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Cephalon 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2009

 

or

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File Number 000-19119

 

Cephalon, Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

23-2484489

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

41 Moores Road

 

 

P.O. Box 4011

 

 

Frazer, Pennsylvania

 

19355

(Address of Principal Executive Offices)

 

(Zip Code)

 

(610) 344-0200
(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of July 31, 2009

Common Stock, par value $.01

 

74,647,315 Shares

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Cautionary Note Regarding Forward-Looking Statements

 

ii

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

 

 

Consolidated Statements of Operations — Three and six months ended June 30, 2009 and 2008

 

1

 

 

 

 

 

Consolidated Balance Sheets — June 30, 2009 and December 31, 2008

 

2

 

 

 

 

 

Consolidated Statements of Changes in Equity — June 30, 2009

 

3

 

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and six months ended June 30, 2009 and 2008

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows — Six months ended June 30, 2009 and 2008

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

45

 

 

 

 

Item 4.

Controls and Procedures

 

45

 

 

 

 

PART II — OTHER INFORMATION

 

45

 

 

 

 

Item 1.

Legal Proceedings

 

45

 

 

 

 

Item 1A.

Risk Factors

 

45

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

61

 

 

 

 

Item 5.

Other Information

 

62

 

 

 

 

Item 6.

Exhibits

 

63

 

 

 

 

SIGNATURES

 

64

 

i



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements contained in this report or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:

 

·                  our dependence on sales of PROVIGIL® (modafinil) Tablets [C-IV] and NUVIGIL® (armodafinil) Tablets [C-IV] in the United States and the market prospects and future marketing efforts for PROVIGIL, NUVIGIL, FENTORA® (fentanyl buccal tablet) [C-II], AMRIX® (cyclobenzaprine hydrochloride extended-release capsules) and TREANDA® (bendamustine hydrochloride);

 

·                  any potential approval of our product candidates, including with respect to any expanded indications for NUVIGIL and/or FENTORA;

 

·                  our anticipated scientific progress in our research programs and our development of potential pharmaceutical products including our ongoing or planned clinical trials, the timing and costs of such trials and the likelihood or timing of revenues from these products, if any;

 

·                  our ability to adequately protect our technology and enforce our intellectual property rights and the future expiration of patent and/or regulatory exclusivity on certain of our products;

 

·                  our ability to comply fully with the terms of our settlement agreements (including our corporate integrity agreement) with the U.S. Attorney’s Office (“USAO”), the U.S. Department of Justice (“DOJ”), the Office of the Inspector General of the Department of Health and Human Services (“OIG”) and other federal government entities, the Offices of the Attorneys General of Connecticut and Massachusetts and the various states;

 

·                  our ongoing litigation matters, including litigation stemming from the settlement of the PROVIGIL patent litigation, the FENTORA patent infringement lawsuits we have filed against Watson Laboratories, Inc. (“Watson”) and Barr Laboratories, Inc. (“Barr”) and the AMRIX patent infringement lawsuits we have filed against Barr, Mylan Pharmaceuticals, Inc. (“Mylan”), Impax Laboratories, Inc. (“Impax”) and Anchen Pharmaceuticals, Inc. (“Anchen”);

 

·                  our future cash flow, our ability to service or repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected level of operations and general economic conditions; and

 

·                  other statements regarding matters that are not historical facts or statements of current condition.

 

Any or all of our forward-looking statements in this report and in the documents we have referred you to may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others:

 

·                  the acceptance of our products by physicians and patients in the marketplace, particularly with respect to our recently launched products;

 

·                  our ability to obtain regulatory approvals to sell our product candidates, including any additional future indications for FENTORA and NUVIGIL, and to launch such products or indications successfully;

 

·                  scientific or regulatory setbacks with respect to research programs, clinical trials, manufacturing activities and/or our existing products;

 

ii



Table of Contents

 

·                  the timing and unpredictability of regulatory approvals;

 

·                  unanticipated cash requirements to support current operations, expand our business or incur capital expenditures;

 

·                  a finding that our patents are invalid or unenforceable or that generic versions of our marketed products do not infringe our patents or the “at risk” launch of generic versions of our products;

 

·                  the loss of key management or scientific personnel;

 

·                  the activities of our competitors in the industry;

 

·                  regulatory, legal or other setbacks or delays with respect to the settlement agreements with the USAO, the DOJ, the OIG and other federal entities, the state settlement agreements and corporate integrity agreement related thereto, the settlement agreements with the Offices of the Attorneys General of Connecticut and Massachusetts, our settlements of the PROVIGIL patent litigation and the ongoing litigation related to such settlements, the FENTORA patent infringement lawsuits we have filed against Watson and Barr and the AMRIX patent infringement lawsuits we have filed against Barr, Mylan, Impax and Anchen;

 

·                  our ability to integrate successfully technologies, products and businesses we acquire and realize the expected benefits from those acquisitions;

 

·                  unanticipated conversion of our convertible notes by our note holders;

 

·                  market conditions generally or in the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both;

 

·                  the effect of volatility of currency exchange rates; and

 

·                  enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to us or our interests.

 

We do not intend to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We discuss in more detail the risks that we anticipate in Part II, Item 1A of this Quarterly Report on Form 10-Q. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

 

iii



Table of Contents

 

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

As adjusted
2008*

 

2009

 

As adjusted
2008*

 

REVENUES:

 

 

 

 

 

 

 

 

 

Sales

 

$

539,021

 

$

485,042

 

$

1,053,387

 

$

918,939

 

Other revenues

 

8,792

 

7,673

 

14,394

 

16,995

 

 

 

547,813

 

492,715

 

1,067,781

 

935,934

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Cost of sales

 

105,407

 

101,318

 

203,177

 

191,234

 

Research and development

 

102,085

 

80,409

 

205,109

 

161,844

 

Selling, general and administrative

 

223,656

 

209,900

 

424,246

 

408,888

 

Restructuring charges

 

1,245

 

1,565

 

2,882

 

5,476

 

Acquired in-process research and development

 

9,368

 

 

40,118

 

10,000

 

 

 

441,761

 

393,192

 

875,532

 

777,442

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

106,052

 

99,523

 

192,249

 

158,492

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

930

 

4,912

 

1,634

 

11,513

 

Interest expense

 

(20,114

)

(20,789

)

(36,718

)

(43,067

)

Other income (expense), net

 

32,104

 

(1,543

)

38,643

 

3,776

 

 

 

12,920

 

(17,420

)

3,559

 

(27,778

)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

118,972

 

82,103

 

195,808

 

130,714

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

46,932

 

30,212

 

79,986

 

48,381

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

72,040

 

51,891

 

115,822

 

82,333

 

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

12,724

 

 

27,525

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO CEPHALON, INC.

 

$

84,764

 

$

51,891

 

$

143,347

 

$

82,333

 

 

 

 

 

 

 

 

 

 

 

BASIC INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.

 

$

1.19

 

$

0.77

 

$

2.05

 

$

1.22

 

 

 

 

 

 

 

 

 

 

 

DILUTED INCOME PER COMMON SHARE ATTRIBUTABLE TO CEPHALON, INC.

 

$

1.11

 

$

0.69

 

$

1.87

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

 

71,119

 

67,777

 

69,962

 

67,721

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING— ASSUMING DILUTION

 

76,629

 

74,852

 

76,808

 

74,569

 

 


* As adjusted for FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



Table of Contents

 

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

December 31,

 

 

 

June 30,
2009

 

As adjusted
2008*

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

1,281,926

 

$

524,459

 

Short term investments

 

122,701

 

 

Receivables, net

 

344,909

 

409,580

 

Inventory, net

 

239,785

 

117,297

 

Deferred tax assets, net

 

235,916

 

224,066

 

Other current assets

 

52,685

 

54,120

 

Total current assets

 

2,277,922

 

1,329,522

 

 

 

 

 

 

 

INVESTMENTS

 

17,123

 

8,081

 

PROPERTY AND EQUIPMENT, net

 

462,207

 

467,449

 

GOODWILL

 

571,706

 

445,332

 

INTANGIBLE ASSETS, net

 

1,098,675

 

607,332

 

DEFERRED TAX ASSETS, net

 

2,605

 

46,074

 

DEBT ISSUANCE COSTS

 

21,351

 

11,838

 

OTHER ASSETS

 

30,143

 

167,314

 

 

 

$

4,481,732

 

$

3,082,942

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current portion of long-term debt, net

 

$

799,832

 

$

781,618

 

Accounts payable

 

91,187

 

87,079

 

Accrued expenses

 

314,737

 

304,415

 

Total current liabilities

 

1,205,756

 

1,173,112

 

 

 

 

 

 

 

LONG-TERM DEBT

 

352,805

 

3,692

 

DEFERRED TAX LIABILITIES, net

 

219,396

 

77,932

 

OTHER LIABILITIES

 

168,314

 

163,123

 

Total liabilities

 

1,946,271

 

1,417,859

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

REDEEMABLE EQUITY

 

228,224

 

248,403

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

Cephalon stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 5,000,000 shares authorized, 2,500,000 shares issued, and none outstanding

 

 

 

Common stock, $0.01 par value, 400,000,000 and 200,000,000 shares authorized, 77,614,391 and 71,707,041 shares issued, and 74,643,615 and 68,736,642 shares outstanding

 

776

 

717

 

Additional paid-in capital

 

2,484,536

 

2,095,324

 

Treasury stock, at cost, 2,970,776 and 2,970,399 shares

 

(201,734

)

(201,705

)

Accumulated deficit

 

(377,939

)

(521,286

)

Accumulated other comprehensive income

 

91,948

 

43,630

 

Total Cephalon stockholders’ equity

 

1,997,587

 

1,416,680

 

Noncontrolling interest

 

309,650

 

 

Total equity

 

2,307,237

 

1,416,680

 

 

 

$

4,481,732

 

$

3,082,942

 

 


* As adjusted for FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

Cephalon Stockholders’ Equity

 

 

 

 

 

 

 

Comprehensive

 

Common Stock

 

Additional
Paid-in

 

Treasury Stock

 

Accumulated

 

Accumulated
Other

Comprehensive

 

Noncontrolling

 

 

 

Total

 

Income (Loss)

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Deficit

 

Income

 

Interest

 

BALANCE, JANUARY 1, 2009

 

$

1,502,926

 

 

 

71,707,041

 

$

717

 

$

2,071,607

 

2,970,399

 

$

(201,705

)

$

(411,323

)

$

43,630

 

$

 

Impact of adopting FASB Staff Position APB 14-1

 

(86,246

)

 

 

 

 

23,717

 

 

 

(109,963

)

 

 

BALANCE, JANUARY 1, 2009, as adjusted*

 

1,416,680

 

 

 

71,707,041

 

717

 

2,095,324

 

2,970,399

 

(201,705

)

(521,286

)

43,630

 

 

Net income

 

115,822

 

$

115,822

 

 

 

 

 

 

 

 

 

 

 

143,347

 

 

 

(27,525

)

Foreign currency translation loss

 

 

 

48,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net prior service costs on retirement-related plans

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains

 

 

 

266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

48,318

 

48,318

 

 

 

 

 

 

 

 

 

 

 

 

 

48,318

 

 

 

Comprehensive income

 

 

 

$

164,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon conversion of convertible notes

 

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

6,271

 

 

 

129,685

 

1

 

6,270

 

 

 

 

 

 

 

 

 

 

 

Tax benefit from equity compensation

 

179

 

 

 

 

 

179

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

24,840

 

 

 

1,250

 

 

24,840

 

 

 

 

 

 

 

 

 

 

 

Treasury stock acquired

 

(29

)

 

 

 

 

 

 

 

 

377

 

(29

)

 

 

 

 

 

 

Amortization of debt discount under APB 14-1

 

20,179

 

 

 

 

 

 

 

20,179

 

 

 

 

 

 

 

 

 

 

 

Ception noncontrolling interest upon consolidation

 

306,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

306,500

 

Arana noncontrolling interest upon consolidation

 

104,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104,730

 

Acquisition of Arana noncontrolling interest shares

 

(89,807

)

 

 

 

 

 

 

(4,685

)

 

 

 

 

 

 

 

 

(85,122

)

Issuance of common stock in exchange for stock warrants

 

 

 

 

776,361

 

8

 

(8

)

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

288,000

 

 

 

5,000,000

 

50

 

287,950

 

 

 

 

 

 

 

 

 

 

 

Issuance of convertible notes

 

147,843

 

 

 

 

 

 

 

147,843

 

 

 

 

 

 

 

 

 

 

 

Sale of warrants

 

37,640

 

 

 

 

 

 

 

37,640

 

 

 

 

 

 

 

 

 

 

 

Purchase of convertible note hedge

 

(121,040

)

 

 

 

 

 

 

(121,040

)

 

 

 

 

 

 

 

 

 

 

Tax benefit from purchase of convertible note hedge

 

(9,784

)

 

 

 

 

 

 

(9,784

)

 

 

 

 

 

 

 

 

 

 

Deconsolidation of Acusphere

 

10,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,634

 

Other

 

261

 

 

 

 

 

 

 

(172

)

 

 

 

 

 

 

 

 

433

 

BALANCE, JUNE 30, 2009

 

$

2,307,237

 

 

 

77,614,391

 

$

776

 

$

2,484,536

 

2,970,776

 

$

(201,734

)

$

(377,939

)

$

91,948

 

$

309,650

 

 


* As adjusted for FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

As Adjusted
2008*

 

2009

 

As Adjusted
2008*

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

72,040

 

$

51,891

 

$

115,822

 

$

82,333

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Gains and Losses

 

54,245

 

(8,555

)

48,081

 

22,017

 

Net prior service gains and losses on retirement-related plans

 

(8

)

(36

)

(29

)

(65

)

Change in unrealized investment gains and losses

 

(1,899

)

(8

)

266

 

(8

)

Total other comprehensive income, net of tax

 

52,338

 

(8,599

)

48,318

 

21,944

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax

 

124,378

 

43,292

 

164,140

 

104,277

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss Attributable to the noncontrolling inter interest

 

(12,724

)

 

(27,525

)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Cephalon, Inc.

 

$

 137,102

 

$

43,292

 

$

191,665

 

$

104,277

 

 


* As adjusted for FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CEPHALON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2009

 

As adjusted
2008*

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

 115,822

 

$

 82,333

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Deferred income tax benefit

 

(385

)

(12,218

)

Depreciation and amortization

 

87,029

 

84,006

 

Stock-based compensation expense

 

24,840

 

21,894

 

Loss on disposals of property and equipment

 

 

1,031

 

Amortization of debt discount and debt issuance costs

 

23,749

 

26,201

 

Gain on foreign exchange contracts

 

(26,754

)

 

Gain on acquisition of Arana

 

(10,008

)

 

Acquired in-process research and development from Acusphere deconsolidation

 

8,366

 

 

Other

 

(5,283

)

(418

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

74,211

 

(56,210

)

Inventory

 

(9,550

)

(7,933

)

Other assets

 

31,479

 

(24,027

)

Accounts payable, accrued expenses and deferred revenues

 

1,493

 

(10,427

)

Other liabilities

 

(1,501

)

16,418

 

Net cash provided by operating activities

 

313,508

 

120,650

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(30,234

)

(42,898

)

Acquisition of intangible assets

 

 

(25,575

)

Cash balance from consolidation of variable interest entity

 

52,563

 

 

Investment in Ception

 

(75,000

)

 

Acquisition of Arana, net of cash acquired

 

(211,803

)

 

Purchases of investments

 

(9,082

)

(6,242

)

Proceeds from foreign exchange contract

 

26,754

 

 

Sales and maturities of available-for-sale investments

 

4,456

 

7,596

 

Net cash used for investing activities

 

(242,346

)

(67,119

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from sale of common stock

 

288,000

 

 

Proceeds from exercises of common stock options

 

6,271

 

13,562

 

Windfall tax benefits from stock-based compensation

 

197

 

480

 

Acquisition of treasury stock

 

(29

)

(24

)

Payments on and retirements of long-term debt

 

(9,131

)

(215,129

)

Net proceeds from issuance of convertible subordinated notes

 

484,738

 

 

Proceeds from sale of warrants

 

37,640

 

 

Purchase of convertible note hedge

 

(121,040

)

 

Net cash provided by (used for) financing activities

 

686,646

 

(201,111

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

(341

)

2,282

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

757,467

 

(145,298

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

524,459

 

818,669

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

1,281,926

 

$

673,371

 

 


* As adjusted for FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CEPHALON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

1.  BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. We have evaluated subsequent events through August 5, 2009, the date at which our financial statements were issued.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (the “2008 Form 10-K”), filed with the U.S. Securities and Exchange Commission (the “SEC”), which includes audited financial statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008. The 2008 Form 10-K has been supplemented by our Current Report on Form 8-K, filed with the SEC on May 20, 2009, to reflect our adoption, effective January 1, 2009 of Financial Accounting Standards Board (“FASB”)  Staff Position (“FSP”) Accounting Principles Board (“APB”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) and Statement of Financial Accounting Standard (“FAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full year.

 

As discussed below, certain prior year amounts have been retrospectively adjusted to comply with FSP APB 14-1 and FAS 160.  In addition, certain reclassifications of prior year amounts have been made to conform to the current year presentation, which have no impact on our total assets or liabilities.

 

As of January 1, 2009, we adopted the provisions of FAS 160.  As a result of adoption, we have reclassified noncontrolling interest from liabilities to a component of equity and we will attribute losses to the noncontrolling interest even if that attribution results in a deficit noncontrolling interest balance.

 

As of January 1, 2009, we adopted the provisions of FSP APB 14-1.  FSP APB 14-1 amends APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” requiring issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to initially record the liability and equity components of the convertible debt separately.  We adopted the provisions of FSP APB 14-1 on a retrospective basis for all prior periods presented.   In association with FSP APB 14-1 and in accordance with FASB Topic No. D-98, we have also presented a temporary equity classification, “redeemable equity,” to highlight cash obligations that are attached to an equity security in order to distinguish this value from permanent capital.  See Note 10 for additional details.

 

In April 2009, the FASB issued FSP FAS No. 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141 (R)-1”). FSP FAS 141 (R)-1 modifies the initial recognition and subsequent accounting for assets and liabilities arising from contingencies in a business combination.  FSP FAS 141 (R)-1 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We adopted the provisions of FSP FAS 141 (R)-1 as of January 1, 2009.

 

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”).  FSP FAS 107-1 requires publicly traded companies to disclose the fair value of financial instruments with each issuance of summarized financial information for interim reporting periods, including the methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions.  FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009.  We adopted the provisions of FSP FAS 107-1 as of April 1, 2009, resulting in additional interim fair value disclosures.

 

In May 2009, the FASB issued FAS No. 165 “Subsequent Events” (“FAS 165”).  FAS 165 establishes principles and requirements for disclosure of subsequent events, defining timing, circumstances and disclosures required for events or transactions that occur after the balance sheet date.  FAS 165 requires publicly traded companies to recognize, in the financial

 

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statements, the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements.  FAS 165 is effective for interim reporting periods ending after June 15, 2009. We adopted the provisions of FAS 165 on April 1, 2009 and will include additional disclosures as applicable.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets (an amendment of FASB Statement No. 140)” (“FAS 166”).   FAS 166 removes the concept of a qualifying special-purpose entity and establishes specific conditions for reporting a transfer of a portion of a financial asset as a sale.  FAS 166 is effective for annual reporting periods beginning after November 15, 2009.  We are currently evaluating the impact of FAS 166 adoption on our consolidated financial statements.

 

In June 2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”).  FAS 167 replaces the previous quantitative based risk and rewards calculation for determining the primary beneficiary of a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activates of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses or (2) the right to receive benefits.  FAS 167 also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  FAS 167 is effective for annual reporting periods beginning after November 15, 2009.  We are currently evaluating the impact of adopting FAS 167 but the revised standard could change our assessment of which entities are included in our consolidated financial statements.

 

In June 2009, the FASB issued FAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (“FAS 168”).  FAS 168 establishes the codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, but is not intended to change existing accounting for public companies.  FAS 168 is effective for interim and annual reporting periods beginning after September 15, 2009.  We do not expect the implementation of FAS 168 to have a material impact on our consolidated financial statements:

 

Collaborative Arrangements

 

As of January 1, 2009, we adopted the provisions of Emerging Issues Task Force (“EITF”) Abstract Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which resulted in the following additional disclosures for our collaborative arrangements:

 

We enter into collaborative arrangements with pharmaceutical or biotech companies to develop and produce orally disintegrating tablets (“ODT’s”) of branded and generic drugs and to develop and improve nominated antibodies supplied by our collaboration partners using our humanization technology. In these arrangements, we earn fees for work performed, license fees, royalties on product sales and/or risk based milestone payments.   We also manufacture ODT products under supply agreements. Revenues recognized from product sales are classified as sales and revenues recognized from fees for services, license fees, royalties and milestone payments are classified as other revenues.

 

Amounts recognized under collaborative arrangements consisted of the following:

 

 

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

Sales

 

$

 19,535

 

$

 18,482

 

Other Revenues

 

13,515

 

14,690

 

Total

 

$

 33,050

 

$

 33,172

 

 

2.   ACQUISITIONS AND TRANSACTIONS

 

Equity Offering

 

On May 27, 2009, we issued an aggregate of 5,000,000 shares of common stock, par value $0.01 per share, at a price of $60.00 per share, resulting in net cash proceeds of $288.0 million.  In connection with the equity offering, we also issued $500.0 million aggregate principal amount of 2.5% convertible senior subordinated notes due on May 1, 2014. See Note 10 for additional details.

 

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Arana Therapeutics Limited

 

On February 27, 2009, we announced that we acquired (through our wholly owned subsidiary Cephalon International Holdings, Inc. (“Cephalon International”)), approximately 19.8% of the total issued share capital (the “Equity Stake”) of Arana Therapeutics Limited, an Australian company listed on the Australian Securities Exchange (“Arana”), for $41.4 million and that we intended to initiate a takeover offer for Arana (through Cephalon International).  On March 9, 2009, through Cephalon International, we filed a Bidder’s Statement with the Australian Securities and Investments Commission in connection with our takeover offer for Arana.   The offer terms consisted of the following:

 

·                  Payment of Australian dollar (“A$”) 1.40 cash for each Arana ordinary share less any dividends paid by Arana;

·                  Upon Cephalon International’s receipt of a relevant interest in 90% of Arana ordinary shares, the offer price would increase by A$0.05 to A$1.45 (the “90% Premium”); and

·                  On March 2, 2009, Arana declared an A$0.05 fully franked special dividend (the “Dividend”) per Arana ordinary share payable to all Arana shareholders on record as of March 30, 2009.  The effect of the Dividend was to reduce our offer price by A$0.05.

 

The takeover offer closed on June 29, 2009.  Cephalon International’s relevant interest in Arana as of that date was 93.1%.  Cephalon International commenced a compulsory acquisition for the remaining 6.9% interest in Arana’s ordinary shares on June 25, 2009 and expects to achieve a 100% relevant interest in Arana in the third quarter of 2009.  At a price of A$1.40 per Arana ordinary share acquired pursuant to the takeover offer and to be acquired pursuant to the compulsory acquisition, the total funds used to acquire Arana is expected to be approximately $223.0 million, net of gains on foreign exchange contracts, of which approximately $16.0 million is for shares to be acquired under the compulsory acquisition.  The final total amount will be dependent on the Australian dollar exchange rate at the time the compulsory acquisition is completed.

 

Arana is a biopharmaceutical company focused on developing next generation antibody based drugs that will improve the lives of patients with inflammatory diseases and cancer. The company’s lead compound, ART621, is a new generation tumor necrosis factor (TNF) alpha blocker in Phase II development for patients with inflammatory diseases. Arana has a patent portfolio related to anti-TNF alpha antibodies and receives licensing income in connection with certain patents.  We acquired Arana in order to expand our technology base.  Arana is included in our United States operating segment.

 

Our initial investment in Arana was recorded as an available for sale investment in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“FAS 115”). On May 27, 2009, we acquired additional shares for $89.8 million which increased our Arana holdings to 50.4% of the outstanding shares.  As a result, effective on that date we have consolidated Arana in accordance with FAS No. 141(R), “Business Combinations” (“FAS 141(R)”).  The 90% Premium payment is considered contingent consideration and was initially recognized at its estimated fair value of $1.0 million for the shares purchased on May 27, 2009.  Upon satisfying the 90% criteria on June 12, 2009, the excess of the actual payments over the recorded liability for the 90% premium of $2.8 million was recorded as a charge to other income (expense), net.   The fair value of the noncontrolling interest in Arana as of May 27, 2009 was $104.7 million based on the closing stock price for Arana’s shares on that date.

 

The fair value of our Arana holdings of approximately 19.8% immediately prior to the acquisition on May 27, 2009 was $48.0 million.  This investment was remeasured to fair value on the acquisition date with the increase of $6.6 million over the original cost recognized in other income (expense), net.  This gain is the result of an increase in the value of the Australian dollar relative to the U.S. dollar, net of changes in the Arana share price.  For the quarter ended June 30, 2009, we have included $2.0 million of revenues and $4.4 million of net losses for Arana in our consolidated results.

 

The following summarizes the carrying amounts and classification of Arana’s assets and liabilities included in our consolidated balance sheet as of May 27, 2009:

 

Cash and cash equivalents

 

$

 9,606

 

Short term investments

 

122,817

 

Accounts receivable

 

6,766

 

Other current assets

 

2,807

 

Property and equipment, net

 

7,465

 

Intangible assets

 

125,009

 

Accounts payable

 

2,551

 

Accrued expenses

 

3,080

 

Other liabilities

 

4,258

 

Deferred tax liabilities

 

12,043

 

Noncontrolling interest

 

104,730

 

 

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The total purchase price consideration as measured under FAS 141(R) was A$311.2 million based on the fair value of the Arana stock on May 27, 2009.  The fair value of Arana’s net assets on that date was A$324.1 million, which resulted in a gain of A$12.8 million (or $10.0 million) recognized in other income (expense), net.  This gain is primarily the difference between the 90% Premium payment actually made and the assessed probability of making the 90% Premium payment at the acquisition date.  The actual price to be paid for all of Arana’s outstanding stock including the 90% Premium is A$322.7 million.

 

The purchase price allocation has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available concerning the fair value and tax basis of the acquired assets and liabilities.  There is no goodwill recognized or deductible for tax purposes.  The book value of the accounts receivable approximates their fair value and gross contractual value.

 

The following unaudited pro forma information presents results as if the acquisition occurred at the beginning of each annual reporting period presented:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

$

551,997

 

$

 500,894

 

$

 1,076,343

 

$

 949,738

 

Net income

 

83,991

 

50,841

 

136,472

 

78,142

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share attributable to Cephalon, Inc.

 

1.18

 

0.75

 

1.95

 

1.15

 

Diluted income per common share attributable to Cephalon, Inc.

 

1.10

 

0.68

 

1.78

 

1.05

 

 

On March 17, 2009, Cephalon entered into a foreign exchange forward contract and a foreign exchange option contract related to our Arana transaction.  Together, these contracts protected against fluctuations between the Australian Dollar and the U.S. Dollar, up to a value of $144.2 million.  Changes in the value of these contracts were recognized within net income. The forwards contract matured on May 7, 2009 and the options contracted matured on May 28, 2009.  On April 29, 2009, Cephalon entered into a foreign exchange forward contract which matured on June 4, 2009 to replace the forwards contract which matured on May 7, 2009.  All foreign exchange contracts have been settled as of June 30, 2009. Other income (expense), net includes $13.7 million and $19.0 million of gains on these foreign exchange contracts for the three and six months ended June 30, 2009, respectively.

 

Acusphere, Inc.

 

On November 3, 2008, we entered into a license and convertible note transaction with Acusphere, Inc.  In connection with the transaction, we received an exclusive worldwide license from Acusphere to all of its intellectual property relating to the development and marketing of celecoxib for all current and future indications. Under the license, we paid Acusphere an upfront fee of $5 million and agreed to make a $15 million milestone payment, as well as royalties on net sales.  In addition, we purchased a $15 million senior secured three-year convertible note (the “Acusphere Note”) from Acusphere, secured by substantially all the assets of Acusphere.  Separately, in March 2008, we purchased license rights for Acusphere’s Hydrophobic Drug Delivery Systems (HDDS™) technology for use in oncology therapeutics for $10 million.

 

On June 24, 2009, we exchanged the Acusphere Note and $1.0 million for (i) the elimination of the $15 million milestone payment and any future royalty payments associated with the celecoxib license agreement and (ii) the Acusphere patent rights relating to the HDDS technology.

 

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In accordance with FASB Interpretation No. 46R “Consolidation of Variable Interest Entities,” (“FIN 46R”), we had previously determined that effective on November 3, 2008 Acusphere was a variable interest entity for which we were the primary beneficiary and began including Acusphere in our consolidated financial statements.  Effective with the termination of the Acusphere Note, we are no longer considered the primary beneficiary and deconsolidated Acusphere, resulting in a $9.4 million charge to acquired in-process research and development, as a result of the elimination of the royalty and milestone payments associated with the celecoxib license agreement.

 

Due to the adoption of FAS 160, effective January 1, 2009 through the deconsolidation of Acusphere, we attributed Acusphere’s losses to the noncontrolling interest, which increased net income attributable to Cephalon by $2.5 million and $10.6 million during the three and six months ended June 30, 2009, respectively.

 

Ception Therapeutics, Inc.

 

On January 13, 2009, we entered into an option agreement (the “Ception Option Agreement”) with Ception Therapeutics, Inc. (“Ception”).  Under the terms of the Ception Option Agreement, we have the irrevocable option (the “Ception Option”) to purchase all of the outstanding capital stock on a fully diluted basis of Ception at any time on or prior to the expiration of the Option Period (as defined below).  As consideration for the Ception Option, we paid $50.0 million to Ception and paid Ception stockholders an aggregate of $50.0 million.  We also agreed to provide up to $25.0 million of financing to Ception during the Option Period.  We have not provided financing as of June 30, 2009. We, in our sole discretion, may exercise the Ception Option by providing written notice to Ception at any time during the period from January 13, 2009 to and including the date that (i) is fifteen business days after our receipt of the final study report for Ception’s ongoing Phase IIb/III clinical trial for reslizumab in pediatric patients with eosinophilic esophagitis (“Res-5-0002 EE Study”) indicating that the co-primary endpoints have been achieved or (ii) is thirty business days after our receipt of the final study report for Res-5-0002 EE Study indicating that the co-primary endpoints have not been achieved (the “Option Period”).   The Res-5-0002 EE Study is now fully enrolled and we anticipate completion of the study in the fourth quarter of 2009 or the first quarter of 2010.  If the data are positive and we exercise the Ception Option, we intend to file a Biologics License Application for reslizumab with the FDA in 2010.  If we exercise the Ception Option, we have agreed to pay a total of $250.0 million less any third party debt payable by Ception in exchange for all the outstanding capital stock of Ception on a fully-diluted basis.  Ception stockholders also could receive (i) additional payments related to clinical and regulatory milestones and (ii) royalties related to net sales of products developed from Ception’s program to discover small molecule, orally-active, anti-TNF (tumor necrosis factor) receptor agents.

 

In accordance with FIN 46R, we have determined that, because of our rights under the Ception Option Agreement, effective on January 13, 2009 Ception is a variable interest entity for which we are the primary beneficiary.  As a result, as of January 13, 2009 we have included the financial condition and results of operations of Ception in our consolidated financial statements.  However, we do not have an equity interest in Ception and, therefore, we have allocated the losses attributable to the non-controlling interest in Ception to non-controlling interest in the consolidated statement of operations and consolidated balance sheet.   Ception did not have a material impact on our revenues or earnings attributable to our Cephalon shareholders for the period ended June 30, 2009 or on a pro forma basis for the periods ended June 30, 2009 and 2008.  Ception is included in our U. S. operating segment.

 

The following summarizes the carrying amounts and classification of Ception’s assets and liabilities included in our consolidated balance sheet as of January 13, 2009 and June 30, 2009:

 

 

 

January 13,
2009

 

June 30,
2009

 

Cash and cash equivalents

 

$

52,563

 

$

58,800

 

Other current assets

 

25,225

 

281

 

Property and equipment, net

 

320

 

239

 

Goodwill

 

121,918

 

121,918

 

Intangible assets

 

374,400

 

374,400

 

Debt issuance costs

 

16

 

6

 

Other assets

 

10

 

10

 

Current portion of long-term debt, net

 

4,725

 

4,961

 

Accounts payable

 

2,715

 

2,538

 

Accrued expenses

 

8,326

 

7,253

 

Long-term debt

 

3,394

 

1,231

 

Deferred tax liabilities

 

148,792

 

148,792

 

Noncontrolling interest

 

306,500

 

290,980

 

 

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The goodwill recognized in the opening balance sheet primarily resulted from the recognition of deferred taxes associated with the value assigned to identifiable intangible assets.  There is no goodwill recognized or deductible for tax purposes.  The fair value of the noncontrolling interest was computed based on the present value of the probability weighted future payments to the current Ception stockholders.

 

Although Ception is included in our consolidated financial statements, our interest in Ception’s assets is limited to that accorded to us in the agreements with Ception as described above.  For example, Ception’s cash and cash equivalents balance includes $50.0 million of Ception Option Agreement proceeds; Ception has retained the right to distribute those cash proceeds to its current stockholders. Ception’s creditors have no recourse to the general credit of Cephalon.

 

SymBio Pharmaceuticals Limited

 

On March 9, 2009, we paid $0.8 million to exercise our option pursuant to the Option and Exclusivity Agreement with SymBio Pharmaceuticals Limited (“SymBio”), granting Cephalon an exclusive sublicense to bendamustine hydrochloride in China and Hong Kong.  As further required by the Option and Exclusivity Agreement, on March 13, 2009, we invested $9.1 million in shares of SymBio.  Our investment in SymBio is recorded as a cost basis investment. As of June 30, 2009, we owned 17.5% of SymBio’s outstanding common stock.

 

3.   RESTRUCTURING

 

On January 15, 2008, we announced a restructuring plan under which we intend to (i) transition manufacturing activities at our CIMA LABS INC. (“CIMA”) facility in Eden Prairie, Minnesota, to our recently expanded manufacturing facility in Salt Lake City, Utah, and (ii) consolidate at CIMA’s Brooklyn Park, Minnesota, facility certain drug delivery research and development activities currently performed in Salt Lake City. The phased transition of manufacturing activities and the closure of the Eden Prairie facility are expected to be completed within two to three years.  The consolidation of drug delivery research and development activities at Brooklyn Park was completed in 2008.  The plan is intended to increase efficiencies in manufacturing and research and development activities, reduce our cost structure and enhance competitiveness.

 

As a result of this plan, we will incur certain costs associated with exit or disposal activities.  As part of the plan, we estimate that approximately 90 jobs will be eliminated in total, with approximately 170 net jobs eliminated at CIMA and approximately 80 net jobs added in Salt Lake City.

 

The total estimated pre-tax costs of the plan are as follows:

 

Severance costs

 

$

14-16 million

 

Manufacturing and personnel transfer costs

 

7-  8 million

 

Total

 

$

21-24 million

 

 

The estimated pre-tax costs of the plan are being recognized between 2008 and 2011 and are included in the United States segment.  Through June 30, 2009, we have incurred a total of $11.3 million related to the restructuring plan.  In addition to the costs described above, we recognized pre-tax, non-cash accelerated depreciation of plant and equipment at the Eden Prairie facility, which we expect to total approximately $18 million to $20 million.  Through June 30, 2009, we have incurred a total of $10.2 million in accelerated depreciation charges.

 

Total charges and spending related to the restructuring plan recognized in the consolidated statement of operations and included in the United States segment are as follows:

 

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Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Restructuring reserves, beginning of period

 

$

4,596

 

$

3,802

 

$

3,733

 

$

 

Severance costs

 

747

 

1,086

 

1,813

 

4,894

 

Manufacturing and personnel transfer costs

 

498

 

479

 

1,069

 

582

 

Payments

 

(583

)

(3,258

)

(1,357

)

(3,367

)

Restructuring reserves, end of period

 

$

5,258

 

$

2,109

 

$

5,258

 

$

2,109

 

 

4.  ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE

 

During the first half of 2009, we incurred expense of $9.4 million in exchange for the elimination of the $15 million milestone and royalty payments associated with the celecoxib license agreement and Acusphere patent rights relating to its HDDS technology. See Note 2 for additional information.  We also paid $30.0 million in exchange for the exclusive, worldwide license rights to LUPUZORTM, acquired from ImmuPharma plc (“ImmuPharma”) and paid SymBio $0.8 million in exchange for exclusive sublicense rights to bendamustine hydrochloride in China and Hong Kong.

 

For the first half of 2008, we recorded acquired in-process research and development expense of $10.0 million related to our license of Acusphere HDDS technology for use in oncology therapeutics.

 

5.   OTHER INCOME (EXPENSE), NET

 

Other income (expense), net consisted of the following:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Gains on foreign exchange derivative instruments

 

$

13,670

 

$

 

$

19,022

 

$

 

Arana dividend income

 

 

 

1,567

 

 

Loss on Arana contingent consideration (90% ownership incentive payment)

 

(2,773

)

 

(2,773

)

 

Gain on excess of Arana net assets over consideration

 

10,008

 

 

10,008

 

 

Gain on pre-bid Arana holding

 

6,596

 

 

6,596

 

 

Foreign exchange gains (losses)

 

4,603

 

(1,535

)

4,223

 

3,788

 

Other

 

 

(8

)

 

(12

)

Other income (expense), net

 

$

32,104

 

$

(1,543

)

$

38,643

 

$

3,776

 

 

6.   INVENTORY, NET

 

Inventory, net consisted of the following:

 

 

 

June 30,
2009

 

December 31,
2008

 

Raw materials

 

$

31,830

 

$

27,555

 

Work-in-process

 

151,679

 

35,501

 

Finished goods

 

56,276

 

54,241

 

Total inventory, net

 

$

239,785

 

$

117,297

 

 

 

 

 

 

 

Inventory, net included in other non-current assets

 

$

 

$

111,598

 

 

In June 2007, we secured final FDA approval of NUVIGIL.  We launched NUVIGIL commercially on June 1, 2009 and reclassified our NUVIGIL inventory balances to current inventory at that time.  At June 30, 2009, we included $110.8 million of NUVIGIL in inventory.  At December 31, 2008, we included NUVIGIL inventory balances of $111.6 million in other non-current assets, rather than inventory.

 

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Over the past few years, we have been developing a manufacturing process for the active pharmaceutical ingredient in NUVIGIL that is more cost effective than our prior process of separating modafinil into armodafinil.  As a result of our plan to manufacture armodafinil in the future using this new process coupled with the launch of NUVIGIL on June 1, 2009, we assessed the potential impact of these items on certain of our existing agreements to purchase modafinil.  Under these contracts, we have agreed to purchase minimum amounts of modafinil through 2012, with aggregate purchase commitments totaling $46.2 million as of June 30, 2009.  During the third quarter of 2008, we recorded a reserve of $26.0 million for purchase commitments for modafinil raw materials not expected to be utilized.  We reassessed our future modafinil needs during the second quarter of 2009, in association with the accelerated launch of  NUVIGIL, and increased the reserve by $3.0 million, to $29.0 million.

 

7.  INVESTMENTS

 

Our non-current investments are recorded on a cost basis.  The carrying value of our short-term investments approximates fair value.

 

As of June 30, 2009, presented in accordance with FAS No. 157 “Fair Value Measurement” (“FAS 157”), our fair value assets include:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

June 30, 2009

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Short-term investments

 

$

122,701

 

$

122,701

 

$

 

$

 

 

8.  GOODWILL

 

Goodwill consisted of the following:

 

 

 

United 
States

 

Europe

 

Total

 

December 31, 2008

 

$

344,310

 

$

101,022

 

$

445,332

 

Foreign currency translation adjustment

 

 

4,456

 

4,456

 

Ception Therapeutics, Inc. goodwill

 

121,918

 

 

121,918

 

June 30, 2009

 

$

466,228

 

$

105,478

 

$

571,706

 

 

We are currently conducting our annual test of impairment of goodwill as of July 1, 2009 and do not expect to record an impairment charge based on our preliminary results of this annual test of impairment.

 

9.  INTANGIBLE ASSETS, NET

 

Intangible assets consisted of the following:

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

Estimated
Useful
Lives

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Modafinil developed technology

 

15 years

 

$

99,000

 

$

49,500

 

$

49,500

 

$

99,000

 

$

46,200

 

$

52,800

 

DURASOLV technology

 

14 years

 

70,000

 

23,739

 

46,261

 

70,000

 

21,304

 

48,696

 

ACTIQ marketing rights

 

10-12 years

 

83,454

 

57,364

 

26,090

 

83,454

 

53,637

 

29,817

 

GABITRIL product rights

 

9-15 years

 

107,152

 

65,469

 

41,683

 

107,148

 

61,848

 

45,300

 

TRISENOX product rights

 

8-13 years

 

112,652

 

35,807

 

76,845

 

111,945

 

31,022

 

80,923

 

AMRIX product rights

 

18 years

 

99,303

 

19,479

 

79,824

 

99,332

 

16,932

 

82,400

 

MYOCET trademark

 

20 years

 

172,769

 

30,228

 

142,541

 

143,077

 

21,462

 

121,615

 

Ception product rights

 

Indefinite

 

374,400

 

 

374,400

 

 

 

 

Arana ART 621 product rights

 

Indefinite

 

85,431

 

 

85,431

 

 

 

 

Arana platform technology

 

20 years

 

23,953

 

100

 

23,853

 

 

 

 

Arana royalty agreements

 

1 year

 

20,221

 

1,348

 

18,873

 

 

 

 

Other product rights

 

5-20 years

 

298,935

 

165,561

 

133,374

 

289,337

 

143,556

 

145,781

 

 

 

 

 

$

1,547,270

 

$

448,595

 

$

1,098,675

 

$

1,003,293

 

$

395,961

 

$

607,332

 

 

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Intangible assets are amortized over their estimated useful economic life using the straight line method. Amortization expense was $22.9 million and $26.8 million for the three months ended June 30, 2009 and 2008, respectively, and $44.2 million and $53.0 million for the six months ended June 30, 2009 and 2008, respectively.

 

In accordance with FAS No. 142, “Goodwill and Other Intangible Assets,” as amended by FAS 141(R), research and development intangible assets are classified as indefinite-lived until the completion or abandonment of the associated research and development efforts.

 

10.  LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

 

 

June 30
2009

 

As adjusted
December 31,
2008*

 

2.0% convertible senior subordinated notes due June 1, 2015

 

$

820,000

 

$

820,000

 

Debt discount on 2.0% convertible senior subordinated notes due June 1, 2015

 

(216,348

)

(230,614

)

2.5% convertible senior subordinated notes due May 1, 2014

 

500,000

 

 

Debt discount on 2.5% convertible senior subordinated notes due May 1, 2014

 

(150,181

)

 

Zero Coupon convertible subordinated notes first putable June 2010

 

199,923

 

199,888

 

Debt discount on Zero Coupon convertible subordinated notes first putable June 2010

 

(11,876

)

(17,789

)

Mortgage and building improvement loans

 

821

 

1,288

 

Capital lease obligations