DUSA » Topics » CHARGEBACKS, REBATES AND DISCOUNTS

These excerpts taken from the DUSA 10-K filed Mar 11, 2009.
CHARGEBACKS, REBATES AND DISCOUNTS
 
Chargebacks typically occur when suppliers enter into contractual pricing arrangements with end-user customers, including certain federally mandated programs, who then purchase from wholesalers at prices below what the supplier charges the wholesaler. Since we only offer “preferred pricing” to end-user customers under federally mandated programs, chargebacks have not been significant. Our rebate programs can generally be categorized into the following two types: Medicaid rebates and consumer rebates. Medicaid rebates are amounts owed based on legal requirements with public sector benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant. Consumer rebates are amounts owed as a result of mail-in coupons that are distributed by health care providers to consumers at the time a prescription is written.
 
We offer our wholesaler customers a 2% prompt pay discount. We evaluate the amount accrued for prompt pay discounts by analyzing the unpaid invoices in our accounts receivable aging subject to a prompt pay discount. Prompt pay discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated based on actual and expected activity at each reporting date. We record these discounts at the time of sale and they are accounted for as a reduction of revenues.
 
Inventory — Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventories are continually reviewed for slow moving, obsolete and excess items. Inventory items identified as slow-moving are evaluated to determine if an adjustment is required. Additionally, our industry is characterized by regular technological developments that could result in obsolete inventory. Although we make every effort to assure the reasonableness of our estimates, any significant unanticipated changes in demand, technological development, or significant changes to our business model could have a significant impact on the value of our inventory and our results of operations. We use sales projections to estimate the appropriate level of inventory reserves, if any, that are necessary at each balance sheet date.
 
Valuation Of Long-lived, Intangible Assets and Goodwill — We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Factors considered important which could trigger an impairment review include significant changes relative to: (i) projected future operating results; (ii) the use of the assets or the strategy for the overall business; (iii) business collaborations; and (iv) industry, business, or economic trends and developments. Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. If it is determined that the carrying value of long-lived or intangible assets may not be recoverable, the asset is written down to its estimated fair value on a discounted cash flow basis. At December 31, 2008 and 2007, respectively, total property, plant and equipment had a net carrying value of $1,938,000 and $2,143,000, including $1,313,000 at December 31, 2008 associated with our manufacturing facility. As of December 31, 2008 and 2007, respectively, we had intangible assets totaling $10,000 and $54,000 recorded in deferred charges and other assets relating to the unamortized balance of payments made in 2004 to a light source supplier related to an amendment to our agreement and to a licensor related to the reacquisition of our product rights in Canada. The payment to the light source supplier was fully amortized during 2008.
 
On March 10, 2006, the Company acquired all of the outstanding common stock of Sirius Laboratories, Inc. All goodwill and intangible assets recorded in connection with the Sirius acquisition have been charged to the accompanying statements of operations as impairments as of December 31, 2008. We agreed to pay additional consideration in future periods to the former Sirius shareholders based upon the achievement of total cumulative sales milestones for the Sirius products over the period ending 50 months from the date of close. The first cumulative sales milestone was achieved during the three-month period ended September 30, 2008, and accordingly a cash payment in the amount of $1.5 million was paid to the former Sirius shareholders during the third quarter of 2008. The payment was recorded initially as goodwill and then subsequently deemed impaired and expensed during the same period.
 
During the fourth quarter of 2007, we performed our annual test for goodwill impairment as required by FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). We used December 1st as the date of our annual goodwill impairment test. Based on the review, we recorded an impairment charge to goodwill of $6.8 million, which was all associated with the Non-PDT Drug Products reporting unit and


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represented the entire goodwill balance. As discussed in more detail in Note 3 to the Consolidated Financial Statements, the impairment charge is primarily related to our revised estimate of cash flows associated with the Sirius products and product pipeline. Decisions related to the product pipeline are based on a number of factors, most importantly, our development partner’s, Altana, Inc.’s, receipt of a non-approvable letter from the FDA in the fourth quarter of 2007 with respect to its ANDA supplement covering one of the potential products we acquired from Sirius. We paid and/or accrued $500,000 in milestone payments in the fourth quarter of 2007 as a result of our decision not to pursue this product or any additional potential products from the acquisition.
 
In 2006, we reviewed the valuation of our intangible assets and goodwill associated with Nicomide® for impairment as a result of a decision by the U.S. courts to dissolve a preliminary injunction that had previously enjoined a competitor from manufacturing and selling a generic and recorded a write down of $15.7 million in 2006, representing the remaining net asset value of the intangible assets as of December 31, 2006.
 
Share-Based Compensation — We measure all employee share-based compensation awards using a fair value based method and record share-based compensation expense in our financial statements if the requisite service to earn the award is provided. In accordance with FASB Statement No. 123(R), Share-Based Payment (SFAS 123(R)), we recognize the expense attributable to stock awards that are granted or vest in periods ending subsequent to the adoption of SFAS 123(R) in the accompanying Consolidated Statements of Operations. For more information about our share-based compensation, see Note 10 to the Consolidated Financial Statements.
 
Derivative Financial Instruments — We follow FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), for the common stock purchase warrants in connection with the October 2007 private placement. The warrants are accounted for as derivative liabilities at fair value in accordance with SFAS 133. The warrants do not meet the criteria in paragraph 11(a) of SFAS 133 that a contract should not be considered a derivative instrument if it is (1) indexed to its own stock and (2) classified as a component of stockholders’ equity.
 
We record the warrant liability at its fair value using the Black-Scholes option-pricing model and revalue it at each reporting date until the warrants are exercised or expire. Changes in the fair value of the warrants are reported in our Statements of Operations as non-operating income or expense under the caption “Gain on change in fair value of warrants”. The fair value of the warrants is subject to significant fluctuation based on changes in our stock price, expected volatility, remaining contractual life and the risk-free interest rate. The market price for our common stock has been and may continue to be volatile. Consequently, future fluctuations in the price of our common stock may cause significant increases or decreases in the fair value of the warrants.


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CHARGEBACKS,
REBATES AND DISCOUNTS



 



Chargebacks typically occur when suppliers enter into
contractual pricing arrangements with end-user customers,
including certain federally mandated programs, who then purchase
from wholesalers at prices below what the supplier charges the
wholesaler. Since we only offer “preferred pricing” to
end-user customers under federally mandated programs,
chargebacks have not been significant. Our rebate programs can
generally be categorized into the following two types: Medicaid
rebates and consumer rebates. Medicaid rebates are amounts owed
based on legal requirements with public sector benefit providers
after the final dispensing of the product by a pharmacy to a
benefit plan participant. Consumer rebates are amounts owed as a
result of mail-in coupons that are distributed by health care
providers to consumers at the time a prescription is written.


 



We offer our wholesaler customers a 2% prompt pay discount. We
evaluate the amount accrued for prompt pay discounts by
analyzing the unpaid invoices in our accounts receivable aging
subject to a prompt pay discount. Prompt pay discounts are known
within 15 to 30 days of sale, and therefore can be reliably
estimated based on actual and expected activity at each
reporting date. We record these discounts at the time of sale
and they are accounted for as a reduction of revenues.


 



Inventory — Inventories are stated at the
lower of cost or market value. Cost is determined using the
first-in,
first-out method. Inventories are continually reviewed for slow
moving, obsolete and excess items. Inventory items identified as
slow-moving are evaluated to determine if an adjustment is
required. Additionally, our industry is characterized by regular
technological developments that could result in obsolete
inventory. Although we make every effort to assure the
reasonableness of our estimates, any significant unanticipated
changes in demand, technological development, or significant
changes to our business model could have a significant impact on
the value of our inventory and our results of operations. We use
sales projections to estimate the appropriate level of inventory
reserves, if any, that are necessary at each balance sheet date.


 



Valuation Of Long-lived, Intangible Assets and
Goodwill
 — We review long-lived assets for
impairment whenever events or changes in business circumstances
indicate that the carrying amount of assets may not be fully
recoverable or that the useful lives of these assets are no
longer appropriate. Factors considered important which could
trigger an impairment review include significant changes
relative to: (i) projected future operating results;
(ii) the use of the assets or the strategy for the overall
business; (iii) business collaborations; and
(iv) industry, business, or economic trends and
developments. Each impairment test is based on a comparison of
the undiscounted cash flow to the recorded value of the asset.
If it is determined that the carrying value of long-lived or
intangible assets may not be recoverable, the asset is written
down to its estimated fair value on a discounted cash flow
basis. At December 31, 2008 and 2007, respectively, total
property, plant and equipment had a net carrying value of
$1,938,000 and $2,143,000, including $1,313,000 at
December 31, 2008 associated with our manufacturing
facility. As of December 31, 2008 and 2007, respectively,
we had intangible assets totaling $10,000 and $54,000 recorded
in deferred charges and other assets relating to the unamortized
balance of payments made in 2004 to a light source supplier
related to an amendment to our agreement and to a licensor
related to the reacquisition of our product rights in Canada.
The payment to the light source supplier was fully amortized
during 2008.


 



On March 10, 2006, the Company acquired all of the
outstanding common stock of Sirius Laboratories, Inc. All
goodwill and intangible assets recorded in connection with the
Sirius acquisition have been charged to the accompanying
statements of operations as impairments as of December 31,
2008. We agreed to pay additional consideration in future
periods to the former Sirius shareholders based upon the
achievement of total cumulative sales milestones for the Sirius
products over the period ending 50 months from the date of
close. The first cumulative sales milestone was achieved during
the three-month period ended September 30, 2008, and
accordingly a cash payment in the amount of $1.5 million
was paid to the former Sirius shareholders during the third
quarter of 2008. The payment was recorded initially as goodwill
and then subsequently deemed impaired and expensed during the
same period.


 



During the fourth quarter of 2007, we performed our annual test
for goodwill impairment as required by FASB Statement
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). We used December 1st as the date
of our annual goodwill impairment test. Based on the review, we
recorded an impairment charge to goodwill of $6.8 million,
which was all associated with the Non-PDT Drug Products
reporting unit and





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Table of Contents






represented the entire goodwill balance. As discussed in more
detail in Note 3 to the Consolidated Financial Statements,
the impairment charge is primarily related to our revised
estimate of cash flows associated with the Sirius products and
product pipeline. Decisions related to the product pipeline are
based on a number of factors, most importantly, our development
partner’s, Altana, Inc.’s, receipt of a non-approvable
letter from the FDA in the fourth quarter of 2007 with respect
to its ANDA supplement covering one of the potential products we
acquired from Sirius. We paid
and/or
accrued $500,000 in milestone payments in the fourth quarter of
2007 as a result of our decision not to pursue this product or
any additional potential products from the acquisition.


 



In 2006, we reviewed the valuation of our intangible assets and
goodwill associated with
Nicomide®

for impairment as a result of a decision by the U.S. courts
to dissolve a preliminary injunction that had previously
enjoined a competitor from manufacturing and selling a generic
and recorded a write down of $15.7 million in 2006,
representing the remaining net asset value of the intangible
assets as of December 31, 2006.


 



Share-Based Compensation — We measure all
employee share-based compensation awards using a fair value
based method and record share-based compensation expense in our
financial statements if the requisite service to earn the award
is provided. In accordance with FASB Statement No. 123(R),
Share-Based Payment (SFAS 123(R)), we recognize the
expense attributable to stock awards that are granted or vest in
periods ending subsequent to the adoption of SFAS 123(R) in
the accompanying Consolidated Statements of Operations. For more
information about our share-based compensation, see Note 10
to the Consolidated Financial Statements.


 



Derivative Financial Instruments — We follow
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), for the
common stock purchase warrants in connection with the October
2007 private placement. The warrants are accounted for as
derivative liabilities at fair value in accordance with
SFAS 133. The warrants do not meet the criteria in
paragraph 11(a) of SFAS 133 that a contract should not
be considered a derivative instrument if it is (1) indexed
to its own stock and (2) classified as a component of
stockholders’ equity.


 



We record the warrant liability at its fair value using the
Black-Scholes option-pricing model and revalue it at each
reporting date until the warrants are exercised or expire.
Changes in the fair value of the warrants are reported in our
Statements of Operations as non-operating income or expense
under the caption “Gain on change in fair value of
warrants”. The fair value of the warrants is subject to
significant fluctuation based on changes in our stock price,
expected volatility, remaining contractual life and the
risk-free interest rate. The market price for our common stock
has been and may continue to be volatile. Consequently, future
fluctuations in the price of our common stock may cause
significant increases or decreases in the fair value of the
warrants.





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EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 11, 2009

RELATED TOPICS for DUSA:

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