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SAGENT PHARMACEUTICALS, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Online, Inc. 
 The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in Item 8 under the heading "Financial Statements and Supplementary Data". This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled "Risk Factors."

Overview

  We are a specialty pharmaceutical company that develops and sources products that we sell primarily in the U.S. through our highly experienced sales and marketing team. With a primary focus on generic injectable pharmaceuticals, we currently offer our customers a broad range of products across anti-infective, oncolytic and critical care indications in a variety of presentations, including single- and multi-dose vials, pre-filled ready-to-use syringes and premix bags, and we generally seek to develop injectable products where the form or packaging of the product can be enhanced to improve delivery, product safety or end-user convenience. Our management team includes industry veterans who have previously served critical functions at other injectable pharmaceutical companies and key customers and have long-standing relationships with customers, regulatory agencies, and suppliers. We have rapidly established a large and diverse product portfolio and product pipeline as a result of our innovative business model, which combines an extensive network of collaborations with API suppliers and finished product developers and manufacturers in Asia, Europe, the Middle East and the Americas with our proven and experienced U.S.-based regulatory, quality assurance, business development, project management, and sales and marketing teams.  We have developed an extensive international network of collaborations involving API sourcing, product development, finished product manufacturing and product licensing. As of December 31, 2011, our network provided us access to over 90 worldwide manufacturing and development facilities, including several dedicated facilities used to manufacture specific complex APIs and finished products. We currently have two collaborations structured as joint ventures. Our Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd. ("KSCP") joint venture with CKT was established to construct and operate an innovative, sterile manufacturing facility in Chengdu, China that is designed to comply with FDA regulations, including cGMP. Our 50/50 joint venture known as Sagent Strides LLC ("Sagent Strides") with a subsidiary of Strides Arcolab Limited ("Strides"), an Indian manufacturer of finished pharmaceutical products, was established to sell into the U.S. market a wide variety of generic injectable products manufactured by Strides.  We are developing an extensive injectable product portfolio encompassing multiple presentations of a broad range of products across anti-infective, oncolytic and critical care indications. Our product portfolio has grown to a total of 33 products that we offer in an aggregate of 87 presentations as of December 31, 2011.  We maintain an active product development program. Our new product pipeline can generally be classified into two categories: (i) new products for which we have submitted or acquired ANDAs that are filed and under review by the FDA; and (ii) new products for which we have begun initial development activities such as sourcing of API and finished products and preparing the necessary ANDAs. As of December 31, 2011, our new product pipeline included 36 products represented by 63 ANDAs that we had filed, or licensed rights to, that were under review by the FDA, and six products represented by 13 ANDAs that have been recently approved and are pending commercial launch. Our 63 ANDAs under review by the FDA as of December 31, 2011 have been on file for an average of approximately 27 months, with eight of them being on file for less than 12 months, 15 of them being on file for between 12 and 24 months and 40 of them being on file for longer than 24 months. We expect to launch substantially all of these new products by the end of 2013. We also had approximately 29 additional products under initial development as of December 31, 2011. Our product development activities also include expanding our product portfolio by adding new products through in-licensing and similar arrangements with foreign manufacturers and domestic virtual pharmaceutical development companies that seek to utilize our U.S. sales and marketing expertise.                                           27

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The specific timing of our new product launches is subject to a variety of factors, some of which are beyond our control, including the timing of FDA approval for ANDAs currently under review or that we file with respect to new products. The timing of these and other new product launches will have a significant impact on our results of operations.

The following table provides a summary of certain aspects of our product development efforts for the periods presented:

                                                        For the year ended December 31,                                                   2011              2010            2009 Products launched during the period                    12                 8             6 ANDAs submitted or licensed during the period          17                21            42 ANDAs under FDA review at end of period                63                68            63

The table below sets forth our new products represented by ANDAs that are under review by the FDA or recently approved and under initial development as of December 31, 2011 by product category:

                                              Number of Products                                     Under FDA             Initial                  Product category     review            development                  Anti-infective              8                     4                  Oncology                    5                    11                  Critical care              23                    14                                              36                    29

Product Competition and Development Costs

  Within the U.S. generic pharmaceutical industry, the level of market share, revenue and gross profit attributable to a particular generic product is significantly influenced by the number of competitors in that product's market and the timing of our product's regulatory approval and launch in relation to competing approvals and launches. In order to establish market presence, we initially selected products for development based in large part on our ability to rapidly secure API sourcing, finished product manufacturing and regulatory approvals despite such products facing significant competition from existing generic products at their time of launch. As a result, our gross margins associated with such products have been adversely impacted by such competitive conditions. More recently, we have focused on developing value-added differentiated products where we can compete on many factors in addition to price. Specifically, we have targeted injectable products where the form or packaging of the product can be enhanced to improve delivery, patient safety or end-user convenience and where generic competition is likely to be limited by product manufacturing complexity or lack of API supply. In addition, we may challenge proprietary product patents to seek first-to-market rights.  Similarly, our initial focus in establishing our international network of collaborations was to rapidly secure the necessary API sourcing and finished product manufacturing for us to establish our market presence. As a result, we believe we have the opportunity to optimize our product margins by continuing to improve the commercial terms of our supply arrangements and to gain access to additional, more favorable API, product development and manufacturing capabilities. For example, we believe our KSCP joint venture will be able to supply us with high-quality finished products at an attractive cost of goods once this facility is fully operational.                                           28

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  The development of generic injectable products is characterized by significant up-front costs, including costs associated with product development activities, sourcing API and manufacturing capability, obtaining regulatory approvals, building inventory and sales and marketing. As a result, we have made, and we expect to continue to make, substantial investments in product development. Product development expenses for the years ended December 31, 2011, 2010 and 2009 totaled approximately $12.8 million, $11.2 million and $12.4 million respectively. In addition, we expect that our overall level of product development activity in any specific period may vary significantly based upon our business strategy to continue to identify and source new product opportunities, for example, we have committed $10.0 million of our IPO proceeds to additional development activities, the majority of which we anticipate spending during 2012.

Critical Accounting Policies and Estimates

  The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The most significant estimates in our consolidated financial statements are discussed below. Actual results could vary from those estimates.

Revenue Recognition

  We recognize revenue when our obligations to a customer are fulfilled relative to a specific product and all of the following conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) delivery has occurred. Delivery is deemed to have occurred upon customer receipt of product, upon fulfillment of acceptance terms, if any, and when no significant contractual obligations remain. Net sales reflect reductions of gross sales for estimated wholesaler chargebacks, estimated contractual allowances, and estimated early payment discounts. We provide for estimated returns at the time of sale based on historic product return experience.  In the case of new products for which the product introduction is not an extension of an existing line of product, where we determine that there are not products in a similar therapeutic category, or where we determine the new product has dissimilar characteristics with existing products, such that we cannot reliably estimate expected returns of the new product, we defer recognition of revenue until the right of return no longer exists or until we have developed sufficient historical experience to estimate sales returns. Subsequent adjustments to our prior year provisions and reserve requirements for chargebacks, allowances, discounts and returns have been less than 1% of total consolidated net revenue on an annual basis in each of the three fiscal years ended December 31, 2011.

Shipping and handling fees billed to customers are recognized in net revenues. Other shipping and handling costs are included in cost of goods sold.

Revenue Recognition - Chargebacks

  The majority of our products are distributed through independent pharmaceutical wholesalers. In accordance with industry practice, sales to wholesalers are initially transacted at wholesale list price. The wholesalers then generally sell to an end user, normally a hospital, alternative healthcare facility, or an independent pharmacy, at a lower price previously contractually established between the end user and Sagent.  When we initially record a sale to a wholesaler, the sale and resulting receivable are recorded at our list price. However, experience indicates that most of these selling prices will eventually be reduced to a lower, end-user contract price. Therefore, at the time of the sale, a contra asset is recorded for, and revenue is reduced by, the difference between the list price and the estimated average end-user contract price. This contra asset is calculated by product code, taking the expected number of outstanding wholesale units sold that will ultimately be sold under end-user contracts multiplied by the anticipated, weighted-average contract price. When the wholesaler ultimately sells the product, the wholesaler charges us, or issues a chargeback, for the difference between the list price and the end-user contract price and such chargeback is offset against the initial estimated contra asset.  The significant estimates inherent in the initial chargeback provision relate to wholesale units pending chargeback and to the end-user contract-selling price. We base the estimate for these factors on internal, product-specific sales and chargeback processing experience, estimated wholesaler inventory stocking levels, current contract pricing and expectations for future contract pricing changes. Our chargeback provision is potentially impacted by a number of market conditions, including: competitive pricing, competitive products, and other changes impacting demand in both the distribution channel and end users.                                             29

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  We rely on internal data, external data from our wholesaler customers and management estimates to estimate the amount of inventory in the channel subject to future chargeback. The amount of product in the channel is comprised of both product at the wholesaler and product that the wholesaler has sold, but not yet reported as end-user sales. We changed the estimation of our chargeback liability in 2011, based on an improved process to analyze estimated inventory in the wholesaler channel. Physical inventory in the channel is estimated by the evaluation of our monthly sales to the wholesalers and our knowledge of inventory levels and estimated inventory turnover at these wholesalers.  Our total chargeback accrual was $28.9 million and $13.5 million at December 31, 2011 and 2010, respectively, and is included within accounts receivable. A 1% decrease in estimated end-user contract-selling prices would reduce net revenue for the year ended December 31, 2011, by $0.2 million and a 1% increase in wholesale units pending chargeback for the year ended December 31, 2011, would reduce net revenue by .

Revenue Recognition - Cash Discounts

  We offer cash discounts, approximating 2% of the gross sales price, as an incentive for prompt payment and occasionally offer greater discounts and extended payment terms in support of product launches or other promotional programs. Our wholesale customers typically pay within terms, and we account for cash discounts by reducing net sales and accounts receivable by the full amount of the discount offered at the time of sale. We consider payment performance and adjust the accrual to reflect actual experience.

Revenue Recognition - Sales Returns

  Consistent with industry practice, our return policy permits customers to return products within a window of time before and after the expiration of product dating. We provide for product returns and other customer credits at the time of sale by applying historical experience factors. We provide specifically for known outstanding returns and credits. The effect of any changes in estimated returns is taken in the current period's income.  For returns of established products, we determine our estimate of the sales return accrual primarily based on historical experience, but also consider other factors that could impact sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product recalls, product discontinuances, price changes of competitive products, and introductions of competitive new products.

Revenue Recognition - Contractual Allowances

  Contractual allowances, generally rebates or administrative fees, are offered to certain wholesale customers, GPOs, and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to five months from date of sale. We provide a provision for contractual allowances at the time of sale based on the historical relationship between sales and such allowances. Contractual allowances are reflected in the consolidated financial statements as a reduction of revenues and as a current accrued liability.  Inventories  Inventories, substantially all of which are finished goods, are stated at the lower of cost (first in, first out) or market value. Inventories consist of products currently approved for marketing and may include certain products pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to receiving regulatory approval based on our judgment of probable future commercial success and realizable value. Such judgment incorporates management's knowledge and best judgment of where the product is in the regulatory review process, market conditions, competing products and economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, we may need to provide for and expense such inventory. We had capitalized $0.3 million of inventory, related to one product, pending regulatory approval at December 31, 2011 and 2010. This product was approved in February 2012.                                           30

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  We establish reserves for our inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, estimated time required to sell such inventory, remaining shelf life and current expected market conditions, including level of competition. We record provisions for inventory to cost of goods sold. In 2011, we recorded an incremental $4.3 million inventory reserve, primarily related to the writedown of excess inventory for the U.S. dialysis market.  Income Taxes  Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the financial statements in the period that includes the legislative enactment date.  In assessing the potential for realization of deferred tax assets and establishing valuation allowances, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, and tax planning strategies in making this assessment. Based upon our history of tax losses we do not believe realization of these tax assets is more likely than not. As a result, full valuation allowances for the deferred tax assets were established.  Furthermore, even if we generate taxable income in future years, our ability to use our deferred tax assets, such as our net operating losses, to reduce future federal income tax liability may be limited as a result of previous or future changes in equity ownership of our company.

Stock-Based Compensation

  We recognize compensation cost for all share-based payments (including employee stock options) at fair value. We use the straight-line attribution method to recognize share-based compensation expense over the vesting period of the award.  We measure and recognize stock based compensation expense for performance based options if the performance measures are considered probable of being achieved. We evaluate the probability of the achievement of the performance measures at each balance sheet date. If it is not probable that the performance measures will be achieved, any previously recognized compensation cost would be reversed.  We estimate the value of stock options on the date of grant using a Black-Scholes option pricing model that incorporates various assumptions. The risk-free rate of interest for the average contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is zero as we have not paid nor do we anticipate paying any dividends. For service-based awards, we use the "simplified method" described in SEC Staff Accounting Bulletin Topic 14 where the expected term of awards granted is based on the midpoint between the vesting date and the end of the contractual term, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. For performance-based awards, we determine the expected term based on the anticipated achievement and exercise pattern of the underlying options. Our expected volatility is based on the historical volatility of similar companies' stock. The weighted-average estimated values of employee stock option grants and rights granted under our employee stock purchase plan as well as the weighted-average assumptions that were used in calculating such values during the last three years were based on estimates at the date of grant as follows:                                           31

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          Risk free                                Expected

Expected Fair value at

         interest rate        Expected life      dividend yield        volatility         grant date 2011              1.47 %            6 years                   0 %              61 %    $         11.15 2010              1.60 %            6 years                   0 %              65 %               7.21 2009              2.40 %            6 years                   0 %              63 %               2.51   We have also granted performance based stock options with terms that allow the recipient to vest in a specific number of shares based upon the achievement of certain performance measures, as specified in the grants. Share-based compensation expense associated with these stock options is recognized over the requisite service period of the awards or the implied service period, if shorter.  While the assumptions used to calculate and account for share-based compensation awards represent management's best estimates, these estimates involve inherent uncertainties and the application of management's judgment. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period-to-period.

Valuation and Impairment of Marketable Securities

  Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of investments are included in accumulated other comprehensive income, net of tax, as reported in our balance sheets. Changes in the fair value of investments impact our net income (loss) only when such investments are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security's cost basis. We regularly review our investment portfolio to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of an investment is less than its cost, the financial condition of the issuer and any changes thereto, and our intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment's amortized cost basis. Our assessment on whether an investment is other-than-temporarily impaired or not, could change in the future due to new developments or changes in assumptions related to any particular investment.

Product Development

  Product development costs are expensed as incurred. These expenses include the costs of our internal product development efforts, acquired in-process product development, as well as product development costs incurred in connection with our third-party collaboration efforts. Our third-party development collaborations typically provide for achievement-based milestones to be paid by us throughout the product development process, typically upon: (i) signing of the development agreement; (ii) manufacture of the submission batches used in conjunction with the filing of an ANDA with the FDA; (iii) filing of an ANDA with the FDA; and (iv) FDA approval. In addition, depending upon the nature of the product and the terms of our collaboration, we may also provide or pay for API and samples of the reference-listed drug.  Preapproval milestone payments made under contract product development arrangements or product licensing arrangements prior to regulatory approval are expensed as a component of product development when the related milestone is achieved. Once the product receives regulatory approval, we record any subsequent milestone payments as an intangible asset to be amortized on a straight-line basis as a component of cost of goods sold over the related license period or the estimated life of the acquired product, which ranges from three years to seven years with a weighted-average of four years prior to the next renewal or extension as of December 31, 2011. We make the determination whether to capitalize or expense amounts related to the development of new products and technologies through agreements with third parties based on our ability to recover its cost in a reasonable period of time from the estimated future cash flows anticipated to be generated pursuant to each agreement. Market, regulatory and legal factors, among other things, may affect the ability to realize projected cash flows that an agreement was initially expected to generate. We regularly monitor these factors and subject capitalized costs to periodic impairment testing.                                           32

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Intangible Assets

  Certain amounts paid to third parties related to the development of new products and technologies, as described above, are capitalized and included in intangible assets in the accompanying consolidated balance sheets.

Recently Adopted Accounting Standards

  In June 2011, new guidance was issued regarding the presentation of comprehensive income, which was partially deferred in December 2011. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of operations and other comprehensive income or separate but consecutive statements of operations and other comprehensive income. We have adopted this guidance as of December 31, 2011. Adoption of this standard did not have a material impact on our consolidated financial statements.

New Accounting Guidance

  In May 2011, new guidance was issued on the accounting for fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. We will adopt this guidance on January 1, 2012, and do not believe this guidance will have a significant impact on our financial results.

Non-GAAP Financial Measures

the United States ("GAAP").

Adjusted gross profit

  We use the non-GAAP financial measure "adjusted gross profit" and corresponding growth ratios. The difference between "adjusted gross profit" and "gross profit," which is the most directly comparable GAAP financial measure, is that adjusted gross profit excludes costs primarily related to the writedown of excess inventory for the U.S. dialysis market. We believe that adjusted gross profit is relevant and useful supplemental information for our investors. Our management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses adjusted gross profit and corresponding ratios, including adjusted gross margin, to make operating and strategic decisions and evaluate our performance. We have disclosed this measure so that you have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that adjusted gross profit better reflects the underlying gross profit on a going-forward basis and provides improved comparability of results because it excludes costs related to a market we are substantially exiting from gross profit. The limitation of this measure is that it excludes items that have an impact on gross profit. The best way that this limitation can be addressed is by using adjusted gross profit in combination with our GAAP reported gross profit. Because adjusted gross profit calculations may vary among other companies, the adjusted gross profit figures presented in the Consolidated Results of Operations section may not be comparable to similarly titled measures used by other companies. Our use of adjusted gross profit is not meant to be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling adjusted gross profit to GAAP reported gross profit.                                                                                 Gross profit as                                                                                  % of net                                                                                  revenues                                      2011        2010       $ Change        2011          2010   Adjusted gross profit            $ 23,052     $ 9,043     $  14,009         15.1 %       12.2 %   Impact of inventory writedowns      4,283          -         (4,283 )       (2.8 %)        -    Reported gross profit            $ 18,769     $ 9,043     $   9,727         12.3 %       12.2 %                                             33

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Results of Operations

  The following compares our consolidated results of operations for the year ended December 31, 2011 with those of the year ended December 31, 2010 (in thousands, except per share amounts):                                                  Year ended December 31,                                                2011               2010           $ change          % change Net revenue                                $    152,405         $  74,056        $  78,349               106 % Cost of sales                                   133,636            65,013           68,623               106 %  Gross profit                                     18,769             9,043            9,726               108 % Gross profit as % of net revenues                  12.3 %            12.2 %  Operating expenses: Product development                              12,763            11,223            1,540                14 % Selling, general and administrative              25,148            18,931            6,217                33 % Equity in net loss of joint ventures              2,531             1,476            1,055                71 %  Total operating expenses                         40,442            31,630            8,812                28 %  Loss from operations                            (21,673 )         (22,587 )            914                 4 % Interest income and other                           284                34              250               735 % Interest expense                                 (4,195 )          (1,129 )         (3,066 )            (272 )% Change in fair value of preferred stock warrants                                     (838 )            (813 )            (25 )              (3 )%  Loss before income taxes                        (26,422 )         (24,495 )         (1,927 )              (8 )% Provision for income taxes                           -                 -                -                 -  Net loss                                   $    (26,422 )       $ (24,495 )      $  (1,927 )              (8 )%  Net loss per common share: Basic                                      $      (1.31 )       $  (12.53 )      $   11.22                90 % Diluted                                    $      (1.31 )       $  (12.53 )      $   11.22                90 %   Net revenue: Net revenue for the year ended December 31, 2011 totaled $152.4 million, an increase of $78.3 million, or 106%, as compared to $74.1 million for the year ended December 31, 2010. The launch of 33 new codes or presentations of 12 products during 2011, including levofloxacin, which was introduced in July, partially offset by the impact of wholesaler list price increases, contributed $42.0 million of the net revenue increase in 2011. Net revenues for products launched before December 31, 2010 increased by $36.4 million, or 49%, to $110.5 million during 2011, due to the impact of annualizing sales, increased unit volumes and changes in the estimation of our outstanding chargeback liability, partially offset by lower pricing, especially on our heparin products.

Contributing to revenue growth for the year ended December 31, 2011 was a year-end promotional program offering wholesalers a 5% discount for selected products purchased during December 2011.

  Cost of sales: Cost of goods sold for the year ended December 31, 2011 totaled $133.6 million, an increase of $68.6 million, or 106%, as compared to $65.0 million for the year ended December 31, 2010. Gross profit as a percentage of net revenue was 12.3% for the year ended December 31, 2011. Adjusted gross profit, which excludes certain costs primarily associated with the exit of the dialysis market for one of our products, was $23.1 million, or 15.1% as a percentage of net revenue, for the year ended December 31, 2011. Refer to the "Non-GAAP Financial Measures" section preceding this Results of Operations discussion for further information on adjusted gross profit. Gross profit and adjusted gross profit as a percentage of net revenue for the year ended December 31, 2010 was 12.2%. The increase in adjusted gross profit as a percentage of net revenue was driven primarily by our introduction of new, higher margin products, principally levofloxacin, gemcitabine and topotecan, partially offset by the impact of lower pricing, especially on our heparin products.  Product development: Product development expense for the year ended December 31, 2011 totaled $12.8 million, an increase of $1.5 million, or 14%, as compared to $11.2 million for the year ended December 31, 2010. The increase in product development expense was primarily due to the timing of milestone payments and FDA filing fees for our development programs.                                           34

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  As of December 31, 2011, our new product pipeline included 36 products represented by 63 ANDAs which we had filed, or licensed rights to, that were under review by the FDA and six products represented by 13 ANDAs that have been recently approved and were pending commercial launch. We expect to launch substantially all of these remaining new products by the end of 2013. We also had an additional 29 products represented by 36 ANDAs under initial development at December 31, 2011.  Selling, general and administrative: Selling, general and administrative expenses for the year ended December 31, 2011, totaled $25.1 million, an increase of $6.2 million, or 33%, as compared to $18.9 million for the year ended December 31, 2010. The increase in selling, general and administrative expense was primarily due to increases in headcount and corporate infrastructure to support revenue growth and manage the requirements of operating as a public company. Selling, general and administrative expense as a percentage of net revenue was 17% and 26% for the year ended December 31, 2011 and 2010, respectively; the reduction reflects the benefit of significant sales growth across our established sales and administrative organization.  Equity in net loss of joint ventures: Equity in net loss of joint ventures for the year ended December 31, 2011 totaled $2.5 million, an increase of $1.1 million, or 71%, as compared to $1.5 million for the year ended December 31, 2010. The increase was primarily due to additional development activities of our KSCP joint venture, as the manufacturing facility continued validation and development activities in advance of the initial submission from the facility, which occurred during the third quarter, partially offset by increased income generated by the Sagent Strides joint venture. Included in this amount is $2.1 million and $0.4 million, respectively, of earnings directly related to the sale of product through our joint venture with Strides.  Interest expense: Interest expense for the year ended December 31, 2011 totaled $4.2 million, an increase of $3.1 million, or 272%, as compared to $1.1 million for the year ended December 31, 2010. The increase was principally due to higher average borrowings under our expanded senior secured revolving credit facility and borrowings under our new term loan credit facility during the year ended December 31, 2011 as compared to the year ended December 31, 2010. In February 2012, we retired our senior secured revolving credit facility and term loan credit facility, and replaced them with a new credit facility. Refer to Liquidity and Capital Resources - Silicon Valley Bank Revolving Credit Facility for further detail.  Provision for income taxes: We have generated tax losses since inception and as a result, we have recorded a full valuation allowance against our deferred tax assets. The exercise of the overallotment option as part of our initial public offering in April 2011 triggered an ownership change as defined by Section 382 of the US Internal Revenue Code. This change will limit the amount of our net operating loss carryforwards which we could utilize to offset future taxable income. As none of our current net operating loss carryforwards expire before 2027, we expect that despite the use limitations triggered by our IPO, we will have a reasonable opportunity to utilize all of these loss carryforwards before they expire, but such loss carryforwards will be usable only to the extent that we generate sufficient taxable income.

Net loss and net loss per common share: The net loss for the year ended December 31, 2011 was $26.4 million. The net loss for the year ended December 31, 2010 was $24.5 million. Net loss per common share decreased by $11.22, or 90%. The decrease in net loss per common share is due to the following factors:

         Basic and diluted EPS for the year ended December 31, 2010   $ (12.53 )       Increase in common shares outstanding                           12.21       Increase in net loss                                            (0.99 )        Basic and diluted EPS for the year ended December 31, 2011   $  (1.31 )                                             35

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  The following compares our consolidated results of operations for the year ended December 31, 2010 with those of the year ended December 31, 2009 (in thousands, except per share amounts):                                                   Year ended December 31,                                                  2010             2009         $ change        % change Net revenue                                  $     74,056       $  29,222      $  44,834             153 % Cost of sales                                      65,013          28,785         36,228             126 %  Gross profit                                        9,043             437          8,606           1,969 % Gross profit as % of net revenues                    12.2 %           1.5 %  Operating expenses: Product development                                11,223          12,404         (1,181 )           (10 )% Selling, general and administrative                18,931          16,677          2,254              14 % Equity in net loss of joint ventures                1,476           1,491            (15 )            (1 )%  Total operating expenses                           31,630          30,572          1,058               3 %  Loss from operations                              (22,587 )       (30,135 )        7,548             (25 )% Interest income and other                              34              66            (32 )           (48 )% Interest expense                                   (1,129 )          (467 )         (662 )           142 % Change in fair value of preferred stock warrants                                             (813 )            -            (813 )           100 %  Loss before income taxes                          (24,495 )       (30,536 )        6,041             (20 )% Provision for income taxes                             -               -              -                0 %  Net loss                                     $    (24,495 )     $ (30,536 )    $   6,041             (20 )%  Net loss per common share: Basic                                        $     (12.53 )     $  (17.16 )    $    4.63              27 % Diluted                                      $     (12.53 )     $  (17.16 )    $    4.63              27 %   Net revenue. Net revenue for the year ended December 31, 2010 totaled $74.1 million, an increase of $44.8 million, or 153%, as compared to $29.2 million in 2009. The launch of 25 codes or presentations of eight new products, including nine codes of heparin, and the launch of two additional codes for existing products, represented $24.7 million, or 55%, of the net revenue increase in 2010 as compared to 2009. During 2010, net revenue from products launched in 2009 totaled $13.8 million, an increase of $10.3 million, as compared to $3.5 million in 2009. The increase in net revenue from products launched in 2009 was due primarily to the inclusion of a full twelve-months net revenue for those products and increased market penetration. Net revenue in 2010 for products launched prior to 2009 totaled $35.6 million, an increase of $9.8 million, or 22%, as compared to $25.7 million in 2009, and represented 22% of the total net revenue increase for the period. This increase resulted from a 201% increase in unit volumes due to increased market penetration while average selling prices remained consistent with the prior year.  Cost of goods sold. Cost of goods sold for the year ended December 31, 2010 totaled $65.0 million, an increase of $36.2 million, or 126%, as compared to $28.8 million for 2009. Gross profit as a percentage of net revenue was 12.2% and 1.5% for the years ended December 31, 2010 and 2009, respectively. The increase in gross profit as a percentage of net revenue was primarily driven by our introduction of new, higher margin products, principally heparin and topotecan, which contributed to a higher overall gross margin.  Product development. Product development expense for the year ended December 31, 2010 totaled $11.2 million, a decrease of $1.2 million, or 10%, as compared to $12.4 million for 2009. The decrease in product development expense was mainly a result of the timing of third-party development activities as the number and the expected total cost of products under development did not change significantly period-over-period.                                           36

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  Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2010 totaled $18.9 million, an increase of $2.3 million, or 14%, as compared to $16.7 million for 2009. The dollar increase in selling, general and administrative expense was primarily due to an increase in headcount and related expenses and corporate infrastructure to support our anticipated growth and the write off of amounts due from a supplier under our profit sharing arrangement. The amount due from a supplier under our profit sharing agreement has been included in selling, general and administrative expense as it relates to amounts prepaid to the supplier under the agreement which will not be recouped following the termination of the agreement in mid-2010. Selling, general and administrative expense as a percentage of net revenues was 26% and 57% for the years ended December 31, 2010 and 2009, respectively; the reduction reflecting the benefit of increased net sales across our existing sales and marketing organization which had been established in anticipation of new product launches.  Equity in net loss of unconsolidated joint ventures. Equity in net loss of unconsolidated joint ventures for the year ended December 31, 2010 totaled $1.5 million, a decrease of less than $0.1 million, or 1%, as compared to $1.5 million for 2009. The decrease was primarily due to a decrease in product development expenses associated with our Sagent Strides joint venture, partially offset by an increase in start-up costs associated with our KSCP joint venture.

Interest income and other. Interest income and other for the years ended December 31, 2010 and 2009 totaled less than $0.1 million and $0.1 million, respectively.

  Interest expense. Interest expense for the year ended December 31, 2010 totaled $1.1 million, an increase of $0.7 million, or 142%, as compared to $0.5 million for 2009. The increase was principally due to higher average borrowings during 2010 as compared to 2009 under our senior secured revolving credit facility.

Change in fair value of preferred stock warrants. Change in fair value of preferred stock warrants for the year ended December 31, 2010 was $0.8 million resulting from the change in the fair value from issuance on April 6, 2010 through December 31, 2010.

  Provision for income taxes. We have generated tax losses since inception and as a result, we have recorded a full valuation allowance against our deferred tax assets.  Net loss and net loss per common share: The net loss for the year ended December 31, 2010 of $24.5 million decreased by $6.0 million, or 20%, from the $30.5 million net loss for the year ended December 31, 2009. Net loss per common share decreased by $4.63, or 27%. The decrease in net loss per common share is due to the following factors:          Basic and diluted EPS for the year ended December 31, 2009   $ (17.16 )       Decrease in net loss                                             3.42       Increase in common shares outstanding                            1.21        Basic and diluted EPS for the year ended December 31, 2010   $ (12.53 )

Liquidity and Capital Resources

Funding Requirements

  As of December 31, 2011, we have not generated any operating profit. Our future capital requirements will depend on a number of factors, including the continued commercial success of our existing products, launching the 42 products that are represented by our 76 ANDAs that have been recently approved and are pending commercial launch or are pending approval by the FDA as of December 31, 2011, and successfully identifying and sourcing other new product opportunities.  Based on our existing business plan, we expect cash and cash equivalents and short-term investments, together with our available borrowings, will be sufficient to fund our planned operations, including the continued development of our product pipeline, for at least the next 12 months. However, we may require additional funds in the event we change our business plan, execute strategic initiatives, including acquisitions, or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the regulatory environment or the loss of key relationships with suppliers, group purchasing organizations or end-user customers.                                           37

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  If required, additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings or debt financings, which may not be available to us on terms we consider acceptable or at all.

If adequate funds are not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products. We may elect to raise additional funds even before we need them if we believe that the conditions for raising capital are favorable.

Cash Flows

Overview

  On December 31, 2011, cash and cash equivalents on hand totaled $52.3 million, working capital totaled $116.7 million and our current ratio (current assets to current liabilities) was approximately 2.4 to 1.0. We have made a net investment of $74.8 million of the proceeds from our IPO in other short-term investments, generally U.S. government or high quality investment grade corporate debt securities with a remaining term of two years or less.

Sources and Uses of Cash

  Operating activities: Net cash used in operating activities was $20.4 million, $27.8 million and $42.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in the use of cash for operating activities in 2011 primarily relates to improved working capital management and reduced cash losses. The reduction in the use of cash for operating activities in 2010 primarily related to a reduction in our net loss of $6.0 million and improved working capital management.  Investing activities: Net cash used in investing activities was $79.6 million, $7.3 million and $9.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in cash used for investing activities in 2011 primarily relates to the net investment of $74.8 million of the proceeds from our April 2011 IPO in short-term available-for-sale securities. The reduction in cash used for investing activities in 2010 relates primarily to reduced funding requirements of our joint ventures, partially offset by increased payments to acquire product license and development rights.  Financing activities: Net cash provided by financing activities was $117.8 million, $61.7 million and $34.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in cash provided by financing activities in 2011 primarily relates to $101.6 million from the issuance of common shares, including $95.6 million from our initial public offering, and $15.0 million from our term loan credit facility, partially offset by $45.4 million of proceeds from the issuance of Class B preferred stock in 2010. The increase in cash provided by financing activities in 2010 relates to increased funding through the issuance of preferred stock and increased borrowings under our senior secured revolving credit facility.

Credit facilities

  During 2011, we maintained two active credit facilities; a Senior Secured Revolving Credit Facility and a Term Loan Credit Facility, which we entered in March 2011. In February 2012, we repaid all of our outstanding borrowings and terminated each facility. We replaced these facilities with a new Revolving Credit Facility with Silicon Valley Bank. Refer below for a description of each of the facilities in place during 2011, as well as our new facility with Silicon Valley Bank.

Senior Secured Revolving Credit Facility

  On June 16, 2009, our principal operating subsidiary entered into a senior secured revolving credit facility with Midcap Financial, LLC. In December 2010, our principal operating subsidiary entered into an amendment to the senior secured revolving credit facility pursuant to which it is able to borrow up to $25.0 million in revolving loans, subject to borrowing availability. The borrowing availability is calculated based on eligible accounts receivable and inventory. On March 8, 2011, our principal operating subsidiary further amended the senior secured revolving credit facility to, among other things, permit the entry into our new $15.0 million term loan credit facility, which we describe below, and the incurrence of debt and granting of liens thereunder.                                           38

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  The senior secured revolving credit facility expires June 16, 2013. Borrowings under the senior secured revolving credit facility may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to either an adjusted London Interbank Offered Rate ("LIBOR"), plus a margin of 5.50%, or an alternate base rate plus a margin of 4.50%. Loans under the senior secured revolving credit facility are secured by substantially all of our assets.  The senior secured revolving credit facility contains various covenants, including a covenant to maintain minimum net invoiced revenue, and restrictions on the ability to incur additional indebtedness, create liens, make certain investments, pay dividends, sell assets, or enter into a merger or acquisition. With respect to dividends, our principal operating subsidiary, as the borrower under the senior secured credit facility, was prohibited, subject to certain limited exceptions, from declaring dividends or otherwise making any distributions, loans or advances to Sagent until Sagent became a borrower under the senior secured revolving credit facility. Sagent became a borrower under this agreement as part of a joinder and amendment to the senior secured revolving credit facility finalized on September 26, 2011. The joinder and amendment also eliminated the covenant to maintain minimum net invoiced revenue in periods where we report a specified level of cash and cash equivalents in our consolidated financial statements.  As of December 31, 2011, we had $24.9 million of outstanding borrowings under our senior secured revolving credit facility, which represented our maximum borrowing availability as of that date based on our borrowing base calculation. The interest rate on the senior secured revolving credit facility was 8.50% at December 31, 2011 and 2010. As of December 31, 2011, we were in compliance with all of the covenants under the senior secured revolving credit facility.

Term Loan Credit Facility

  On March 8, 2011, our principal operating subsidiary entered into a $15.0 million term loan credit facility with Midcap Funding III, LLC, as agent and a lender, and the other financial institutions party thereto, as lenders. We borrowed the full amount of the facility at that time, and no further borrowings or re-borrowings are permitted. The term loan credit facility is coterminous with the senior secured revolving credit facility and expires June 16, 2013. Borrowings under the term loan facility may be used for general corporate purposes, including funding working capital. Loans outstanding under the term loan credit facility bear interest at LIBOR, plus a margin of 9.0%, subject to a 3.0% LIBOR floor. Equal monthly amortization payments in respect of the term loan are payable beginning September 1, 2011. The term loan credit facility is secured by a second lien on substantially all of our assets. At December 31, 2011, we had $12.3 million outstanding under our Term Loan Credit Facility.  The term loan credit facility contains various covenants substantially similar to the senior secured revolving credit facility, including a covenant to maintain minimum net invoiced revenue and restrictions on the borrower's ability to incur additional indebtedness, create liens, make certain investments, pay dividends, sell assets, or enter into a merger or acquisition. With respect to dividends, our principal operating subsidiary, as the borrower under the term loan credit facility, was prohibited, subject to certain limited exceptions, including an exception to distribute $1.5 million to us to cover fees and expenses related to the IPO, from declaring dividends or otherwise making any distributions, loans or advances to us, until Sagent became a borrower under the term loan credit facility. Sagent became a borrower under this agreement as part of a joinder and amendment to the term loan credit facility finalized on September 26, 2011. The joinder and amendment also eliminated the covenant to maintain minimum net invoiced revenue in periods where we report a specified level of cash and cash equivalents in our consolidated financial statements.                                           39

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Aggregate Contractual Obligations:

The following table summarizes our long-term contractual obligations and commitments as of December 31, 2011. The actual amount that may be required in the future to repay our senior secured revolving credit facility may be different, including as a result of additional borrowings under our senior secured revolving credit facility.

                                                                        Payments due by period                                                         Less than one                                       More than Contractual obligations (1)                Total            year            1-3 years       3-5 years       five years Long-term debt obligations (2)            $ 37,509     $        33,418     $     4,091     $        -      $         - Capital lease obligations                       -                   -               -               -                - Operating lease obligations (3)              1,488                 280             586             622               - Purchase obligations                            -                   -               -               -                - Contingent milestone payments (4)           22,311              14,375           6,371           1,442              123 Joint venture funding requirements (5)         358                 185             173              -                -                                            $ 61,666     $        48,258     $    11,221     $     2,064     $        123

(1) We had no material purchase commitments, individually or in the aggregate,

under our manufacturing and supply agreements.

(2) Includes amounts payable under our senior secured revolving credit facility

based on interest rates calculated at the applicable borrowing rate as of

December 31, 2011. As of December 31, 2011, we had approximately $24.9

million of outstanding borrowings under our senior secured revolving credit

facility and $12.3 million payable under our term loan credit facility. In

February 2012, we repaid in full our senior secured revolving credit

facility and term loan credit facility, and replaced them with a revolving

credit facility with Silicon Valley Bank.

(3) Includes annual minimum lease payments related to non-cancelable operating

leases.

(4) Includes management's estimate for contingent potential milestone payments

and fees pursuant to strategic business agreements for the development and

marketing of finished dosage form pharmaceutical products assuming all

contingent milestone payments occur. Does not include contingent royalty

payments, which are dependent on the introduction of new products.

(5) Includes minimum funding requirements in connection with our existing joint

ventures.

Silicon Valley Bank Revolving Credit Facility

  On February 13, 2012, we entered into a Loan and Security Agreement, with Silicon Valley Bank (the "SVB Agreement"), following the termination and repayment of our Senior Secured Revolving Credit Facility and Term Loan Credit Facility. The SVB Agreement provides for a $40.0 million asset based revolving loan facility, with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction of conditions precedent specified in the SVB Agreement. The SVB Agreement matures on February 13, 2016, at which time all outstanding amounts will become due and payable. Borrowings under the SVB Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.50% per annum or an alternative base rate plus 1.50% per annum. We also pay a commitment fee on undrawn amounts equal to 0.30% per annum. During the continuance of an event of default, at Silicon Valley Bank's option, all obligations will bear interest at a rate per annum equal to 5.00% per annum above the otherwise applicable rate.  Loans under the SVB Agreement are secured by substantially all of our and our principal operating subsidiary's assets, other than our equity interests in our joint ventures and certain other limited exceptions.  The SVB Agreement contains various customary affirmative and negative covenants. The negative covenants restrict our ability to, among other things, incur additional indebtedness, create or permit to exist liens, make certain investments, dividends and other payments in respect of capital stock, sell assets or otherwise dispose of our property, change our lines of business, or enter into a merger or acquisition, in each case, subject to thresholds and exceptions as set forth in the SVB Agreement. The financial covenants in the SVB Agreement are limited to maintenance of a minimum adjusted quick ratio and a minimum free cash flow. The SVB Agreement also contains customary events of default, including non-payment of principal, interest and other fees after stated grace periods, violations of covenants, material inaccuracy of representations and warranties, certain bankruptcy and liquidation events, certain material judgments and attachment events, cross-default to other debt in excess of a specified amount and material agreements, failure to maintain certain material governmental approvals, and actual or asserted invalidity of subordination terms, guarantees and collateral, in each case, subject to grace periods, thresholds and exceptions as set forth in the SVB Agreement.                                           40

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Off-Balance Sheet Arrangements

  We are not party to any off-balance sheet arrangements, nor have we created any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. With the exception of operating leases, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed on our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Effects of Inflation

  We do not believe that our sales or operating results have been materially impacted by inflation during the periods presented in our financial statements. There can be no assurance, however, that our sales or operating results will not be impacted by inflation in the future.                                           41

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