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King Pharmaceuticals 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Commission File
No. 001-15875
King Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
(423) 989-8000
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant 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 the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
(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 þ
Number of shares outstanding of registrant’s common stock
as of August 5, 2009: 248,136,638
TABLE OF
CONTENTS
Table of Contents
PART I —
FINANCIAL INFORMATION
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
See accompanying notes.
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KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
See accompanying notes.
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KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
See accompanying notes.
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KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
See accompanying notes.
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KING
PHARMACEUTICALS, INC.
June 30, 2009 and 2008
(In thousands, except share and per share data)
(Unaudited)
The accompanying unaudited interim condensed consolidated
financial statements of King Pharmaceuticals, Inc.
(“King” or the “Company”) were prepared by
the Company in accordance with the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
and, accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three and six months ended
June 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009.
These unaudited interim condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in
the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2008. The year-end
condensed balance sheet was derived from the audited
consolidated financial statements and has been adjusted to
reflect the adoption of Financial Accounting Standards Board
(“FASB”) Staff Position No. APB
14-1
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (“FSP APB
14-1”)
but does not include all disclosures required by generally
accepted accounting principles. FSP APB
14-1 was
effective January 1, 2009 and required retrospective
application. Please see Note 9 for additional information
on the adoption of FSP APB
14-1.
These unaudited interim condensed consolidated financial
statements include the accounts of King and all of its
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
The Company has performed an evaluation of subsequent events
through August 6, 2009, which is the date the financial
statements were issued.
The basic and diluted income per common share was determined
using the following share data:
For the three months ended June 30, 2009, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share, included
options to purchase 7,902,942 shares of common stock,
286,368 restricted stock awards (“RSAs”) and 371,840
long-term performance units (“LPUs”). For the six
months ended June 30, 2009, the weighted average shares
that were anti-dilutive, and therefore excluded from the
calculation of diluted income per share included options to
purchase 7,029,986 shares of common stock, 303,948 RSAs and
262,723 LPUs. For the three months ended June 30, 2008, the
weighted average shares that were anti-dilutive, and therefore
excluded from the calculation of diluted income per share,
included options to purchase 6,295,371 shares of common
stock, 326,600 RSAs and 830,315 LPUs. For the six months ended
June 30, 2008, the weighted average shares that were anti-
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dilutive, and therefore excluded from the calculation of diluted
income per share included options to purchase
5,721,081 shares of common stock, 408,480 RSAs and 548,805
LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into the
Company’s common stock in the future, subject to certain
contingencies. Shares of the Company’s common stock
associated with this right of conversion were excluded from the
calculation of diluted income per share because these notes are
anti-dilutive since the conversion price of the notes was
greater than the average market price of the Company’s
common stock for all periods presented.
As previously disclosed, the Company has been involved in
multiple legal proceedings over patents relating to its product
Skelaxin®
(metaxalone). In January 2009, the U.S. District Court for
the Eastern District of New York issued an Order ruling invalid
two of these patents. In June 2009, the Court entered judgment
against the Company. The Company has appealed the judgment and
intends to vigorously defend its interests. The entry of the
Order may lead to generic versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Company’s sales of
Skelaxin®
to decline significantly as a result. Net sales of
Skelaxin®
were $446,243 in 2008, and $102,178 and $202,777, respectively,
in the three and six months ended June 30, 2009. For
additional information regarding
Skelaxin®
litigation, please see Note 10. For additional information
regarding
Skelaxin®
intangible assets, please see Note 8. For additional
information regarding
Skelaxin®
restructuring action, please see Note 14.
Cash and Cash Equivalents. The Company
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. As of
June 30, 2009 and December 31, 2008, the
Company’s cash and cash equivalents consisted of
institutional money market funds and bank time deposits. There
were no cumulative unrealized holding gains or losses associated
with these money market funds and time deposits as of
June 30, 2009 and December 31, 2008.
Derivatives. The Company had forward foreign
exchange contracts outstanding during the three and six months
of 2009 on certain
non-U.S. cash
balances. The forward exchange contracts were not designated as
hedges under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, (“SFAS No. 133”).
The Company recorded these contracts at fair value and changes
in fair value were recognized in current earnings. All foreign
exchange contracts expired in the second quarter of 2009.
In connection with the Company’s acquisition of Alpharma on
December 29, 2008, the Company borrowed $425,000 in
principal under its Senior Secured Revolving Credit Facility as
amended on December 5, 2008. The Company also borrowed
$200,000 pursuant to a Term Facility. The terms of the Revolving
Credit Facility require the Company to maintain hedging
agreements that will fix the interest rates on 50% of the
Company’s outstanding long-term debt beginning 90 days
after the amendment to the facility for a period of two years.
The Revolving Credit Facility and the Term Facility have
variable interest rates. The Convertible Senior Notes of the
Company are at a fixed interest rate. Accordingly, in March
2009, the Company entered into an interest rate swap agreement
on interest under the Revolving Credit Facility with an
aggregate notional amount of $112,500, which expires in March
2011. The interest rate swap has been designated as a cash flow
hedge and is being used to offset the overall variability of
cash flows. For a cash flow hedge, the effective portion of the
gain or loss on the derivative is reported as a component of
other comprehensive income and reclassified into earnings in the
period during which the hedged transaction affects earnings. For
additional information on the Senior Secured Revolving Credit
Facility, please see Note 9.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables summarize the fair value and presentation
in the condensed consolidated balance sheets for derivatives
designated as hedging instruments under SFAS No. 133,
as of June 30, 2009:
The following tables summarize the effect of derivative
instruments on the condensed consolidated statements of
operations for the three and six months ended June 30, 2009:
Marketable Securities. As of June 30,
2009 and December 31, 2008, the Company’s investment
in marketable securities consisted solely of Palatin
Technologies, Inc. common stock with a cost basis of $511. The
cumulative unrealized holding gain in those investments as of
June 30, 2009 was $908. There were no cumulative unrealized
holding gains or losses in these investments as of
December 31, 2008.
Investments in Debt Securities. Tax-exempt
auction rate securities are long-term variable rate bonds tied
to short-term interest rates that are intended to reset through
an auction process generally every seven, 28 or 35 days.
The Company classifies auction rate securities as
available-for-sale
at the time of purchase in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. In accordance with FASB Staff Position 115-2 and
FAS 124-2, Recognition and Presentation of
Other-than-Temporary Impairments (“FSP FAS
115-2”), temporary gains or losses are included in
accumulated other comprehensive income (loss) on the Condensed
Consolidated Balance Sheets.
Other-than-temporary
credit losses are included in Loss on investments in the
Condensed Consolidated Statements of Operations. Non-credit
related other-than-temporary losses are recorded in accumulated
other comprehensive income (loss) on the Consolidated Balance
Sheets as the Company has no intent to sell the securities and
believes that it is more likely than not that it will not be
required to sell the security prior to recovery.
As of June 30, 2009 and December 31, 2008, the par
value of the Company’s investments in debt securities was
$383,425 and $417,075, respectively, and consisted solely of
tax-exempt auction rate securities associated with municipal
bonds and student loans. The Company has not invested in any
mortgage-backed securities or any securities backed by corporate
debt obligations. The Company’s investment policy requires
it
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to maintain an investment portfolio with a high credit quality.
Accordingly, the Company’s investments in debt securities
were limited to issues which were rated AA or higher at the time
of purchase.
On February 11, 2008, the Company began to experience
auction failures with respect to its investments in auction rate
securities. In the event of an auction failure, the interest
rate on the security is reset according to the contractual terms
in the underlying indenture. The funds associated with failed
auctions will not be accessible until a successful auction
occurs, the issuer calls or restructures the underlying
security, the underlying security matures or it is purchased by
a buyer outside the auction process.
Excluding the municipal bond discussed below, as of
June 30, 2009, there were cumulative unrealized holding
losses of $38,683 recorded in accumulated other comprehensive
income (loss) on the Condensed Consolidated Balance Sheets
associated with investments in debt securities with a par value
of $328,175 classified as available for sale. All of these
investments in debt securities have been in continuous
unrealized loss positions for greater than twelve months. As of
June 30, 2009 the Company believed the decline associated
with the underlying securities was temporary and it was probable
that the par amount of these auction rate securities would be
collectible under their contractual terms.
The Company adopted the provisions of FSP
FAS 115-2
as of April 1, 2009. During the fourth quarter of 2008, the
Company recognized unrealized losses of $6,832 in other income
(expense) for a municipal bond with a par value of $15,000 for
which the holding losses were determined to be
other-than-temporary. The Company determined $1,042 (or $646
net-of-tax) of this previously recognized loss was non-credit
related. Upon the adoption of FSP 115-2 the Company was
required to reclassify this non-credit related loss from
retained earnings to accumulated other comprehensive income
(loss). As of June 30, 2009, there were cumulative
unrealized holding gains of $384 associated with this security
recorded in accumulated other comprehensive income (loss) on the
Condensed Consolidated Balance Sheets. For the three and six
months ended June 30, 2009, no other-than-temporary
impairment losses associated with available for sale investments
in debt securities were recognized.
During the second quarter of 2009, the Company sold certain
auction rate securities associated with student loans with a par
value of $20,350 for $18,923 to the issuer and realized a loss
of $1,427 in the Condensed Consolidated Statement of Operations.
During the fourth quarter of 2008 the Company accepted an offer
from UBS Financial Services, Inc. (“UBS”) providing
the Company the right to sell certain auction rate securities
outstanding at June 30, 2009 with a par value of $40,250 to
UBS during the period from June 30, 2010 to July 2,
2012 at par value (the “right”). The Company has
elected to account for this right at fair value in accordance
with SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. As a result,
gains and losses associated with this right are recorded in
other income (expense) in the Condensed Consolidated Statement
of Operations. The value of the right to sell certain auction
rate securities to UBS was estimated considering the present
value of future cash flows, the fair value of the auction rate
security and counterparty risk. As of June 30, 2009 and
December 31, 2008, the fair value of the right to sell the
auction rate securities to UBS at par was $3,567 and $4,024,
respectively. With respect to this right, during the second
quarter and first six months of 2009, the Company recognized an
unrealized gain of $108 and an unrealized loss of $457 in other
income (expense), respectively, in the accompanying Condensed
Consolidated Statement of Operations.
In addition, during the fourth quarter of 2008, the Company
reclassified the auction rate securities that are included in
this right from available-for-sale securities to trading
securities. As of June 30, 2009 and December 31, 2008,
the fair value of the investments in debt securities classified
as trading was $36,144 and $36,007, respectively. During the
second quarter and first six months of 2009, the Company
recognized unrealized gains related to these securities of $795
and $537, respectively, in other income (expense) in the
accompanying Condensed Consolidated Statement of Operations.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of June 30, 2009, the Company has classified $41,064 of
auction rate securities as current assets and $294,166 as
long-term assets.
The following tables summarize the Company’s assets and
liabilities that are measured at fair value on a recurring basis:
The fair value of marketable securities within the Level 1
classification is based on the quoted price for identical
securities in an active market as of the valuation date.
The fair value of investments in debt securities within the
Level 2 classification is at par based on public call
notices from the issuer of the security.
The fair value of investments in debt securities within the
Level 3 classification is based on a trinomial discount
model. This model considers the probability at the valuation
date of three potential occurrences for each auction event
through the maturity date of the security. The three potential
outcomes for each auction are (i) successful auction/early
redemption, (ii) failed auction and (iii) issuer
default. Inputs in determining the probabilities of the
potential outcomes include, but are not limited to, the
security’s collateral, credit rating, insurance,
issuer’s financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of
each security is determined by summing the present value of the
probability-weighted future
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
principal and interest payments determined by the model. As of
June 30, 2009, the Company assumed a weighted average
discount rate of approximately 4.5% and an expected term of
approximately three to five years. The discount rate was
determined as the loss-adjusted required rate of return using
public information such as spreads on near-risk free to risk
free assets. The expected term is based on the Company’s
estimate of future liquidity as of June 30, 2009. Transfers
out of Level 3 classification occur only when public call
notices have been announced by the issuer prior to the date of
the valuation.
The following table provides a reconciliation of assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3):
Inventories consist of the following:
During the first quarter of 2009, the Company classified as held
for sale a pharmaceutical manufacturing facility which was
acquired as a result of the acquisition of Alpharma Inc. The
manufacturing facility is recorded at estimated fair value less
cost to sell. The Company finalized its determination of fair
value of this asset in the first quarter of 2009, reduced the
value by $3,600 and adjusted goodwill accordingly.
The net book value of some of the Company’s manufacturing
facilities currently exceeds fair market value. Management
currently believes that the long-term assets associated with
these facilities are not impaired based on
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
estimated undiscounted future cash flows. However, if the
Company were to approve a plan to sell or close any of the
facilities for which the carrying value exceeds fair market
value, the Company would have to write off a portion of the
assets or reduce the estimated useful life of the assets which
would accelerate depreciation.
On December 29, 2008, the Company completed its acquisition
of Alpharma Inc. (“Alpharma”). Alpharma had a growing
specialty pharmaceutical franchise in the U.S. pain market
with its
Flector®
Patch (diclofenac epolamine topical patch) 1.3% and a pipeline
of new pain medicines led by
Embedatm,
an investigational formulation of long-acting morphine that is
designed to provide controlled pain relief and deter certain
common methods of misuse and abuse. Alpharma is also a provider
of medicated feed additives and water-soluble therapeutics used
primarily for poultry, cattle and swine. The Company paid a cash
price of $37.00 per share for the outstanding shares of
Class A Common Stock, together with the associated
preferred stock purchase rights of Alpharma, totaling
approximately $1,527,354, $61,120 associated with Alpharma
employee stock-based awards (which were paid in the first
quarter of 2009), and incurred $30,573 of expenses related to
the transaction resulting in a total purchase price of
$1,619,047. Contemporaneously with the acquisition of Alpharma
and in accordance with a consent order with the
U.S. Federal Trade Commission, the Company divested
Alpharma’s
Kadian®
assets to Actavis Elizabeth, L.L.C.
Management believes the Company’s acquisition of Alpharma
is particularly significant because it strengthens King’s
portfolio and development pipeline of pain management products,
and increases its capabilities and expertise in this market. The
development pipeline provides the Company with both near-term
and long-term revenue opportunities and the animal health
business further diversifies its revenue base. As a result,
management believes the acquisition of Alpharma creates a
stronger foundation for sustainable, long-term growth for the
Company.
The accompanying Condensed Consolidated Statement of Operations
for the three and six month periods ended June 30, 2008 do
not include any activity for Alpharma because the Company
acquired Alpharma in the fourth quarter of 2008.
The allocation of the initial purchase price and acquisition
costs is as follows:
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The valuation of the intangible assets acquired is as follows:
None of the goodwill is expected to be deductible for tax
purposes. The goodwill has been allocated to the segments as
follows:
The above allocation of the purchase price is not yet finalized
as the acquisition was completed close to the end of 2008 and
management is continuing to complete its initial estimate of the
valuation of certain assets and liabilities.
The acquisition was financed with available cash on hand,
borrowings under the Senior Secured Revolving Credit Facility of
$425,000 and borrowings under the Term Loan of $200,000. For
additional information on the borrowings, please see Note 9.
As indicated above, $590,000 of the purchase price for Alpharma
was allocated to acquired in-process research and development
for the
Embedatm,
Oxycodone NT and Hydrocodone NT projects in the amounts of
$410,000, $90,000 and $90,000, respectively. The value of the
acquired in-process research and development projects was
expensed on the date of acquisition, as they had not received
regulatory approval and had no alternative future use. The
projects were valued through the application of
probability-weighted, discounted cash flow approach. The
estimated cash flows were projected over periods of 10 to
14 years utilizing a discount rate of 25% to 30%.
The
Embedatm
New Drug Application (“NDA”) was submitted to the
U.S. Food and Drug Administration (“FDA”) in June
2008. The success of the project is dependent upon NDA approval
by the FDA. The Company currently believes it will obtain
approval of the
Embedatm
NDA during 2009.
Oxycodone NT and Hydrocodone NT are long-acting opioids for the
treatment of moderate to severe chronic pain that are in the
early stages of clinical development. These products are
designed to resist certain common methods of misuse and abuse
associated with currently available oxycodone and hydrocodone
opioids. If the clinical development program is successful, the
Company would not expect to commercialize Oxycodone NT and
Hydrocodone NT any sooner than 2012. The estimated cost to
complete the development of Oxycodone NT and Hydrocodone NT is
approximately $35,000 each. The Company believes there is a
reasonable probability of completing these projects
successfully, but the success of the projects depends on the
outcome of the clinical development programs and approval by the
FDA.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following unaudited pro forma summary presents the financial
information as if the acquisition of Alpharma had occurred
January 1, 2008 for the three and six months ended
June 30, 2008. These pro forma results have been prepared
for comparative purposes and do not purport to be indicative of
what would have occurred had the acquisition been made on
January 1, 2008, nor are they indicative of future results.
The pro forma results for the six months ended June 30, 2008 do
not include the $590,000 in-process research and development
expense noted above.
In connection with the acquisition of Alpharma, the Company and
Alpharma executed a consent order (the “Consent
Order”) with the U.S. Federal Trade Commission. The
Consent Order required the Company to divest the assets related
to Alpharma’s branded oral long-acting opioid analgesic
drug
Kadian®
to Actavis Elizabeth, LLC. In accordance with the Consent Order,
effective upon the acquisition of Alpharma, on December 29,
2008, the Company divested the
Kadian®
product to Actavis. Actavis is entitled to sell
Kadian®
as a branded or generic product. Prior to the divestiture,
Actavis supplied
Kadian®
to Alpharma.
Actavis will pay a purchase price of up to an aggregate of
$127,500 in cash based on the achievement of certain
Kadian®
quarterly gross profit-related milestones for the period
beginning January 1, 2009 and ending June 30, 2010.
The maximum purchase price payment associated with each calendar
quarter is as follows:
None of the quarterly payments above, when combined with all
prior payments made by Actavis, shall exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis and its affiliates for the
period beginning on January 1, 2009 and ending on the last
day of such calendar quarter. Any quarterly purchase price
payment that is not paid by Actavis due to the application of
such provision will be carried forward to the next calendar
quarter, increasing the maximum quarterly payment in the
subsequent quarter. However, the cumulative purchase price
payable by Actavis will not exceed the lesser of
(a) $127,500 and (b) the gross profits from the sale
of
Kadian®
in the United States by Actavis and its affiliates for the
period from January 1, 2009 through June 30, 2010. The
Company recorded a receivable of $115,000 at the time of the
divestiture, reflecting the present value of the estimated
future purchase price payments from Actavis. There was no gain
or loss recorded as a result of the divestiture. In accordance
with the agreement, quarterly payments will be received one
quarter in arrears. During the second quarter of 2009 the
Company received $34,800 from Actavis, $30,000 related to the
first quarter of 2009 gross profit from sales and $4,800 related
to inventory sold to Actavis at the time of the divestiture.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible assets consist primarily of patents, licenses,
trademarks and product rights. A summary of the gross carrying
amount and accumulated amortization is as follows:
Amortization expense for the three months ended June 30,
2009 and 2008 was $38,149 and $21,044, respectively.
Amortization expense for the six months ended June 30, 2009
and 2008 was $76,327 and $71,971, respectively.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an Order ruling invalid two
Skelaxin®
patents. In June 2009, the Court entered judgment against the
Company. The Company has appealed, and intends to vigorously
defend its interests. The entry of the Order may lead to generic
versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Company’s sales of
Skelaxin®
to decline significantly as a result. The Company believes that
the intangible assets associated with
Skelaxin®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, as a result of the
Order described above, the Company reduced the estimated
remaining useful life of the intangible assets of
Skelaxin®
during the first quarter of 2009. If the Company’s current
estimates regarding future cash flows adversely change, the
Company may have to further reduce the estimated remaining
useful life
and/or write
off a portion or all of these intangible assets. As of
June 30, 2009, the net intangible assets associated with
Skelaxin®
totaled approximately $76,897. For additional information
regarding
Skelaxin®
litigation, please see Note 10.
In April 2009, a competitor entered the market with a generic
substitute for
Cytomel®.
As a result, the Company lowered its future sales forecast for
this product. As of June 30, 2009, the net intangible
assets associated with
Cytomel®
totaled approximately $10,815. The Company believes that the
intangible assets associated with
Cytomel®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, if the
Company’s current estimates regarding future cash flows
adversely change, the Company may have to reduce the estimated
remaining useful life
and/or write
off a portion or all of these intangible assets.
As a result of a decline in end-user demand for
Synercid®,
the Company lowered its future sales forecast for this product
which decreased the estimated undiscounted future cash flows
associated with the
Synercid®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $38,064 during the second quarter of 2008 to adjust
the carrying value of the
Synercid®
intangible assets on the Company’s balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Synercid®
based on its estimated discounted future cash flows.
Synercid®
is included in the Company’s branded pharmaceutical
segment. If the Company’s current estimates regarding
future cash flows adversely change, the Company may have to
reduce the estimated remaining useful life
and/or write
off an additional portion of the intangible assets. As of
June 30, 2009, the net intangible assets associated with
Synercid®
totaled approximately $26,040.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill at June 30, 2009 and December 31, 2008 is as
follows:
The adjustment to Alpharma goodwill is due to management’s
continuation of the initial estimate of the valuation of certain
assets and liabilities related to this acquisition. The most
significant adjustment related to certain tax assets, for which
management obtained additional information about the status of
these assets as of the acquisition date.
Long-term debt consists of the following:
Convertible
Senior Notes
Effective January 1, 2009, the Company adopted the FASB
Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion (“FSP APB
14-1”).
FSP APB 14-1
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuer’s nonconvertible debt
borrowing rate. FSP APB
14-1
requires retrospective application to all periods presented.
Upon adoption of FSP APB
14-1, the
separate components of debt and equity of the Company’s
$400,000
11/4%
Convertible Senior Notes due April 1, 2026 were determined
using an interest rate of 7.13%, which reflects the
nonconvertible debt borrowing rate of the Company at the date of
issuance. As a result, the initial components of debt and equity
were $271,267 and $128,733, respectively. The debt component is
being amortized retrospectively beginning April 1, 2006
through March 31, 2013.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables reflect the Company’s previously
reported amounts, along with the adjusted amounts as required by
FSP APB 14-1:
Condensed
Consolidated Statement of Operations
Three months ended June 30, 2008
Condensed
Consolidated Statement of Operations
Six months ended June 30, 2008
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidated Balance Sheet
As of December 31, 2008
The Company’s previously reported amounts as of
December 31, 2007 reflect a change of $76,377 in
Shareholders’ equity and a change of $(12,303) in Retained
earnings.
A summary of the gross carrying amount, unamortized debt cost
and the net carrying value of the liability component is as
follows:
During the first quarter of 2009, Alpharma and its
U.S. subsidiaries became guarantors of the Convertible
Senior Notes.
The fair value of the Company’s Convertible Senior Notes at
June 30, 2009 and December 31, 2008 was approximately $316,000
and $293,000, respectively, using quoted market prices.
Senior
Secured Revolving Credit Facility
During the three and six months ended June 30, 2009, the
Company made payments of $102,092 and $134,185, respectively, on
the Senior Secured Revolving Credit Facility (“Revolving
Credit Facility”), $64,830 and $91,322, respectively, in
excess of that required by the terms of the Revolving Credit
Facility.
The availability for borrowing under the Revolving Credit
Facility was reduced to $355,095 as of June 30, 2009. The
remaining undrawn commitment amount under the Revolving Credit
Facility totals approximately $61,315 after giving effect to
outstanding letters of credit totaling $2,965.
In connection with the borrowings, the Company incurred
approximately $22,219 of deferred financing costs that are being
amortized ratably through the maturity date.
The fair value of the Senior Secured Revolving Credit Facility
approximates its carrying value. Changes in interest rates are
reflected in earnings and cash flow from operations.
Senior
Secured Term Facility
During the three and six months ended June 30, 2009, the
Company made payments of $49,886 and $65,815, respectively, on
the Senior Secured Term Facility, $27,784 and $33,904,
respectively, in excess of
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that required by the repayment schedule and the provisions
related to mandatory prepayments under the Senior Secured Term
Facility.
In connection with the borrowings, the Company incurred
approximately $8,738 of deferred financing costs that are being
amortized ratably through the maturity date based on the
repayment schedule.
The fair value of the Senior Secured Term Facility approximates
its carrying value. Changes in interest rates are reflected in
earnings and cash flow from operations.
Alpharma
Convertible Senior Notes
At the time of the acquisition of Alpharma by the Company,
Alpharma had $300,000 of Convertible Senior Notes outstanding
(“Alpharma Notes”). The Alpharma Notes were
convertible into shares of Alpharma’s Class A common
stock at an initial conversion rate of 30.6725 Alpharma common
shares per $1,000 principal amount. The conversion rate of the
Alpharma Notes was subject to adjustment upon the direct or
indirect sale of all or substantially all of Alpharma’s
assets or more than 50% of the outstanding shares of the
Alpharma common stock to a third party (a “Fundamental
Change”). In the event of a Fundamental Change, the
Alpharma Notes included a make-whole provision that adjusted the
conversion rate by a predetermined number of additional shares
of Alpharma’s common stock based on (1) the effective
date of the fundamental change and (2) Alpharma’s
common stock market price as of the effective date. The
acquisition of Alpharma by the Company was a Fundamental Change.
As a result, any Alpharma Notes converted in connection with the
acquisition of Alpharma were entitled to be converted at an
increased rate equal to the value of 34.7053 Alpharma common
shares, at the acquisition price of $37 per share, per $1,000
principal amount of Alpharma Notes, at a date no later than 35
trading days after the occurrence of the Fundamental Change.
During the first quarter of 2009, the Company paid $385,227 to
redeem the Alpharma Convertible Senior Notes.
Intellectual
Property Matters
Altace®
Lupin Ltd. (“Lupin”) filed an Abbreviated New Drug
Application (“ANDA”) with the FDA seeking permission
to market a generic version of
Altace®.
In addition to its ANDA, Lupin filed a Paragraph IV
certification challenging the validity and infringement of
U.S. Patent No. 5,061,722 (the “ ‘722
patent”), a composition of matter patent covering
Altace®,
and seeking to market its generic version of
Altace®
before expiration of the ‘722 patent. The companies
litigated the matter and the court ultimately invalidated the
Company’s ‘722 patent. On June 9, 2008, Lupin
received approval from the FDA to market its generic ramipril
product.
The Company was previously involved in patent infringement
litigation with Cobalt Pharmaceuticals, Inc.
(“Cobalt”), a generic drug manufacturer located in
Mississauga, Ontario, Canada, regarding an ANDA it filed with
the FDA seeking permission to market a generic version of
Altace®.
The parties submitted a joint stipulation of dismissal on
April 4, 2006, and the Court granted dismissal. Following
the court’s decision in the Company’s litigation with
Lupin, Cobalt launched a generic substitute for
Altace®
in December 2007. A number of other competitors launched generic
substitutes for
Altace®
in June 2008.
On August 2, 2006 and August 2, 2007, the Company
received civil investigative demands (“CIDs”) for
information from the FTC. The CIDs required the Company to
provide information related to the Company’s collaboration
with Arrow International Limited (“Arrow”) to develop
novel formulations of
Altace®,
the dismissal without prejudice of the Company’s patent
infringement litigation against Cobalt under the Hatch-Waxman
Act of 1984 and other information. Arrow and Cobalt are
affiliates of one another. The Company is cooperating with the
FTC in this investigation.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Skelaxin®
Eon Labs, Inc. (“Eon Labs”), CorePharma, LLC
(“Core”) and Mutual Pharmaceutical Co., Inc.
(“Mutual”) each filed an ANDA with the FDA seeking
permission to market a generic version of
Skelaxin®
400 mg tablets. Additionally, Eon Labs’ ANDA seeks
permission to market a generic version of
Skelaxin®
800 mg tablets. United States Patent Nos. 6,407,128 (the
“ ‘128 patent”) and 6,683,102 (the
“ ‘102 patent”), two
method-of-use
patents relating to
Skelaxin®,
are listed in the FDA’s Orange Book and do not expire until
December 3, 2021. Eon Labs and Core each filed
Paragraph IV certifications against the ‘128 and
‘102 patents alleging noninfringement, invalidity and
unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the ‘102 patent
alleging noninfringement and invalidity of that patent. A patent
infringement suit was filed against Eon Labs on January 2,
2003 in the U.S. District Court for the Eastern District of
New York; against Core on March 7, 2003 in the
U.S. District Court for the District of New Jersey
(subsequently transferred to the U.S. District Court for
the Eastern District of New York); and against Mutual on
March 12, 2004 in the U.S. District Court for the
Eastern District of Pennsylvania, concerning their proposed
400 mg products. Additionally, the Company filed a separate
suit against Eon Labs on December 17, 2004 in the
U.S. District Court for the Eastern District of New York,
concerning its proposed generic version of the 800 mg
Skelaxin®
product. On May 17, 2006, the U.S. District Court for
the Eastern District of Pennsylvania placed the Mutual case on
the Civil Suspense Calendar pending the outcome of the FDA
activity described below. On June 16, 2006, the
U.S. District Court for the Eastern District of New York
consolidated the Eon Labs cases with the Core case. In January
2008, the Company entered into an agreement with Core providing
them with, among other things, the right to launch an authorized
generic version of
Skelaxin®
pursuant to a license in December 2012 or earlier under certain
conditions. On January 8, 2008, the Company and Core
submitted a joint stipulation of dismissal without prejudice. On
January 15, 2008, the Court entered an order dismissing the
case without prejudice.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provided the Company with an automatic stay of
FDA approval of Eon Labs’ ANDA for its proposed 400 mg
and 800 mg products for 30 months (unless the patents
are held invalid, unenforceable or not infringed) from no
earlier than November 18, 2002 and November 3, 2004,
respectively. The
30-month
stay of FDA approval for Eon Labs’ ANDA for its proposed
400 mg product expired in May 2005 and Eon Labs
subsequently withdrew its 400 mg ANDA in September 2006.
The 30-month
stay of FDA approval for Eon Labs’ 800 mg product was
tolled by the Court on January 10, 2005 and has not
expired. The Court lifted the tolling of the
30-month
stay as of April 30, 2007. Although the Court has reserved
judgment on the length of the tolling period, the stay should
not expire prior to early August 2009 unless the Court rules
otherwise. Eon Labs asked for a determination of the length of
the tolling period in a March 14, 2008 letter to the Court.
The Court declined to make any determination. On April 30,
2007, Eon Labs’ 400 mg case was dismissed without
prejudice, although Eon Labs’ claim for fees and expenses
was severed and consolidated with Eon Labs’ 800 mg
case. On August 27, 2007, Eon Labs served a motion for
summary judgment on the issue of infringement. The Court granted
the Company discovery for purposes of responding to Eon’s
motion until March 14, 2008 and set a briefing schedule. On
March 7, 2008, the Company filed a letter with the Court
regarding Eon Labs’ inability to adhere to the discovery
schedule and the Court took Eon Labs’ motion for summary
judgment on the issue of infringement off the calendar.
Subsequently, Eon Labs filed an amended motion for summary
judgment on the issue of infringement on April 4, 2008. Eon
Labs also filed a motion for summary judgment on the issue of
validity on April 16, 2008. On June 6, 2008, the
Company responded to Eon Labs’ motion for summary judgment
on the issue of validity. On May 8, 2008, Eon Labs filed
amended pleadings. On May 22, 2008, the Company moved to
dismiss certain defenses and counterclaims. On January 20,
2009, the Court issued an Order ruling invalid the ‘128 and
‘102 patents. The Order was issued without the benefit of a
hearing in response to Eon Labs’ motion for summary
judgment. The Order also allowed Eon Labs to pursue its claim
for exceptional case, and on March 31, 2009, Eon Labs filed
its motion for this purpose, which was opposed by the Company
and Elan Pharmaceuticals, Inc. (“Elan”). Eon Labs has
replied and the motion remains
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pending before the Court. On May 20, 2009, Eon Labs asked
for entry of final judgment, and on June 4, 2009, the Court
granted this request. On July 1, 2009, the Company filed a
notice of appeal of the Court’s entry of judgment and on
July 2, 2009, Elan did the same. The appeals were docketed
by the Federal Circuit on July 10, 2009. In late July 2009,
the companies moved to dismiss the appeals for lack of
jurisdiction. The Company intends to vigorously defend its
interests.
On December 5, 2008, the Company, along with co-plaintiff
Pharmaceutical IP Holding, Inc. (“PIH”) initiated suit
in the U.S. District Court of New Jersey against Sandoz,
Inc. (“Sandoz”) for infringement of U.S. Patent
No. 7,122,566 (the “— ‘566
patent”). The ’566 patent is a
method-of-use
patent relating to
Skelaxin®
listed in the FDA’s Orange Book; it expires on
February 6, 2026. The ‘566 patent is owned by PIH and
licensed to the Company. The Company and PIH sued Sandoz,
alleging that Eon Labs’ submission of its ANDA seeking
approval to sell a generic version of a 800 mg
Skelaxin®
tablet prior to the expiration of the ‘566 patent
constitutes infringement of the patent. Sandoz, who acquired Eon
Labs, is the named owner of Eon Labs’ ANDA and filed a
Paragraph IV certification challenging the validity and
alleging non-infringement of the ‘566 patent. On
January 13, 2009, Sandoz answered the complaint and filed
counterclaims of invalidity and non-infringement. The Company
filed a reply on February 5, 2009.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin®
stating that the use listed in the FDA’s Orange Book for
the ‘128 patent may be deleted from the ANDA
applicants’ product labeling. The Company believes that
this decision is arbitrary, capricious and inconsistent with the
FDA’s previous position on this issue. The Company filed a
Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the ‘128 patent and
prohibit the removal of information corresponding to the use
listed in the Orange Book. The Company concurrently filed a
petition for stay of action requesting the FDA to stay approval
of any generic
Skelaxin®
products until the FDA has fully evaluated the Company’s
Citizen Petition.
On March 12, 2004, the FDA sent a letter to the Company
explaining that the Company’s proposed labeling revision
for
Skelaxin®,
which includes references to additional clinical studies
relating to food, age and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a petition
for stay of action requesting the FDA to stay approval of the
Company’s proposed labeling revision until the FDA has
fully evaluated and ruled upon the Company’s Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual have filed
responses and supplements to their pending Citizen Petitions and
responses. On December 8, 2005, Mutual filed another
supplement with the FDA in which it withdrew its prior petition
for stay, supplement and opposition to the Company’s
Citizen Petition. On November 24, 2006, the FDA approved
the revision to the
Skelaxin®
labeling. On February 13, 2007, the Company filed another
supplement to the Company’s Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling. On May 2, 2007, Mutual filed comments in
connection with the Company’s supplemental submission.
These issues are pending. On July 27, 2007 and
January 24, 2008, Mutual filed two other Citizen Petitions
in which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the data provided in its
earlier submissions. These petitions were denied on
July 18, 2008.
Net sales of
Skelaxin®
were $446,243 in 2008 and $102,178 and $202,777, respectively,
in the three and six months ended June 30, 2009. As of
June 30, 2009, the Company had net intangible assets
related to
Skelaxin®
of $76,897. If a generic version of
Skelaxin®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Company’s
business, financial condition, results of operations and cash
flows could be materially adversely affected. See Note 8
for information regarding the
Skelaxin®
intangible assets.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Avinza®
Actavis, Inc. (“Actavis”) filed an ANDA with the FDA
seeking permission to market a generic version of
Avinza®.
U.S. Patent No. 6,066,339 (the
“— ‘399 patent”) is a formulation
patent relating to
Avinza®
that is listed in the Orange Book and expires on
November 25, 2017. Actavis filed a Paragraph IV
certification challenging the validity and alleging
non-infringement of the ’339 patent, and the Company and
Elan Pharma International LTD (“EPI”), the owner of
the ‘339 patent, filed suit on October 18, 2007 in the
United States District Court for the District of New Jersey to
defend the rights under the patent. Pursuant to the Hatch-Waxman
Act, the filing of the lawsuit against Actavis provided the
Company with an automatic stay of FDA approval of Actavis’
ANDA for up to 30 months (unless the patent is held
invalid, unenforceable or not infringed) from no earlier than
September 4, 2007. On November 18, 2007, Actavis
answered the complaint and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on December 7, 2007. The initial scheduling
conference was held on March 11, 2008. Fact discovery is
largely complete and the parties continue to await a hearing
date for claim construction.
Sandoz filed an ANDA with the FDA seeking permission to market a
generic version of
Avinza®
and provided the Company with a Paragraph IV certification
challenging the validity and alleging non-infringement of the
‘339 patent. The Company and EPI filed suit on
July 21, 2009, in the United States District Court for the
District of New Jersey to defend the rights under the patent.
Pursuant to the Hatch-Waxman Act, the filing of the lawsuit
against Sandoz provided the Company with an automatic stay of
FDA approval of Sandoz’s ANDA for up to 30 months
(unless the patent is held invalid, unenforceable or not
infringed) from no earlier than June 11, 2009.
The Company intends to vigorously defend its rights under the
‘339 patent. Net sales of
Avinza®
were $135,452 in 2008 and $28,892 and $67,872, respectively, in
the three and six months ended June 30, 2009. As of
June 30, 2009, the Company had net intangible assets
related to
Avinza®
of $223,491. If a generic form of
Avinza®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Company’s
business, financial condition, results of operations and cash
flows could be otherwise materially adversely affected.
Adenoscan®
On February 15, 2008, the Company, along with co-plaintiffs
Astellas US LLC and Astellas Pharma US, Inc. (collectively
“Astellas”), and Item Development AB
(“Item”) initiated suit in the U.S. District
Court for the Central District of California against Anazao
Health Corp. (“Anazao”), NuView Radiopharmaceuticals,
Inc. (“NuView”), Paul J. Crowe (“Crowe”) and
Keith Rustvold (“Rustvold”) for the unauthorized sale
and attempted sale of generic adenosine to hospitals and
outpatient imaging clinics for use in Myocardial Perfusion
Imaging procedures for an indication that has not been approved
by the FDA. On July 2, 2008, plaintiffs filed a notice of
dismissal as to Anazao. The Company and co-plaintiffs have
alleged infringement of U.S. Patent Nos. 5,731,296 (the
“— ‘296 patent”) and 5,070,877 (the
“— ‘877 patent”), which cover a method
of using adenosine in Myocardial Perfusion Imaging and which
Astellas sells under the tradename,
Adenoscan®;
unfair competition in violation of the California Business and
Professions Code, and violations of various other sections of
the California Business and Professions Code, concerning the
labeling, advertising and dispensing of drugs; and intentional
interference with Company and co-plaintiffs’ prospective
economic advantage. On June 30, 2008, NuView, Crowe and
Rustvold filed an answer raising defenses and counterclaims of
non-infringement, invalidity, unenforceability due to
inequitable conduct and patent misuse, and unfair competition
under California State Law. On August 28, 2008, the Company
filed a reply. On November 20, 2008, the Company and other
plaintiffs amended their complaint to add MTS Health Supplies,
Inc., Nabil Saba and Ghassan Salaymeg (collectively,
“MTS”) as defendants. On November 21, 2008,
defendant NuView amended its answer and counterclaims to allege
patent misuse antitrust violations by plaintiffs. On
April 10, 2009, a Final Judgment and Injunction on Consent
was entered by the Court against NuView, Crowe and Rustvold. On
April 13, 2009, the Court entered a Final Judgment and
Injunction on Consent against all remaining defendants and
terminated the action.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Epi-Pen
On November 11, 2008, the Company was granted
U.S. Patent 7,449,012 (the “ ‘012
patent”) covering the next generation autoinjector
(“NGA”) for use with epinephrine to be sold under the
Epi-Pen brand name. The ‘012 patent expires
September 11, 2025. The ‘012 patent was listed in
FDA’s Orange Book on July 17, 2009 under the Epi-Pen
NDA. On July 21, 2009, the Company received a
Paragraph IV certification from Teva Pharmaceutical
Industries Ltd. (“Teva”) giving notice that it had
filed an ANDA to commercialize an epinephrine injectable product
and challenging the validity and alleging non-infringement of
the ‘012 patent. The Company is currently evaluating its
rights and options with respect to the Teva certification.
Average
Wholesale Price Litigation
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(“Monarch”), a wholly-owned subsidiary of the Company,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(“NYC”) in Federal Court in the State of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (“AWP”) and fraudulently failed to
accurately report their “best prices” and their
average manufacturer’s prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits and
treble and punitive damages. The United States District Court
for the District of Massachusetts has been established as the
multidistrict litigation court for the case, In re:
Pharmaceutical Industry Average Wholesale Pricing Litigation
(the “MDL Court”).
Since the filing of the NYC case, 48 New York counties have
filed lawsuits against the pharmaceutical industry, including
the Company and Monarch. The allegations in all of these cases
are virtually the same as the allegations in the NYC case. All
of these lawsuits are currently pending in the MDL Court in the
District of Massachusetts except for the Erie, Oswego and
Schenectady County cases, which were removed in October 2006 and
remanded to New York State Court in September 2007. Motions to
dismiss were granted in part and denied in part for all
defendants in all NYC and county cases pending in the MDL Court.
The Erie motion to dismiss was granted in part and denied in
part by the State Court before removal. Motions to dismiss were
filed in October 2007 in the Oswego and Schenectady cases, and
these cases were subsequently transferred to Erie County for
coordination with the Erie County case. These motions to dismiss
have yet to be ruled upon by the Erie Court. It is not
anticipated that any trials involving the Company will be set in
any of these cases within the next year.
In January 2005, the State of Alabama filed a lawsuit in State
Court against 79 defendants, including the Company and Monarch.
The four causes of action center on the allegation that all
defendants fraudulently inflated the AWPs of their products. A
motion to dismiss was filed and denied by the Court, but the
Court did require an amended complaint to be filed. The Company
filed an answer and counterclaim for return of rebates overpaid
to the state. Alabama filed a motion to dismiss the
counterclaim, which was granted. The Company appealed the
dismissal. The Alabama Supreme Court affirmed the dismissal. In
a separate appeal of a motion to sever denied by the trial
court, the Alabama Supreme Court severed all defendants into
single-defendant cases. Trials against AstraZeneca
International, Novartis Pharmaceuticals, SmithKline Beecham
Corporation and Sandoz resulted in verdicts for the State. These
defendants have appealed their verdicts. A trial against Watson
in June 2009 resulted in a deadlocked jury. In April 2009, the
Court established various trial dates for all defendants. The
Company was scheduled for trial in January 2011.
In October 2005, the State of Mississippi filed a lawsuit in
State Court against the Company, Monarch and 84 other
defendants, alleging fourteen causes of action. Many of those
causes of action allege that all defendants fraudulently
inflated the AWPs and wholesale acquisition costs of their
products. A motion to dismiss the criminal statute counts and a
motion for more definite statement were granted. Mississippi
filed an amended complaint dismissing the Company and Monarch
from the lawsuit without prejudice. These claims could be
refiled.
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Over half of the states have filed similar lawsuits but the
Company has not been named in any other case except Iowa’s.
The Company has filed a motion to dismiss the Iowa complaint. On
February 20, 2008, the Iowa case was transferred to the MDL
Court. The relief sought in all of these cases is similar to the
relief sought in the NYC lawsuit. The MDL Court granted in part
and denied in part the Company’s motion to dismiss, and the
Company has filed its answer. Discovery is proceeding in these
cases. The Company intends to defend all of the AWP lawsuits
vigorously, but is currently unable to predict the outcome or
reasonably estimate the range of potential loss.
See also “AWP Litigation” under the section
“Alpharma Matters” below.
Governmental
Pricing Investigation and Related Matters
As previously reported, during the first quarter of 2006, the
Company paid approximately $129,268 related to underpayment of
rebates owed to Medicaid and other governmental pricing programs
during the period from 1994 to 2002. On October 31, 2005,
the Company also entered into a five-year corporate integrity
agreement with the Office of the Inspector General of the United
States Department of Health and Human Services.
Beginning in March 2003, a number of purported class action
complaints were filed by holders of the Company’s
securities against the Company, its directors, former directors,
executive officers, former executive officers, a Company
subsidiary and a former director of the subsidiary. These cases
were settled in January 2007.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee State Court alleging a
breach of fiduciary duty, among other things, by some of the
Company’s current and former officers and directors. These
cases were consolidated. The parties reached agreement on a
stipulation of settlement on August 21, 2008. The
settlement requires the Company to maintain
and/or adopt
certain corporate governance measures and provides for payment
of attorneys’ fees and expenses to plaintiffs’ counsel
in the amount of $13,500. This amount has been paid by the
Company’s insurance carriers. The stipulation of settlement
was filed with the Court on August 22, 2008. The Court
entered an order approving the settlement on December 17,
2008. A shareholder appealed the Court’s approval of the
settlement, but this appeal was later voluntarily withdrawn. The
Company regards the matter as concluded.
During the third quarter of 2006, the second quarter of 2007,
the second quarter of 2008 and the third quarter of 2008, the
Company recorded anticipated insurance recoveries of legal fees
in the amounts of $6,750, $3,398, $3,001 and $8,000,
respectively, for the class action and derivative suits
described above. In November 2006, July 2007, August 2008 and
October 2008, respectively, the Company received payments from
its insurance carriers for the recovery of these legal fees.
Fen-Phen
Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multidistrict litigation court has been established in
Philadelphia, Pennsylvania, In re Fen-Phen Litigation.
The plaintiffs seek, among other things, compensatory and
punitive damages
and/or
court-supervised medical monitoring of persons who have ingested
these products.
The Company’s wholly-owned subsidiary, King Research and
Development, is a defendant in approximately 59 multi-plaintiff
(approximately 295 plaintiffs) lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine. These lawsuits have been filed in various
jurisdictions throughout the United States and in each of these
lawsuits King Research and Development, as the successor
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to Jones Pharma Incorporated (“Jones”), is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine or phentermine, Jones was a
distributor of a generic phentermine product and, after its
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®,
Abana’s branded phentermine product. The manufacturer of
the phentermine purchased by Jones filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones’ distribution and sale of
Obenix®
or Jones’ generic phentermine product. King Research and
Development’s insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntary
dismissals without the payment of settlement proceeds. In the
event that King Research and Development’s insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 22 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other pharmaceutical companies have also
been sued. The Company was sued by approximately 1,000
plaintiffs, but most of those claims were voluntarily dismissed
or dismissed by the Court for lack of product identification.
The remaining 22 lawsuits were filed in Alabama, Arkansas,
Missouri, Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court has been
established in Little Rock, Arkansas, In re: Prempro Products
Liability Litigation, and all of the plaintiffs’ claims
have been transferred and are pending in that Court except for
one lawsuit pending in Philadelphia, Pennsylvania State Court.
Many of these plaintiffs allege that the Company and other
defendants failed to conduct adequate research and testing
before the sale of the products and post-sale monitoring to
establish the safety and efficacy of the long-term hormone
therapy regimen and, as a result, misled consumers when
marketing their products. Plaintiffs also allege negligence,
strict liability, design defect, breach of implied warranty,
breach of express warranty, fraud and misrepresentation.
Discovery of the plaintiffs’ claims against the Company has
begun but is limited to document discovery. No trial has
occurred in the hormone replacement therapy litigation against
the Company or any other defendants except Wyeth and Pfizer. The
trials against Wyeth have resulted in verdicts for and against
Wyeth, with several verdicts against Wyeth reversed on
post-trial motions. Pfizer has lost two jury verdicts. One of
these verdicts was later reversed, and the other is being
appealed. The Company does not expect to have any trials set in
the next year. The Company intends to defend these lawsuits
vigorously but is currently unable to predict the outcome or to
reasonably estimate the range of potential loss, if any. The
Company may have limited insurance for these claims. The Company
would have to assume defense of the lawsuits and be responsible
for damages, fees and expenses, if any, that are awarded against
it or for amounts in excess of the Company’s product
liability coverage.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Alpharma
Matters
The following matters relate to our Alpharma subsidiary
and/or
certain of its subsidiaries.
Department
of Justice Investigation
On February 28, 2007, Alpharma received a subpoena from the
U.S. Department of Justice (“DOJ”) requesting
certain documents in connection with its investigation into
various marketing practices with respect to
Kadian®
capsules. The DOJ has asked Alpharma to provide documents
relating to post-approval studies of
Kadian®
that were submitted to the FDA. Alpharma and its subsidiary,
Alpharma Pharmaceuticals, have responded and are continuing to
respond to this subpoena and additional information requests and
are fully cooperating with the DOJ. On February 2, 2009,
the Company was informed by the DOJ that its investigation may
be expanded to include Alpharma’s marketing practices with
respect to
Flector®
Patch.
At this time, the Company cannot predict or determine the
outcome of this matter or reasonably estimate the amount or
range of amounts of fines or penalties, if any, that might
result from an adverse outcome.
Chicken
Litter Litigation
Alpharma and one of its subsidiaries are two of multiple
defendants that have been named in several lawsuits that allege
that one of its animal health products causes chickens to
produce manure that contains an arsenical compound which, when
used as agricultural fertilizer by chicken farmers, degrades
into inorganic arsenic and may have caused a variety of diseases
in the plaintiffs (who allegedly live in close proximity to such
farm fields). Alpharma provided notice to its insurance carriers
and its primary insurance carriers have responded by accepting
their obligations to defend or pay Alpharma’s defense
costs, subject to reservation of rights to later reject coverage
for these lawsuits. One of the carriers has filed a declaratory
judgment action in state court in which it has sought a ruling
concerning the allocation of its coverage obligations to
Alpharma among the several insurance carriers and, to the extent
Alpharma does not have full insurance coverage, to Alpharma.
Further, this declaratory judgment action requests that the
Court rule that certain of the carrier’s policies provide
no coverage because certain policy exclusions allegedly operate
to limit its coverage obligations under said policies. The
insurance carriers may take the position that some, or all, of
the applicable insurance policies contain certain provisions
that could limit coverage for future product liability claims
arising in connection with product sold on and after
December 16, 2003.
In addition to the potential for personal injury damages to the
approximately 155 plaintiffs, the plaintiffs are asking for
punitive damages and requesting that Alpharma be enjoined from
the future sale of the product at issue. In September 2006, in
the first trial, which was brought by three plaintiffs, the
Circuit Court of Washington County, Arkansas, Second Division
entered a jury verdict in favor of Alpharma. The plaintiffs
appealed the verdict, challenging certain pretrial expert
rulings; however, in May 2008, the Supreme Court of Arkansas
denied plaintiffs’ challenges. In its ruling, the Supreme
Court of Arkansas also overturned the trial court’s grant
of summary judgment that had the effect of dismissing certain
poultry company co-defendants from the case. This case was tried
against the poultry company co-defendants in May 2009, resulting
in a defense verdict on May 22, 2009. Plaintiffs have filed
a notice of appeal in this matter. Subsequent cases are expected
to be tried against both the poultry companies and Alpharma
together.
While the Company can give no assurance of the outcome of any
future trial in this litigation, it believes that it will be
able to continue to present credible scientific evidence that
its product is not the cause of any injuries the plaintiffs may
have suffered. There is also the possibility of an adverse
customer reaction to the allegations in these lawsuits, as well
as additional lawsuits in other jurisdictions where the product
has been sold. Worldwide sales of this product were
approximately $19,600 in 2008, and approximately $6,537 and
$11,517, respectively, in the three and six months ended
June 30, 2009.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
AWP
Litigation
Alpharma, and in certain instances one of its subsidiaries, are
defendants in connection with various elements of the litigation
described above under the heading “Average Wholesale Price
Litigation”, primarily related to sale of
Kadian®
capsules. At present, Alpharma is involved in proceedings in the
following states: Alaska, Florida, Illinois, Iowa, New York, and
South Carolina. The Mississippi case against Alpharma was
dismissed without prejudice.
These lawsuits vary with respect to the particular causes of
action and relief sought. The relief sought in these lawsuits
includes statutory causes of action including civil penalties
and treble damages, common law causes of action, declaratory and
injunctive relief, and punitive damages, including, in certain
lawsuits, disgorgement of profits. The Company believes it has
meritorious defenses and intends to vigorously defend its
positions in these lawsuits. Numerous other pharmaceutical
companies are defendants in similar lawsuits.
Environmental
Matters
In May 2009, the Company received an information request from
the U.S. Environmental Protection Agency (“EPA”)
pursuant to section 114 of the Clean Air Act regarding the
Company’s historic air emissions and its operation of
certain pollution control equipment (“Information
Request”). In June 2009, the Company provided EPA with its
initial response to the Information Request, identifying past
deviations from the requirements of its state conditional major
air emissions operating permit related to the Company’s
operation of certain pollution control equipment at its Bristol,
Tennessee facility. The Company has subsequently provided
additional information to EPA and the Tennessee Department of
Environment and Conservation. At this time, the Company cannot
predict or determine the outcome of this matter or reasonably
estimate the amount or range of amounts of fines or penalties,
if any, that might result from an adverse outcome.
Other
Contingencies
The Company has a supply agreement with a third party to produce
metaxalone, the active ingredient in
Skelaxin®.
This supply agreement requires the Company to purchase certain
minimum levels of metaxalone and expires in 2010. If sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments for
metaxalone, which could have a material adverse effect upon the
Company’s results of operations and cash flows.
Please see Note 9 for a discussion of the adoption of and
the additional disclosures required by the Financial Accounting
Standards Board (“FASB”) Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion.
During the first quarter of 2009, the Company adopted Statement
of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities —
an amendment of FASB Statement No. 133
(“SFAS No. 161”) which requires
additional disclosures for derivative instruments and hedging
activities. Please see Note 4 for these additional
disclosures.
Effective January 1, 2009, the Company adopted Statement of
Financial Accounting Standards No. 141(R), Business
Combinations (“SFAS No. 141(R)”). This
statement establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase. This statement also requires an
acquirer to recognize and measure in-process research and
development projects as intangible assets at fair value on the
acquisition date. SFAS No. 141(R) also sets forth the
disclosures required to be made in the financial
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) will be applied
by the Company to business combinations occurring on or after
January 1, 2009.
In December 2008, the FASB issued Staff Position
SFAS 132(R), Employers’ Disclosures about
Postretirement Benefit Plan Assets (“FSP
FAS 132(R)”). FSP FAS 132(R) amends
SFAS 132(R) to require enhanced disclosures about an
employer’s plan assets in a defined benefit pension plan or
other postretirement plan. The required disclosures, similar to
those required under SFAS 157, include a discussion on the
inputs and valuation techniques used to develop fair value
measurements of plan assets. In addition, the fair value of each
major category of plan assets is required to be disclosed
separately for pension plans and other postretirement benefit
plans. FSP FAS 132(R) is effective for fiscal years ending
after December 15, 2009. The Company does not anticipate
FSP FAS 132(R) will have a material effect on its financial
statements.
In April 2009, the FASB issued Staff Position
SFAS 107-1
and Accounting Principles Board (“APB”) Opinion
No. 28-1,
Interim Disclosures about Fair Value of Financial Instruments
(“FSP 107-1”).
This statement amends FASB Statement No. 107,
Disclosures about Fair Values of Financial Instruments,
to require disclosures about fair value of financial instruments
in interim financial statements as well as in annual financial
statements. It also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in all
interim financial statements.
FSP 107-1
is effective for interim periods ending after June 15,
2009. The Company adopted
FSP 107-1
on April 1, 2009. Please see Note 4 and Note 9 for
these additional disclosures.
In April 2009, the FASB issued Staff Position
SFAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(“FSP 157-4”).
FSP 157-4
provides additional guidance for determining fair value in
accordance with SFAS No. 157, Fair Value
Measurements when the volume of activity for an asset or
liability has significantly decreased or price quotations or
observable inputs are not associated with orderly transactions.
FSP 157-4
is effective for interim periods ending after June 15,
2009. The Company adopted FSP 157 on April 1, 2009,
and the adoption did not have a material effect on our financial
statements.
In March 2009, the FASB issued Staff Position
SFAS 115-2
and
SFAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments
(“FSP 115-2”).
FSP 115-2
provides guidance in determining whether impairments in debt
securities are other-than-temporary, and modifies the
presentation and disclosures surrounding such instruments. This
Staff Position is effective for interim periods ending after
June 15, 2009. The Company adopted
FSP 115-2
on April 1, 2009. Please see Note 4 for information
regarding the adoption of this standard.
In May 2009, the FASB issued Statement of Financial Accounting
Standards No. 165, Subsequent Events,
(“SFAS No. 165”). This statement establishes
the general standards of accounting for and disclosure of
subsequent events. In addition, this statement requires
disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. The Company
adopted SFAS No. 165 for the quarterly period ending
June 30, 2009. The adoption of SFAS No. 165 did
not have a material impact on our financial statements. Please
see Note 1 for information regarding the adoption of this
standard.
During the three months and six months ended June, 30, 2009, the
Company’s effective income tax rate was 43.6% and 46.1%,
respectively. These rates were higher than the statutory rate of
35% primarily due to losses from foreign subsidiaries with no
tax benefit, taxes related to stock compensation and state taxes.
During the three months and six months ended June, 30, 2008, the
Company’s effective income tax rate from continuing
operations was 33.7% and 33.8%, respectively. These rates varied
from the statutory rate of 35% in 2008 primarily due to tax
benefits related to tax-exempt interest income and domestic
manufacturing deductions, which benefits were partially offset
by state taxes.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s business is classified into six reportable
segments: branded prescription pharmaceuticals, animal health,
Meridian Auto-Injector, royalties, contract manufacturing and
all other. The branded prescription pharmaceuticals segment
includes a variety of branded prescription products that are
separately categorized into neuroscience, hospital and legacy
products. These branded prescription products are aggregated
because of their similarity in regulatory environment,
manufacturing processes, methods of distribution and types of
customer. The animal health business is a global leader in the
development, registration, manufacture and marketing of
medicated feed additives and water soluble therapeutics
primarily for poultry, cattle and swine. Meridian Auto-Injector
products are sold to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen®
product, an epinephrine filled auto-injector which is primarily
prescribed for the treatment of severe allergic reactions and
which is primarily marketed, distributed and sold by Dey, L.P.
Government revenues are principally derived from the sale of
nerve agent antidotes and other emergency medicine auto-injector
products marketed to the U.S. Department of Defense and
other federal, state and local agencies, particularly those
involved in homeland security, as well as to approved foreign
governments. Royalties include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments. The contract
manufacturing segment consists primarily of pharmaceutical
manufacturing services provided to the Company’s branded
prescription pharmaceutical segment.
The Company primarily evaluates its segments based on segment
profit. Reportable segments were separately identified based on
revenues, segment profit (excluding depreciation, amortization
and impairments) and total assets. Revenues among the segments
are presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded prescription pharmaceuticals segment.
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following represents selected information for the
Company’s reportable segments for the periods indicated.
Note that for the three months and six months ended
June 30, 2008, the tables for revenues and segment profit
below do not include revenues and segment profit for the animal
health segment, or for the
Flector®
Patch product within the branded prescription pharmaceuticals
segment, since these are part of Alpharma, a company that was
acquired by King at the end of December 2008.
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following represents branded prescription pharmaceutical
revenues by the Company’s target markets:
First
Quarter of 2009 Action
In January 2009, the U.S. District Court for the Eastern
District of New York issued an Order ruling invalid two patents
relating to the Company’s product
Skelaxin®.
In June 2009, the Court entered judgment against the Company.
The Company has appealed the judgment and intends to vigorously
defend its interests. The entry of the Order may lead to generic
versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Company’s sales of
Skelaxin®
to decline significantly as a result. For additional information
regarding
Skelaxin®
litigation, please see Note 10.
Following the decision of the District Court, the Company’s
senior management team conducted an extensive examination of the
Company and developed a restructuring initiative designed to
partially offset the potential decline in
Skelaxin®
sales in the event that a generic competitor enters the market.
This initiative included, based on an analysis of the
Company’s strategic needs: a reduction in sales, marketing
and other personnel; leveraging of staff; expense reductions and
additional controls over spending; and reorganization of sales
teams.
The Company incurred restructuring charges of approximately
$49,000 during the first and second quarters of 2009 related to
severance pay and other employee termination expenses. Almost
all of the restructuring charges are cash expenditures and were
substantially paid in the second quarter of 2009. The remaining
severance pay and other employee termination costs are expected
to be fully paid by the third quarter of 2010.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 380 members of our
sales force.
Fourth
Quarter of 2008 Action
As part of the acquisition of Alpharma, management developed a
restructuring plan to eliminate redundancies in operations
created by the acquisition. This plan includes a reduction in
personnel, staff leverage, reductions in duplicate expenses and
a realignment of research and development priorities.
The Company has estimated total costs of $71,092 associated with
this restructuring plan, $64,641 of which has been included in
the liabilities assumed in the purchase price of Alpharma. The
restructuring plan includes employee termination costs
associated with a workforce reduction of 250 employees. The
restructuring plan also includes contract termination costs of
$16,779 and other exit costs of $182 as a result of the
acquisition. All employee termination costs are expected to be
paid by the end of 2011. All contract termination costs are
expected to be paid by the end of 2018.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Third
Quarter of 2006 Action
During 2006, the Company decided to streamline its manufacturing
activities in order to improve operating efficiency and reduce
costs, including the decision to transfer the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility, which the Company expects to complete in the
first half of 2010. As a result of these steps, the Company
incurred restructuring charges of approximately $17,000, of
which approximately $12,000 is associated with accelerated
depreciation and approximately $5,000 is associated with
employee termination costs. The employee termination costs are
expected to be paid substantially in 2010.
A summary of the types of costs accrued and incurred are
summarized below:
The restructuring charges in 2009 primarily relate to the
branded prescription pharmaceutical segment. The accrued
employee separation payments as of June 30, 2009 are
expected to be paid by the end of 2011.
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the second quarter of 2009, the Company granted 53,000
RSAs to certain employees, pursuant to its Incentive Plan, and
107,506 RSUs were granted to non-employee directors.
During the first quarter of 2009, the Company granted to certain
employees, pursuant to its Incentive Plan, 843,990 RSAs, 561,450
LPUs with a one-year performance cycle, 240,580 LPUs with a
three-year performance cycle, 1,580 restricted stock units and
1,985,690 nonqualified stock options.
The RSAs are grants of shares of common stock restricted from
sale or transfer for three years from grant date.
RSUs represent the right to receive a share of common stock at
the expiration of a restriction period, generally three years
from grant, but may be restricted over other designated periods
as determined by the Company’s Board of Directors or a
committee of the Board. The RSUs granted to non-employee
directors under the current Compensation Policy for Non-Employee
Directors have a restriction period that generally ends one year
after the date of the grant, unless a deferral election is made
in advance.
The LPUs are rights to receive common stock of the Company in
which the number of shares ultimately received depends on the
Company’s performance over time. LPUs with a one-year
performance cycle, followed by a two-year restriction period,
will be earned based on 2009 operating targets. LPUs with a
three-year performance cycle will be earned based on
market-related performance targets over the years 2009 through
2011. At the end of the applicable performance period, the
number of shares of common stock awarded is either 0% or between
50% and 200% of a target number. The final performance
percentage on which the number of shares of common stock issued
is based, considering performance metrics established for the
performance period, will be determined by the Company’s
Board of Directors or a committee of the Board at its sole
discretion.
The nonqualified stock options were granted at option prices
equal to the fair market value of the common stock at the date
of grant and vest approximately in one-third increments on each
of the first three anniversaries of the grant date.
The Company maintains two qualified noncontributory, defined
benefit pension plans covering its U.S. (domestic)
employees at its Alpharma subsidiary: the previously frozen
Alpharma Inc. Pension Plan and the previously frozen Faulding
Inc. Pension Plan. The benefits payable from these plans are
based on years of service and the employee’s highest
consecutive five years’ compensation during the last ten
years of service. The Company’s funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. Ideally, the Plan assets will approximate
the accumulated benefit obligation (“ABO”). The plan
assets are held by two custodians and managed by two investment
managers. Plan assets are invested in equities, government
securities and bonds.
The Company also has an unfunded supplemental executive pension
plan providing additional benefits to certain employees upon
termination of employment or death. The Company has an unfunded
postretirement medical and nominal life insurance plan
(“postretirement benefits”) covering certain domestic
employees who were eligible as of January 1, 1993. The plan
has not been extended to any additional employees. Retired
eligible employees are required to make premium contributions
for coverage as if they were active employees.
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company uses a measurement date of December 31, 2008
for its pension plans and other postretirement plans. The net
periodic benefit costs for the Company’s pension plans and
other postretirement plans are, as follows:
A competitor entered the market with a generic substitute for
Altace in December 2007 and additional competitors entered the
market in June 2008. The Company’s calculation for
Medicaid, Medicare and commercial rebate reserves are based on
estimates of utilization by rebate-eligible customers, estimates
of the level of inventory of the Company’s products in the
distribution channel that remain potentially subject to those
rebates, and the terms of the Company’s rebate obligations.
During the first quarter of 2008, the Company estimated the
effect that the initial generic substitute would have on
Altace®
utilization by rebate-eligible customers. Actual
Altace®
rebates for the first quarter were lower than originally
anticipated, resulting in a change in estimate during the second
quarter of 2008. This change in estimate resulted in a decrease
in rebate expense of approximately $5,000 and a corresponding
increase in
Altace®
net sales in the second quarter of 2008. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
in the second quarter of 2008 increased by approximately $1,000.
Accordingly, the effect of the change in estimate on second
quarter 2008 operating income was an increase of approximately
$4,000, fully offsetting the effect of the estimate in the first
quarter of 2008.
Each of the Company’s U.S. subsidiaries guaranteed on
a full, unconditional and joint and several basis the
Company’s performance under the $400,000 aggregate
principal amount of the
11/4% Convertible
Senior Notes due April 1, 2026 (the “Notes” and
such subsidiaries the “Guarantor Subsidiaries”).
There are no restrictions under the Company’s current
financing arrangements on the ability of the Guarantor
Subsidiaries to distribute funds to the Company in the form of
cash dividends, loans or advances. The following combined
financial data provides information regarding the financial
position, results of operations and cash flows of the Guarantor
Subsidiaries for the $400,000 aggregate principal amount of the
Notes (condensed consolidating financial data). Separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented because management has
determined that such information would not be material to the
holders of the debt.
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS (In thousands) (Unaudited)
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KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands) (Unaudited)
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands) (Unaudited)
Table of Contents
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Table of Contents
The following discussion contains certain forward-looking
statements that reflect management’s current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) “Risk
Factors” in our Annual Report on
Form 10-K
for the year ended December 31, 2008, which are
supplemented by the discussion which follows; (b) our
audited consolidated financial statements and related notes
which are included in our Annual Report on
Form 10-K
for the year ended December 31, 2008; and (c) our
unaudited consolidated financial statements and related notes
which are included in this report on
Form 10-Q.
Please see the sections entitled “Risk Factors” and
“A Warning About Forward-Looking Statements” for a
discussion of the uncertainties, risks and assumptions
associated with these statements.
Our
Business
We are a vertically integrated pharmaceutical company that
performs basic research and develops, manufactures, markets and
sells branded prescription pharmaceutical products and animal
health products. By “vertically integrated,” we mean
that we have the following capabilities:
Our branded prescription pharmaceuticals include neuroscience
products (primarily pain medicines), hospital products, and
legacy brands. The animal health business is focused on
medicated feed additives (“MFAs”) and water-soluble
therapeutics primarily for poultry, cattle and swine.
Our corporate strategy is focused on specialty markets,
particularly specialty-driven branded prescription
pharmaceutical markets. We believe our target markets have
significant potential and our organization is aligned
accordingly. Our growth in specialty markets is achieved through
organic growth and acquisitions.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management. By “product life-cycle management,” we
mean the extension of the economic life of a product, including
seeking and gaining necessary related governmental approvals, by
such means as:
Our strategy also focuses on growth through the acquisition of
novel branded prescription pharmaceutical products in various
stages of development and the acquisition of prescription
pharmaceutical technologies, particularly those products and
technologies that we believe have significant market potential
and complement the commercial footprint we have established in
the neuroscience and hospital markets. Using our internal
resources and a disciplined business development process, we
strive to be a leader in developing and commercializing
innovative, clinically-differentiated therapies and technologies
in these target, specialty-driven markets. We may also seek
company acquisitions that add products or products in
development, technologies or sales and marketing capabilities to
our existing platforms or that otherwise complement our
operations. We also work to achieve organic growth by continuing
to develop investigational drugs, as we have a commitment to
research and development and advancing the products and
technologies in our development pipeline.
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We market our branded prescription pharmaceutical products
primarily through a dedicated sales force to general/family
practitioners, internal medicine physicians, neurologists, pain
specialists, surgeons and hospitals across the United States and
in Puerto Rico. Branded prescription pharmaceutical products are
innovative products sold under a brand name that have, or
previously had, some degree of market exclusivity. When we refer
to “branded prescription pharmaceutical products,” we
mean branded prescription pharmaceutical products that are
intended for humans.
The animal health products of our wholly-owned subsidiary,
Alpharma Inc., are marketed through a staff of trained sales and
technical service and marketing employees, many of whom are
veterinarians and nutritionists. Sales offices are located in
the U.S., Europe, Canada, Mexico, South America and Asia.
Elsewhere, animal health products are sold primarily through the
use of distributors and other third-party sales companies.
Recent
Developments
Skelaxin®
In January 2009, the U.S. District Court for the Eastern
District of New York issued an Order ruling invalid two patents
relating to
Skelaxin®,
our branded muscle relaxant. In June 2009, the Court entered
judgment against us. We have appealed the judgment and plan to
vigorously defend our interests. Invalidation of these two
patents would likely lead to generic versions of
Skelaxin®
entering the market sooner than previously anticipated and would
likely cause our net sales of
Skelaxin®
to decline significantly. For additional information regarding
Skelaxin®
litigation, please see Note 10, “Commitments and
Contingencies,” in Part 1, Item 1,
“Financial Statements.”
Remoxy®
In early July 2009, we met with the US Food and Drug
Administration (“FDA”) to discuss the Complete
Response Letter, received by us in December 2008, regarding
the New Drug Application (“NDA”) for
Remoxy®.
The outcome of this meeting provided us with a clearer path
forward to resubmit the
Remoxy®
NDA and to address all FDA comments in the Complete Response
Letter. The Company believes the timing of the resubmission will
be determined principally by the generation of six-month
stability data. The Company is not required by the FDA to
conduct clinical trials in order to provide additional safety or
efficacy data in patients with moderate to severe chronic pain.
As part of the resubmission plan, and in order to strengthen the
NDA, we will conduct a likeability study and a pharmacokinetic
trial in volunteers. We anticipate the resubmission of the NDA
could occur by the middle of 2010.
Remoxy®
is a unique long-acting formulation of oral oxycodone with a
proposed indication for the management of moderate to severe
pain when a continuous,
around-the-clock,
opioid analgesic is needed for an extended period of time. This
formulation uses the
Oradurtm
platform technology which provides a unique physical barrier
that is designed to provide controlled pain relief and resist
certain common methods used to extract the opioid more rapidly
than intended as can occur with products currently on the
market. Common methods used to cause a rapid extraction of an
opioid include crushing, chewing and dissolution in alcohol.
These methods are typically used to cause failure of the
controlled release dosage form, resulting in “dose
dumping” of oxycodone, or the immediate release of the
active drug.
Acurox®
Tablets
In early July 2009, the FDA issued a Complete Response Letter
regarding the NDA for
Acurox®
Tablets. The Complete Response Letter raises issues regarding
the potential abuse deterrent benefits of
Acurox®.
We are currently evaluating the FDA’s Complete Response
Letter, and at this stage believe we can respond to the issues
raised without conducting any additional studies. We plan to
meet with the FDA late in the third quarter of 2009 following
submission of our response.
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Acurox®
Tablets, a patented, orally administered, immediate release
tablet containing oxycodone HCl as its sole active analgesic
ingredient, has a proposed indication for the relief of moderate
to severe pain.
Acurox®
uses the patented
Aversion®
Technology of Acura Pharmaceuticals, Inc. (“Acura”),
which is designed to deter misuse and abuse by intentional
swallowing of excess quantities of tablets, intravenous
injection of dissolved tablets and nasal snorting of crushed
tablets. Attempts to extract oxycodone from an
Acurox®
Tablet by dissolving it in liquid result in the formation of a
viscous gel which is intended to sequester the opioid and deter
I.V. injection. Crushing an
Acurox®
Tablet for the purposes of nasal snorting releases an ingredient
that is intended to cause nasal irritation and thereby
discourage this method of misuse and abuse. Swallowing excessive
numbers of
Acurox®
Tablets releases niacin in quantities that are intended to cause
unpleasant and undesirable side effects.
CorVuetm
(binodenoson) for Injection
In December 2008, we submitted an NDA for
CorVuetm
to the FDA.
CorVuetm
is a cardiac pharmacologic stress SPECT (single-photon-emission
computed tomographic) imaging agent with a proposed indication
for use in patients with, or who are at risk for, coronary
artery disease who are unable to perform a cardiac exercise
stress test. In the NDA, we are requesting FDA approval of
CorVuetm
as an adjunct to non-invasive myocardial perfusion imaging tests
to detect perfusion abnormalities in patients with known or
suspected coronary artery disease. An FDA advisory committee
meeting regarding
CorVuetm
was held on July 28, 2009. As a result of the advisory
committee meeting, we plan to supplement the original NDA for
CorVuetm
with additional information. The Prescription Drug User Fee Act
(“PDUFA”) date for the original
CorVuetm
NDA is October 18, 2009.
Three
and Six Months Ended June 30, 2009 and 2008
The following table summarizes total revenues and cost of
revenues by operating segment, excluding intercompany
transactions:
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The following table summarizes our deductions from gross sales:
Gross sales increased in the second quarter of 2009 compared to
the second quarter of 2008 and in the first six months of 2009
compared to the first six months of 2008, primarily due to
additional sales from the acquisition of Alpharma at the end of
December 2008 and an increase in sales of the Meridian
Auto-Injector segment. Gross sales of several key branded
prescription pharmaceuticals products decreased due to market
competition as discussed below.
Based on inventory data provided to us by our customers, we
believe that wholesale inventory levels of our key products,
Skelaxin®,
Thrombin-JMI®,
Flector®
Patch,
Avinza®,
and
Levoxyl®,
are at or below normalized levels as of June 30, 2009. We
estimate that wholesale and retail inventories of our products
as of June 30, 2009 represent gross sales of approximately
$115.0 million to $125.0 million.
The following tables provide the activity and ending balances
for our significant deductions from gross sales:
Accrual
for Rebates, including Administrative Fees (in
thousands):
Rebates include commercial, Medicaid and Medicare rebates.
A competitor entered the market with a generic substitute for
Altace®
during December 2007 and additional competitors entered the
market in June 2008. As a result of this competition, sales of
Altace®
and utilization of
Altace®
by rebate-eligible customers significantly decreased in the
first and second quarters of 2008 and 2009. The decrease in
utilization of
Altace®
by rebate-eligible customers has, in turn, significantly
decreased the “current provision related to sales made in
the current period” and “rebates paid” in the
table
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above. For a discussion regarding
Altace®
net sales, please see
“Altace®
“within the “Sales of Key Products” section below.
Our calculation for Medicaid, Medicare and commercial rebate
reserves are based on estimates of utilization by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates and the terms of our rebate
obligations. During the first quarter of 2008, we estimated the
effect that the initial generic substitute would have on
Altace®
utilization by rebate-eligible customers. Actual
Altace®
rebates for the first quarter were lower than originally
anticipated, resulting in a change in estimate during the second
quarter of 2008. This change in estimate resulted in a decrease
in rebate expense of approximately $5.0 million and a
corresponding increase in
Altace®
net sales in the second quarter of 2008 and is included in the
“current provision related to sales made in prior
periods” in the table above. As a result of this increase
in net sales, the co-promotion expense related to net sales of
Altace®
in the second quarter of 2008 increased by approximately
$1.0 million. Accordingly, the net effect of the change in
estimate on second quarter 2008 operating income was an increase
of approximately $4.0 million fully offsetting the effect
of the estimate in the first quarter of 2008.
Accrual
for Returns (in thousands):
Accrual for Chargebacks (in thousands):
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Branded
Prescription Pharmaceuticals Segment
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