entering into a
license with Halozyme for the development of subcutaneous administration of
Cinryze in combination with rHuPH20 for routine prophylaxis against attacks of
HAE. On August 1, 2012 we were notified by the CBER division of the FDA that
studies of the combination of Cinryze and rHuPH20 were being placed on temporary
clinical hold. In light of this FDA action, we are preparing to commence a Phase
2 study that will evaluate the safety and efficacy of two different doses of the
subcutaneous administration of Cinryze as a standalone therapy for which we
received FDA clearance in 2011 of our Investigational New Drug (IND) application
and the related Phase 2 clinical protocol to study subcutaneous administration
of Cinryze without rHuPH20. As such we anticipate that costs associated with our
Cinryze program to increase in future periods.
Our direct expenses related to our CMV program increased in the three and six
months ended June 30, 2012 compared to the same periods in 2011 as we initiated
two Phase 2 clinical studies to evaluate maribavir for the treatment of CMV
infections in transplant recipients.
Direct Expenses-Other Assets
Our costs related to New Initiatives represent expenses associated with our
evaluation of a recombinant C1-INH technology, spending under our collaboration
agreement with Sanquin supporting their early stage research programs. The
Plenadren costs incurred during the 2012 periods are primarily related to our
open label trial.
Anticipated fluctuations in future direct expenses are discussed under
"Liquidity - Development Programs."
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Indirect Expenses
These costs primarily relate to the compensation of and overhead attributable to
our development team.
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) increased for the three
months ended June 30, 2012 by $8.8 million compared to the same period in the
prior year primarily due to increases in compensation expense and employee cost
of $5.6 million and increased corporate cost of $1.9 million. For the six months
ended June 30, 2012, SG&A increased $18.7 million compared to the same period in
2011 primarily driven by increased compensation expense and employee cost of
$11.3 million, increased marketing expenses of $1.5 million and increased
corporate cost of $3.9 million.
Our European commercialization efforts and the growth of our global organization
are predominant reasons for the overall increase in SG&A in both periods. We
anticipate that our SG&A spending will continue to increase in future periods as
we continue our commercialization and expansion efforts outside the United
States.
Intangible amortization
Intangible amortization for the three and six months ended June 30, 2012 were
$8.8 million and $17.6 million, respectively, as compared to $7.2 million and
$16.1 million, respectively, for the same periods in 2011. The increase is due
to the amortization of our Buccolam and Plenadren assets during the 2012
periods.
Other operating expenses
The change during the three and six months ended June 30, 2012 compared to the
same periods during 2011 is primarily due to the charges to income resulting
from the re-measurement of the fair values of the contingent consideration
liabilities incurred as part of our acquisitions. Also included in other
operating expenses for the three and six month periods ended June 30, 2011 are
approximately $3.4 million of costs associated with the funding of Cinryze
manufacturing enhancements at Sanquin.
Other Income (Expense)
Interest Income
Interest income for three and six months ended June 30, 2012 and 2011 was $0.1
million and $0.2 million and $0.3 million and $0.4 million, respectively.
Interest Expense
For the three months ended For the six months ended
June 30, June 30,
(in thousands) 2012 2011 2012 2011
Interest expense $ 1,207 $ 1,025 $ 2,408 $ 2,050
Amortization of debt discount 2,077 1,944 4,088 3,779
Amortization of finance costs 234 97 469 194
Total interest expense $ 3,518 $ 3,066 $ 6,965 $ 6,023
Interest expense during the first six months of 2012 consists of interest on our
senior convertible notes and also commitment fees on the unused credit facility
while the first six months of 2011 consists of only interest on our senior
convertible notes. The amortization of debt discount relates solely to the
senior convertible notes in all periods and the amortization of finance costs
during the three and six months ended June 30, 2012 relates to the amortization
of debt issue cost on both the senior convertible notes and the $200 million
credit facility while the amount in the three and six months ended June 30, 2011
relates solely to the senior convertible notes.
Other income (expense), net
Our other income (expense), net, includes foreign exchange gains and losses in
the three and six month periods ended June 30, 2012 and 2011. Additionally, the
three and six months ended June 30, 2012 includes approximately $0.6 million and
$1.7 million, respectively, of amortization expense of the deferred asset
related to the Meritage transaction.
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Income Tax Expense
Our income tax expense (benefit) was ($1.2) million and $16.9 million for the
quarters ended June 30, 2012 and 2011, respectively and $16.9 million and $40.8
million for the six months ended June 30, 2012 and June 30, 2011, respectively.
Our income tax expense includes federal, state and foreign income taxes at
statutory rates and the effects of various permanent differences.
Our effective tax rates for the six months ended June 30, 2012 and June 30,
2011, were 51.7% and 40.8%, respectively.
The effective tax rates for the six month periods ended June 30, 2012 and 2011
are higher than the statutory U.S. tax rate due to state income taxes, certain
share-based compensation that is not tax deductible and an increase in the fair
value of contingent consideration that is also not deductible for tax purposes.
In addition, the effective tax rate for the six months ended June 30, 2012 is
higher than the statutory U.S. tax rate due to foreign losses on which no tax
benefit is provided or on which the tax benefit is less than the U.S. statutory
tax rate and non-deductible amortization expense. These increases to the
effective tax rate are partially offset by tax benefits related to orphan drug
credits, manufacturing deductions and charitable contributions. Tax expense
(benefit) for the quarters ended June 30, 2012 and 2011are a combination of the
six month effective tax rate and adjustments for changes in the effective tax
rate from the prior quarter.
We anticipate that our effective tax rate will continue to be higher than normal
in 2012 and to vary based on the operating results of each legal entity and
actual permanent differences. Our effective tax rate in future years will depend
primarily on our foreign operating results and should decline if our product
launches are successful and generate profits.
Our last U.S. tax examination for 2008 concluded in the first quarter of 2011
with no material adjustments. We are currently under examination in a foreign
tax jurisdiction and various state income tax returns are also currently under
examination. At this time, we do not believe that the results of these
examinations will have a material impact on our financial statements.
Liquidity
In the near term, we expect that our sources of revenue will continue to arise
from Cinryze product sales. However, there are no assurances that demand for
Cinryze will continue to grow or that we will be able to maintain adequate
supply of product.
We began the commercial sales of Buccolam and Cinryze in Europe during the
fourth quarter of 2011. Although we began commercial sales of Cinryze and
Buccolam in Europe during the fourth quarter of 2011, the revenues and operating
income from these sales are not material to our consolidated revenues and
operating income for 2011 or the first six months of 2012 and there are no
assurances that there will be growing demand for products in Europe or we will
be successful in our commercialization efforts in Europe or any other
territories we have the rights to sell these drug products.
On April 9, 2012, the FDA denied the citizen petition we filed on March 17, 2006
related to the FDA's proposed in vitro method for determining bioequivalence of
abbreviated new drug applications (ANDAs) referencing Vancocin (vancomycin
hydrochloride, USP) capsules. The FDA also informed us in the same
correspondence that the recent supplemental new drug application (sNDA) for
Vancocin which was approved on December 14, 2011 would not qualify for three
additional years of exclusivity, as the agency interpreted Section 505(v) of the
FD&C Act to require a showing of a significant new use (such as a new
indication) for an old antibiotic such as Vancocin in order for such old
antibiotic to be eligible for a grant of exclusivity. FDA also indicated that it
approved three ANDA's for generic vancomycin capsules and the companies holding
these ANDA approvals indicated that they began shipping generic vancomycin
hydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for generic
vancomycin capsules.
The approval of generic copies of Vancocin has and will continue to adversely
impact our sales of our Vancocin brand prescription products and have a negative
impact on our financial condition and results of operations, including causing a
significant decrease in our revenues, operating income and cash flows compared
to historical levels. The number of generic competitors ultimately approved by
the FDA will impact future sales of Vancocin.
Our ability to generate positive cash flow is also impacted by the timing of
anticipated events in our Cinryze, VP20621, VP20629, Plenadren and other
development programs, including the timing of our expansions into other
territories and the costs of our anticipated commercial activities, the scope of
the clinical trials required by regulatory authorities, results from clinical
trials, the results of our product development efforts, including the OBS
development efforts at Meritage and variations from our estimate of future
direct and indirect expenses.
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The cash flows we have used in operations historically have been applied to
research and development activities, marketing and commercial efforts, business
development activities, general and administrative expenses, debt service, and
income tax payments. Bringing drugs from the preclinical research and
development stage through phase 1, phase 2, and phase 3 clinical trials and FDA
and/or EMA regulatory approval is a time consuming and expensive process.
Because we have product candidates that are currently in the clinical stage of
development, there are a variety of events that could occur during the
development process that will dictate the course we must take with our drug
development efforts and the cost of these efforts. As a result, we cannot
reasonably estimate the costs that we will incur through the commercialization
of any product candidate. However, our future costs may exceed current costs as
we anticipate we will continue to invest in our pipeline, including our
initiative to develop VP20621 (non-toxigenic strains of C. difficile), VP20629,
any additional studies to identify additional therapeutic uses and expand the
labeled indication for Cinryze to potentially include other C1 mediated diseases
as well as new modes of administration for Cinryze. Also, we will incur
additional costs as we intend to seek to commercialize Cinryze, Buccolam and
Plenadren in Europe in countries where we have distribution rights and certain
other countries beginning in 2011 as well as conduct studies to identify
additional C1 mediated diseases, such as AMR and DGF, which may be of interest
for further clinical development.
On October 21, 2008, we completed our acquisition under which ViroPharma
acquired Lev Pharmaceuticals, Inc. (Lev). Lev is a biopharmaceutical company
focused on developing and commercializing therapeutic products for the treatment
of inflammatory diseases. The terms of the merger agreement provided for the
conversion of each share of Lev common stock into upfront consideration of
$453.1 million, or $2.75 per Lev share, comprised of $2.25 per share in cash and
$0.50 per share in ViroPharma common stock, and contingent consideration of up
to $1.00 per share which may be paid on achievement of certain regulatory and
commercial milestones. The target for the first CVR payment of $0.50 per share,
or $87.5 million, will not be paid as a third party's human C1 inhibitor product
was approved for the acute treatment of HAE and granted orphan exclusivity. The
second CVR payment of $0.50 per share, or $87.5 million, becomes payable if
Cinryze reaches at least $600 million in cumulative net product sales by October
2018.
As of June 30, 2012, we have recognized cumulative sales of Cinryze in excess of
the $600 million threshold and we will make this CVR payment along with certain
other contingent acquisition related payments totaling approximately $92.1
million in the third quarter of 2012. Accordingly, we recorded these liabilities
in the second quarter of 2012 with a corresponding increase to goodwill of
approximately $86.2 million, net of tax benefits.
The most significant of our near-term operating development cash outflows are as
described under "Development Programs" as set forth below.
In March 2010, President Obama signed into law the Patient Protection and
Affordable Care Act (PPACA). The PPACA, as amended, will likely increase certain
of our costs as well. For example, an increase in the Medicaid rebate rate from
15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated
drugs has been expanded to include beneficiaries in Medicaid managed care
organizations, effective as of March 23, 2010. Beginning in 2011, the PPACA also
imposes a manufacturer's fee on the sale of branded Pharmaceuticals (excluding
orphan drugs) to specified government programs, expands the 340B drug discount
program (excluding orphan drugs), and includes a 50% discount on brand name
drugs for Medicare Part D participants in the coverage gap, or "donut hole". The
manufacturing fee was immaterial relative to our 2011 operating income and cash
flow and we anticipate it to be immaterial to our 2012 operating income and cash
flow. We currently estimate that our cost associated with the Medicare Part D
coverage gap for the full year 2012 may be approximately $3 million to $4
million. We continue to evaluate PPACA to determine not only the immediate
effects on our business, but also the trends and changes that may be encouraged
by the legislation that may potentially impact our business over time.
Capital Resources
While we anticipate that cash flows from Cinryze, our current cash, cash
equivalents and short-term investments (collectively referred to as our cash)
and revolving credit facility should allow us to fund our ongoing development
and operating costs, as well as our interest payments and future milestone
payments or acquisition costs, we may need additional financing in order to
expand our product portfolio. At June 30, 2012, we had cash, cash equivalents
and short-term investments of $471.9 million. Short-term investments consist of
high quality fixed income securities with remaining maturities of greater than
three months at the date of purchase and high quality debt securities or
obligation of departments or agencies of the United States. At June 30, 2012,
the annualized weighted average nominal interest rate on our short-term
investments was 0.44% and the weighted average length to maturity was 13.1
months. At June 30, 2012, we also had $200 million available under our revolving
credit agreement. As of the date of this filing, we have not drawn any amounts
under the Credit Facility and are in compliance with our covenants. However,
because of the negative impact of approval of generic vancomycin on our
operating results and the resulting effect on certain covenants, the
availability under the facility may be limited at times.
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At June 30, 2012, approximately $197.0 million of our cash and availability
under the credit agreement is subject to the minimum liquidity covenant, as
defined in our credit agreement.
Financing
Should we need financing, we would seek to access the public or private equity
or debt markets, enter into additional arrangements with corporate collaborators
to whom we may issue equity or debt securities or enter into other alternative
financing arrangements that may become available to us.
If we raise additional capital by issuing equity securities, the terms and
prices for these financings may be much more favorable to the new investors than
the terms obtained by our existing stockholders. These financings also may
significantly dilute the ownership of existing stockholders.
If we raise additional capital by accessing debt markets, the terms and pricing
for these financings may be much more favorable to the new lenders than the
terms obtained from our prior lenders. These financings also may require liens
on certain of our assets that may limit our flexibility.
Additional equity or debt financing, however, may not be available on acceptable
terms from any source as a result of, among other factors, our operating
results, our inability to achieve regulatory approval of any of our product
candidates, and our inability to file, prosecute, defend and enforce patent
claims and or other intellectual property rights. If sufficient additional
financing is not available, we may need to delay, reduce or eliminate current
development programs, or reduce or eliminate other aspects of our business.
From time to time, we may seek approval from our board of directors to evaluate
additional opportunities to repurchase our common stock or convertible notes,
including through open market purchases or individually negotiated transactions.
Overall Cash Flows
During the six months ended June 30, 2012, we generated $74.9 million of net
cash from operating activities, primarily from our net income after adjustments
for non-cash items, and the net decrease in accounts receivable and inventories.
Cash provided by investing activities of $12.1 million resulted primarily from
maturities of short-term investments, net of investment purchases. Our net cash
used in financing activities for the six months ended June 30, 2012 was $60.7
million which relates to the common stock repurchases under our share repurchase
program net of proceeds and excess tax benefits from stock option exercises.
During the six months ended June 30, 2011, we generated $68.5 million of net
cash from operating activities, primarily from our net income after adjustments
for non-cash items partly offset by our net increase in working capital. We used
$59.6 million of cash from investing activities mainly in the purchase of
short-term investments, net of investment maturities. Our net cash used in
financing activities for the six months ended June 30, 2011 was $45.9 million
which relates to the common stock repurchase arrangement entered into during the
quarter under our share repurchase program net of proceeds from stock option
exercises.
Development Programs
For each of our development programs, we incur both direct and indirect
expenses. Direct expenses include third party costs related to these programs
such as contract research, consulting, cost sharing payments or receipts, and
preclinical and clinical development costs. Indirect expenses include personnel,
facility and other overhead costs. Additionally, for some of our development
programs, we have cash inflows and outflows upon achieving certain milestones.
Core Development Programs
Cinryze-We acquired Cinryze in October 2008 and through June 30, 2012 have spent
approximately $52.1 million in direct research and development costs related to
Cinryze since acquisition. During 2012, we continue to expect research and
development costs related to Cinryze to increase as we complete our Phase 4
commitment and evaluate additional indications, formulations and territories
including our efforts on the C1 esterase inhibitor/rHuPH20 combination
sub-subcutaneous formulation, AMR and DGF. We are solely responsible for the
costs of Cinryze development. In the first quarter of 2012, we completed a Phase
2 study to evaluate the safety, and pharmacokinetics and pharmacodynamics of
subcutaneous administration of Cinryze in combination with rHuPH20 and announced
the presentation of positive data. On August 1, 2012 we were notified by the
CBER division of the FDA that studies of the combination of Cinryze and rHuPH20
were being placed on temporary clinical hold. In light of this FDA action, we
are preparing to commence a Phase 2 study that will evaluate the safety and
efficacy of two different doses of the subcutaneous administration of Cinryze as
a standalone therapy for which we received FDA clearance in 2011 of our
Investigational New Drug (IND) application and the related Phase 2 clinical
protocol to study subcutaneous administration of Cinryze without rHuPH20. As
such we anticipate that costs associated with our Cinryze program to increase in
future periods.
VP20621-We acquired VP20621 in February 2006 and through June 30, 2012 have
spent approximately $36.6 million in direct research and development costs. For
the remainder of 2012, we expect our research and development activities related
to VP20621 to increase as we continue our development program and in May 2011,
we initiated a Phase 2 dose-ranging clinical study to evaluate the safety,
tolerability, and efficacy of VP 20621 for prevention of recurrence of CDAD in
adults previously treated for CDAD. We are solely responsible for the costs of
VP20621 development.
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VP20629- On September 30, 2011, we entered into a license agreement for the
worldwide rights of Intellect Neurosciences, Inc. (INS) to its clinical stage
drug candidate, VP20629, being developed for the treatment of Friedreich's
Ataxia (FA), a rare, hereditary, progressive neurodegenerative disease. We
expect to initiate a phase 1 study by the end of the first half of 2013. We
intend to file for Orphan Drug Designation upon review of the phase 2 proof of
concept data. Under the terms of the agreement, we have exclusive worldwide
rights to develop and commercialize VP20629 for the treatment, management or
prevention of any disease or condition covered by Intellect's patents. We paid
INS a $6.5 million up-front licensing fee and may pay additional milestones up
to $120 million based upon defined events. We will also pay a tiered royalty of
up to a maximum percentage of low teens, based on annual net sales. We are
solely responsible for the costs of VP20629 development.
CMV program-We acquired the rights to maribavir in September 2003 and through
June 30, 2012 have spent approximately $102.9 million in direct research and
development costs. For the remainder of 2012, we expect our research and
development activities related to maribavir to increase as in the second quarter
of 2012 we announced the initiation of a Phase 2 program to evaluate maribavir
for the treatment of CMV infections in transplant recipients. The planned
program will consist of two independent Phase 2 clinical studies that will
include subjects who have asymptomatic CMV, and those who have failed therapy
with other anti-CMV agents.
Other Assets
Vancocin-We acquired Vancocin in November 2004 and through June 30, 2012 have
spent approximately $3.2 million in direct research and development costs
related to Vancocin activities since acquisition. As a result of the FDA
approval of generic versions of oral vancomycin, we do not anticipate any future
research and development expenses related to Vancocin.
In addition to the programs described above, we have several other assets in
which we may make additional investments. These investments will be dependent on
our assessment of the potential future commercial success of or benefits from
the asset. We will continue to incur costs associated with our other development
assets for direct research and development costs for medicinal products which
will address unmet medical needs such as our current evaluation of a recombinant
C1-INH technology which may be included in future clinical studies. The cost of
our efforts regarding a recombinant C1-INH technology may increase in the
future.
Business Development Activities
On December 22, 2011, we entered into an exclusive development and option
agreement with Meritage Pharma, Inc. (Meritage) , a private company based in San
Diego, CA focused on developing oral budesonide suspension (OBS) as a treatment
for eosinophilic esophagitis (EoE). We have an exclusive option to acquire
Meritage, at our sole discretion, by providing written notice at any time during
the period from December 22, 2011 to and including the date that is the earlier
of (a) the date that is 30 business days after the later of (i) the receipt of
the final study data for the Phase 2 study and (ii) identification of an
acceptable clinical end point definition for a pivotal induction study agreed to
by the FDA. As consideration for the option, we paid an initial $7.5 million.
In June, 2012, Meritage completed the delivery of all the documents and
notifications needed to satisfy the conditions of the First Option Milestone, as
defined in the agreement. As a result of achieving this milestone they are due a
$5.0 million milestone payment, which will be paid in the third quarter of 2012.
Accordingly, in the second quarter of 2012, we recorded this liability and
increased the carrying value of our cost method investment. We retain the option
to provide Meritage up to an additional $7.5 million for the development of OBS.
Meritage will utilize the funding to conduct additional Phase 2 clinical
assessment of OBS. If we exercise our option to acquire Meritage, we have agreed
to pay $69.9 million for all of the outstanding capital stock of Meritage.
Meritage stockholders could also receive additional payments of up to $175
million, upon the achievement of certain clinical and regulatory milestones.
On November 15, 2011, we acquired a 100% ownership interest in DuoCort Pharma AB
(DuoCort), a private company based in Helsingborg, Sweden focused on improving
glucocorticoid replacement therapy for treatment of adrenal insufficiency (AI).
We paid approximately 213 million Swedish Krona (SEK) or approximately $32.1
million in upfront consideration. We have also agreed to make additional
payments ranging from SEK 240 million up to SEK 860 million or approximately $34
million to $122 million, contingent on the achievement of certain milestones. Up
to SEK 160 million or approximately $23 million of the contingent payments
relate to specific regulatory milestones; and up to SEK 700 million or
approximately $99 million of the contingent payments are related to commercial
milestones based on the success of the product.
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On September 30, 2011, we entered into a license agreement for the worldwide
rights of Intellect Neurosciences, Inc. (INS) to its clinical stage drug
candidate, VP20629, being developed for the treatment of Friedreich's Ataxia
(FA), a rare, hereditary, progressive neurodegenerative disease. We paid INS a
$6.5 million up-front licensing fee and may pay additional milestones up to $120
million based upon defined events. We will also pay a tiered royalty of up to a
maximum percentage of low teens, based on annual net sales. We are solely
responsible for the costs of VP20629 development.
In May 2011, Halozyme Therapeutics (Halozyme) granted us an exclusive worldwide
license to use Halozyme's proprietary Enhanze™ technology, a proprietary drug
delivery platform using Halozyme's recombinant human hyaluronidase enzyme
(rHuPH20) technology in combination with a C1 esterase inhibitor. We intend to
apply rHuPH20 initially to develop a novel subcutaneous formulation of Cinryze
for routine prophylaxis against attacks. Under the terms of the license
agreement, we paid Halozyme an initial upfront payment of $9 million. In the
fourth quarter of 2011, we made a milestone payment of $3 million related to the
initiation of a Phase 2 study begun in September 2011 to evaluate the safety,
and pharmacokinetics and pharmacodynamics of subcutaneous administration of
Cinryze in combination with rHuPH20. Pending successful completion of an
additional series of clinical and regulatory milestones, anticipated to begin
during 2012, we may make further milestone payments to Halozyme which could
reach up to an additional $41 million related to HAE and up to $30 million of
additional milestone payments for three additional indications. Additionally, we
will pay an annual maintenance fee of $1 million to Halozyme until specified
events have occurred. Upon regulatory approval, Halozyme will receive up to a
10% royalty on net sales of the combination product utilizing Cinryze and
rHuPH20, depending on the existence of a valid patent claim in the country of
sale.
We intend to continue to seek to acquire additional products or product
candidates. The costs associated with evaluating or acquiring any additional
product or product candidate can vary substantially based upon market size of
the product, the commercial effort required for the product, the product's
current stage of development, and actual and potential generic and non-generic
competition for the product, among other factors. Due to the variability of the
cost of evaluating or acquiring business development candidates, it is not
feasible to predict what our actual evaluation or acquisition costs would be, if
any, however, the costs could be substantial.
Share Repurchase Program
On March 9, 2011, our Board of Directors authorized the use of up to $150
million to repurchase shares of our common stock and/or our 2% Senior
Convertible Notes due 2017. On September 14, 2011, our Board of Directors
authorized the use of up to an additional $200 million to repurchase shares of
our common stock and/or our 2% Senior Convertible Notes due 2017. Purchases may
be made by means of open market transactions, block transactions, privately
negotiated purchase transactions or other techniques from time to time. During
2011, we reacquired approximately 9.2 million shares at a cost of approximately
$169.7 million or an average price of $18.52 per share.
During the first six months of 2012, through open market purchases, we
reacquired approximately 2.7 million shares at a cost of approximately $71.5
million or an average price of $26.61 per share.
From time to time, we may seek approval from our board of directors to evaluate
additional opportunities to repurchase our common stock or convertible notes,
including through open market purchases or individually negotiated transactions.
Senior Convertible Notes
On March 26, 2007, we issued $250.0 million of 2% senior convertible notes due
March 2017 (the "senior convertible notes") in a public offering. Net proceeds
from the issuance of the senior convertible notes were $241.8 million. The
senior convertible notes are unsecured unsubordinated obligations and rank
equally with any other unsecured and unsubordinated indebtedness. The senior
convertible notes bear interest at a rate of 2% per annum, payable semi-annually
in arrears on March 15 and September 15 of each year commencing on September 15,
2007.
The debt and equity components of our senior convertible debt securities are
bifurcated and accounted for separately based on the value and related interest
rate of a non-convertible debt security with the same terms. The fair value of a
non-convertible debt instrument at the original issuance date was determined to
be $148.1 million. The equity (conversion options) component of our convertible
debt securities is included in Additional paid-in capital on our Consolidated
Balance Sheet and, accordingly, the initial carrying value of the debt
securities was reduced by $101.9 million. Our net income for financial reporting
purposes is reduced by recognizing the accretion of the reduced carrying values
of our convertible debt securities to their face amount of $250.0 million as
additional non-cash interest expense. Accordingly, the senior convertible debt
securities will recognize interest expense at effective rates of 8.0% as they
are accreted to par value.
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As of June 30, 2012 senior convertible notes representing $205.0 million of
principal debt are outstanding with a carrying value of $157.5 million and a
fair value of approximately $298.2 million, based on the level 2 valuation
hierarchy of the fair value measurements standard.
The senior convertible notes are convertible into shares of our common stock at
an initial conversion price of $18.87 per share. The senior convertible notes
may only be converted: (i) anytime after December 15, 2016; (ii) during the five
business-day period after any five consecutive trading day period (the
"measurement period") in which the price per note for each trading day of that
measurement period was less than 98% of the product of the last reported sale
price of our common stock and the conversion rate on each such day; (iii) during
any calendar quarter (and only during such quarter) after the calendar quarter
ending June 30, 2007, if the last reported sale price of our common stock for 20
or more trading days in a period of 30 consecutive trading days ending on the
last trading day of the immediately preceding calendar quarter exceeds 130% of
the applicable conversion price in effect on the last trading day of the
immediately preceding calendar quarter; or (iv) upon the occurrence of specified
corporate events. Upon conversion, holders of the senior convertible notes will
receive shares of common stock, subject to ViroPharma's option to irrevocably
elect to settle all future conversions in cash up to the principal amount of the
senior convertible notes, and shares for any excess. We can irrevocably elect
this option at any time on or prior to the 35th scheduled trading day prior to
the maturity date of the senior convertible notes. The senior convertible notes
may be required to be repaid on the occurrence of certain fundamental changes,
as defined in the senior convertible notes.
Concurrent with the issuance of the senior convertible notes, we entered into
privately-negotiated transactions, comprised of purchased call options and
warrants sold, to reduce the potential dilution of our common stock upon
conversion of the senior convertible notes. The transactions, taken together,
have the effect of increasing the initial conversion price to $24.92 per
share. The cost of the transactions was $23.3 million.
The call options allowed ViroPharma to receive up to approximately 13.25 million
shares of its common stock at $18.87 per share from the call option holders,
equal to the number of shares of common stock that ViroPharma would issue to the
holders of the senior convertible notes upon conversion. These call options will
terminate upon the earlier of the maturity dates of the related senior
convertible notes or the first day all of the related senior convertible notes
are no longer outstanding due to conversion or otherwise. Concurrently, we sold
warrants to the warrant holders to receive shares of its common stock at an
exercise price of $24.92 per share. These warrants expire ratably over a 60-day
trading period beginning on June 13, 2017 and will be net-share settled.
The purchased call options are expected to reduce the potential dilution upon
conversion of the senior convertible notes in the event that the market value
per share of ViroPharma common stock at the time of exercise is greater than
$18.87, which corresponds to the initial conversion price of the senior
convertible notes, but less than $24.92 (the warrant exercise price). The
warrant exercise price is 75.0% higher than the price per share of $14.24 of our
common stock on the pricing date. If the market price per share of ViroPharma
common stock at the time of conversion of any senior convertible notes is above
the strike price of the purchased call options ($18.87), the purchased call
options will entitle us to receive from the counterparties in the aggregate the
same number of shares of our common stock as we would be required to issue to
the holder of the converted senior convertible notes. Additionally, if the
market price of ViroPharma common stock at the time of exercise of the sold
warrants exceeds the strike price of the sold warrants ($24.92), we will owe the
counterparties an aggregate of approximately 13.25 million shares of ViroPharma
common stock. If we have insufficient shares of common stock available for
settlement of the warrants, we may issue shares of a newly created series of
preferred stock in lieu of our obligation to deliver common stock. Any such
preferred stock would be convertible into 10% more shares of our common stock
than the amount of common stock we would otherwise have been obligated to
deliver under the warrants.
Initially, the purchased call options and warrants sold with the terms described
above were based upon the $250.0 million offering, and the number of shares we
would purchase under the call option and the number of shares we would sell
under the warrants was 13.25 million, to correlate to the $250.0 million
principal amount. On March 24, 2009 we repurchased, in a privately negotiated
transaction, $45.0 million in principal amount of our senior convertible notes
due March 2017 for total consideration of approximately $21.2 million. The
repurchase represented 18% of our then outstanding debt and was executed at a
price equal to 47% of par value. Additionally, in negotiated transactions, we
sold approximately 2.38 million call options for approximately $1.8 million and
repurchased approximately 2.38 million warrants for approximately $1.5 million
which terminated the call options and warrants that were previously entered into
by us in March 2007. We recognized a $9.1 million gain in the first quarter of
2009 as a result of this debt extinguishment. For tax purposes, the gain
qualifies for deferral until 2014 in accordance with the provisions of the
American Recovery and Reinvestment Act.
As a result of the above negotiated sale and purchase transactions, we are now
entitled to receive approximately 10.87 million shares of our common stock at
$18.87 from the call option holders and if the market price of ViroPharma common
stock at the time of exercise of the sold warrants exceeds the strike price of
the sold warrants ($24.92), will owe the counterparties an aggregate of
approximately 10.87 million shares of ViroPharma common stock, which correlates
to $205 million of convertible notes outstanding.
The purchased call options and sold warrants are separate transactions entered
into by us with the counterparties, are not part of the terms of the senior
convertible notes, and will not affect the holders' rights under the senior
convertible notes. Holders of the senior convertible notes will not have any
rights with respect to the purchased call options or the sold warrants. The
purchased call options
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and sold warrants meet the definition of derivatives. These instruments have
been determined to be indexed to our own stock and have been recorded in
stockholders' equity in our Consolidated Balance Sheet. As long as the
instruments are classified in stockholders' equity they are not subject to the
mark to market provisions.
The senior convertible notes were convertible into shares of our common stock
during the second quarter of 2012 at the election of the holders as the last
reported sale price of our common stock for the 20 or more trading days in the
30 consecutive trading days ending on March 30, 2012 exceeded 130% of the
conversion price, $18.87 per share, in effect on March 30, 2012. No notes were
converted during the second quarter and the notes are not convertible during the
third quarter of 2012 as none of the contingent conversion criteria described
above was met as of June 30, 2012.
Credit Facility
In September 2011, we entered into a $200 million, three-year senior secured
revolving credit facility (the "Credit Facility"), the terms of which are set
forth in a Credit Agreement dated as of September 9, 2011 (the "Credit
Agreement") with JPMorgan Chase Bank, N.A., as administrative agent, BMO Harris
Financing Inc., TD Bank, N.A. and Morgan Stanley Bank, NA as co-syndication
agents and certain other lenders.
The Credit Facility is available for working capital and general corporate
purposes, including acquisitions which comply with the terms of the Credit
Agreement. The Credit Agreement provides separate sub-limits for letters of
credit up to $20 million and swing line loans up to $10 million.
The Credit Agreement requires us to maintain (i) a maximum senior secured
leverage ratio of less than 2.00 to 1.00, (ii) a maximum total leverage ratio of
less than 3.50 to 1.00, (iii) a minimum interest coverage ratio of greater than
3.50 to 1.00 and (iv) minimum liquidity equal to or greater than the sum of $100
million plus the aggregate amount of certain contingent consideration payments
resulting from business acquisitions payable by us within a specified time
period. The Credit Agreement also contains certain other usual and customary
affirmative and negative covenants, including but not limited to, limitations on
capital expenditures, asset sales, mergers and acquisitions, indebtedness,
liens, dividends, investments and transactions with affiliates.
At June 30, 2012, approximately $197.0 million of our cash and availability
under the credit agreement is subject to the minimum liquidity covenant (iv),
described above.
Our obligations under the Credit Facility are guaranteed by certain of our
domestic subsidiaries (the "Subsidiary Guarantors") and are secured by
substantially all of our assets and the assets of the Subsidiary Guarantors.
Borrowings under the Credit Facility will bear interest at an amount equal to a
rate calculated based on the type of borrowing and our senior secured leverage
ratio (as defined in the Credit Agreement) from time to time. For loans (other
than swing line loans), we may elect to pay interest based on adjusted LIBOR
plus between 2.25% and 2.75% or an Alternate Base Rate (as defined in the Credit
Agreement) plus between 1.25% and 1.75%. We will also pay a commitment fee of
between 35 to 45 basis points, payable quarterly, on the average daily unused
amount of the Credit Facility based on our senior secured leverage ratio from
time to time.
As of the date of this filing, we have not drawn any amounts under the Credit
Facility and are in compliance with our covenants. However, because of the
negative impact of approval of generic vancomycin on our operating results and
the resulting effect on certain covenants, the availability under the facility
may be limited at times.
Contractual Obligations
We have commitments to purchase a minimum number of liters of plasma per year
through 2016 from our supplier. Additionally, we are required to purchase a
minimum number of units from our third party toll manufacturers. The total
minimum purchase commitments for these continuing arrangements as of June 30,
2012 are approximately $268.4 million.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and contingent assets and liabilities. Actual
results could differ from such estimates. These estimates and assumptions are
affected by the application of our accounting policies. Critical policies and
practices are both most important to the portrayal of a company's financial
condition and results of operations, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effects of matters that are inherently uncertain.
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Our summary of significant accounting policies is described in Note 2 to our
Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the year ended December 31, 2011. However, we consider the following
policies and estimates to be the most critical in understanding the more complex
judgments that are involved in preparing our consolidated financial statements
and that could impact our results of operations, financial position, and cash
flows:
• Product Sales-Our net sales consist of revenue from sales of our products,
Vancocin branded and authorized generic product, Cinryze, Buccolam and
Diamorphine, less estimates for chargebacks, rebates, distribution service
fees, returns and losses. We recognize revenue for product sales when title and risk of loss has passed to the customer, which is typically upon
delivery to the customer, when estimated provisions for chargebacks,
rebates, distribution service fees, returns and losses are reasonably
determinable, and when collectability is reasonably assured. Revenue from
the launch of a new or significantly unique product may be deferred until
estimates can be made for chargebacks, rebates and losses and all of the
above conditions are met and when the product has achieved market
acceptance, which is typically based on dispensed prescription data and
other information obtained during the period following launch.
At the end of each reporting period we analyze our estimated channel inventory
and we defer recognition of revenue on a product that has been delivered if we
believe that channel inventory at a period end is in excess of ordinary business
needs. Further, if we believe channel inventory levels are increasing without a
reasonably correlating increase in prescription demand, we proactively delay the
processing of wholesaler orders until these levels are reduced.
We establish accruals for chargebacks and rebates, sales discounts and product
returns. These accruals are primarily based upon the history of Vancocin and for
Cinryze they are based on information on payee's obtained from our SP/SD's and
CinryzeSolutions. We also consider the volume and price of our products in the
channel, trends in wholesaler inventory, conditions that might impact patient
demand for our product (such as incidence of disease and the threat of generics)
and other factors.
In addition to internal information, such as unit sales, we use information from
external resources, which we do not verify, to estimate the Vancocin channel
inventory. Our external resources include prescription data reported by IMS
Health Incorporated and written and verbal information obtained from our three
largest wholesaler customers with respect to their inventory levels. Based upon
this information, we believe that inventory held at these warehouses are within
normal levels.
Chargebacks and rebates are the most subjective sales related accruals. While we
currently have no contracts with private third party payors, such as HMO's, we
do have contractual arrangements with governmental agencies, including Medicaid.
We establish accruals for chargebacks and rebates related to these contracts in
the period in which we record the sale as revenue. These accruals are based upon
historical experience of government agencies' market share, governmental
contractual prices, our current pricing and then-current laws, regulations and
interpretations. We analyze the accrual at least quarterly and adjust the
balance as needed. These analyses have been adjusted to reflect the U.S.
healthcare reform acts and their affect on governmental contractual prices and
rebates. We believe that a 10% change in our estimate of the actual rate of
sales subject to governmental rebates would affect our operating income and
accruals by approximately $2.5 million in the period of adjustment.
Annually, as part of our process, we performed an analysis on the share of
Vancocin and Cinryze sales that ultimately go to Medicaid recipients and result
in a Medicaid rebate. As part of that analysis, we considered our actual
Medicaid historical rebates processed, total units sold and fluctuations in
channel inventory. We also consider our payee mix for Cinryze based on
information obtained at the time of prescription.
Under the PPACA we are required to fund 50% of the Medicare Part D insurance
coverage gap for prescription drugs sold to eligible patients staring on
January 1, 2011. For Vancocin sales subject to this discount we recognize this
cost using an effective rebate percentage for all sales to Medicare patients
throughout the year. For applicable Cinryze sales we recognize this cost at the
time of sale for product expected to be purchased by a Medicare Part D insured
patient when we estimate they are within the coverage gap.
Product return accruals are estimated based on Vancocin's history of damage and
product expiration returns and are recorded in the period in which we record the
sale of revenue. There is a no returns policy with sales of generic Vancocin to
our distributor and Cinryze has a no returns policy.
In April 2012, we began selling an authorized generic version of our
prescription Vancocin capsules under a supply agreement with a distributor. The
distributor has agreed to purchase all of its authorized generic product
requirements from us and pay a specified invoice supply price for such products.
We are also entitled to receive a percentage of the gross margin on net sales of
the authorized generic products sold by the distributor. We recognize revenue
from shipments to the distributor at the invoice supply price along with our
percentage of the gross margin on net sales of the authorized generic products
sold by the distributor when the distributor reports to us its gross margin on
net sales of the products and our portion thereof. Any adjustments to the net
sales previously reported to us related to the distributor's estimated sales
discounts and other deductions are recognized in the period the distributor
reports the adjustments to us.
• Impairment of Long-lived Assets- We test our long-lived fixed and
intangible assets for recoverability whenever events occur or changes in
circumstances indicate that the carrying amount of an asset or asset group
may not be recoverable. The impairment test is a two-step test. Under step
one we assess the recoverability of an asset (or asset group). The
carrying amount of an asset (or asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected from the use and
eventual disposition of the asset (or asset group). The impairment loss is
measured in step two as the difference between the carrying value of the asset (or asset group) and its fair value. 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, for example, projections of future cash
flows and the timing and number of generic/competitive entries into the
market, in determining the undiscounted cash flows, and if necessary, the
fair value of the asset and whether impairment exists. These assumptions
are subjective and could result in a material impact on operating results
in the period of impairment.
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On an ongoing periodic basis, we evaluate the useful life of intangible assets
and determine if any economic, governmental or regulatory event has modified
their estimated useful lives.
On August 4, 2009 the FDA'sPharmaceutical Science and Clinical Pharmacology
Advisory Committee voted in favor of the component of the OGD's 2008 draft
guidelines on bioequivalence for Vancocin that permits bioequivalence to be
demonstrated through comparable in vitro dissolution for potential vancomycin
HCl capsule generic products that contain the same active and inactive
ingredients in the same amounts as Vancocin, among other requirements.
On April 9, 2012, FDA denied the citizen petition we filed on March 17, 2006
related to the FDA's proposed in vitro method for determining bioequivalence of
abbreviated new drug applications (ANDAs) referencing Vancocin (vancomycin
hydrochloride, USP) Capsules. The FDA also informed us in the same
correspondence that the recent supplemental new drug application (sNDA) for
Vancocin approved December 14, 2011 would not qualify for three additional years
of exclusivity based on the agency's assertion that in order for an sNDA for an
old antibiotic such as Vancocin to be eligible for a grant of exclusivity, it
must be a significant new use or indication. FDA also indicated that it approved
three ANDA's for generic vancomycin capsules. In June 2012, FDA approved a
fourth ANDA for generic vancomycin capsules.
We have begun shipping authorized generic vancomycin hydrochloride, USP, in
addition to continuing the sales of Vancocin. However, the approval of generic
copies of Vancocin will materially impact our revenues, operating results and
cash flows. We tested the Vancocin intangible assets for impairment as of
March 31, 2012. There was no impairment of these intangible assets as of
March 31, 2012. Vancocin will continue to be utilized and sold as a branded drug
product and we are selling an authorized generic version of Vancocin along with
generics of other companies that have entered the market. There have been no
events since March 31, 2012 that would indicate we must re-test these assets for
impairment. However, should future events occur that may cause further
reductions in revenue we may be required to test the recoverability of these
assets and may an incur impairment.
• Impairment of Goodwill and Indefinite-lived Intangible Assets - We review
the carrying value of goodwill and indefinite-lived intangible assets, to
determine whether impairment may exist. In September 2011, the FASB issued
ASU 2011-08, Testing Goodwill for Impairment. The objective of this Update
is to simplify how entities test goodwill for impairment. The amendments
in the Update provide the option to first assess qualitative factors to
determine whether it is necessary to perform the current two-step test. If
an entity believes, as a result of its qualitative assessment, that it is
more-likely-than-not (a likelihood of more than 50%) that the fair value
of a reporting unit is less than its carrying amount, the quantitative
impairment test is required. Otherwise, no further testing is required.
The two step goodwill impairment test consists of the following steps. The
first step compares a reporting unit's fair value to its carrying amount
to identify potential goodwill impairment. If the carrying amount of a
reporting unit exceeds the reporting unit's fair value, the second step of
the impairment test must be completed to measure the amount of the
reporting unit's goodwill impairment loss, if any. Step two requires an
assignment of the reporting unit's fair value to the reporting unit's
assets and liabilities to determine the implied fair value of the
reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of the reporting unit's
goodwill to determine the goodwill impairment loss to be recognized, if
any. The impairment test for indefinite-lived intangible assets is a
one-step test, which compares the fair value of the intangible asset to
its carrying value. If the carrying value exceeds its fair value, an
impairment loss is recognized in an amount equal to the excess. Based on
accounting standards, it is required that these assets be assessed at
least annually for impairment unless a triggering event occurs between
annual assessments which would then require an assessment in the period
which a triggering event occurred.
• Share-Based Payments-We record the estimated grant date fair value of awards granted as stock-based compensation expense in our consolidated
statements of operations over the requisite service period, which is
generally the vesting period.
• Income Taxes-Our annual effective tax rate is based on pre-tax earnings,
enacted tax laws and statutory tax rates, determination of manufacturing
income and related deduction limits, limitations on the use of tax credits
and net operating loss carryforwards, evaluation of qualified expenses
related to the orphan drug credit and tax planning opportunities available
in the jurisdictions in which we operate. Significant judgment is required
in determining our effective tax rate.
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On a periodic basis, we evaluate the realizability of our deferred tax assets
and adjust such amounts in light of changing facts and circumstances, including
but not limited to projections of future taxable income, the reversal of
deferred tax liabilities, tax legislation, rulings by relevant tax authorities,
tax planning strategies and the progress of ongoing tax examinations. As part of
this evaluation, we consider whether it is more likely than not that all or some
portion of the deferred tax asset will not be realized. The ultimate realization
of a deferred tax asset is dependent upon the generation of future taxable
income during the period in which the related temporary difference becomes
deductible or the NOL and credit carryforwards can be utilized. With respect to
the reversal of valuation allowances, we consider the level of past and future
taxable income, the existence and nature of reversing deferred tax liabilities,
the utilization of carryforwards and other factors. Revisions to the estimated
net realizable value of the deferred tax asset could cause our provision for
income taxes to vary significantly from period to period.
We recognize the benefit of tax positions that we have taken or expect to take
on the income tax returns we file if such tax position is more likely than not
of being sustained. Settlement of filing positions that may be challenged by tax
authorities could impact our income tax expense in the year of resolution.
• Acquisition Accounting-The application of the purchase accounting requires
certain estimates and assumptions especially concerning the determination
of the fair values of the acquired intangible assets and property, plant
and equipment as well as the liabilities assumed at the date of the
acquisition. Moreover, the useful lives of the acquired intangible assets,
property, plant and equipment have to be determined.
The total purchase price of businesses acquired will be allocated to the net
tangible assets and identifiable intangible assets based on their fair values as
of the date of the acquisition and the fair value of any contingent
consideration. Changes in the fair value of contingent consideration will be
expensed in the period in which the change in fair value occurs. Additionally,
acquired IPR&D projects will initially be capitalized and considered
indefinite-lived assets subject to annual impairment reviews or more often upon
the occurrence of certain events. For those compounds that reach
commercialization, the assets are amortized over the expected useful lives.
Measurement of fair value and useful lives are based to a large extent on
anticipated cash flows. If actual cash flows vary from those used in calculating
fair values, this may significantly affect our future results of operations. In
particular, the estimation of discounted cash flows of intangible assets of
newly developed products is subject to assumptions closely related to the nature
of the acquired products. Factors that may affect the assumptions regarding
future cash flows:
• long-term sales forecasts,
• anticipation of selling price erosion after the end of orphan
exclusivity due to follow-on biologic competition in the market,
• behavior of competitors (launch of competing products, marketing
initiatives etc.).
For significant acquisitions, the purchase price allocation is carried out with
assistance from independent third-party valuation specialists. The valuations
are based on information available at the acquisition date.
As our business evolves, we may face additional issues that will require
increased levels of management estimation and complex judgments.
