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Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, statements regarding our future product development
activities and costs, the revenue potential (licensing, royalty and sales) of
our products and product candidates, the success, safety and efficacy of our
drug products, revenues, development timelines, product acquisitions, liquidity
and capital resources and trends, and other statements containing
forward-looking words, such as, "believes," "may," "could," "will," "expects,"
"intends," "estimates," "anticipates," "plans," "seeks," "continues," or the
negative thereof or variation thereon or similar terminology (although not all
forward-looking statements contain these words). Such forward-looking statements
are based on the reasonable beliefs of our management as well as assumptions
made by and information currently available to our management. Readers should
not put undue reliance on these forward-looking statements. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified; therefore, our actual results may differ
materially from those described in any forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in our periodic reports filed with the Securities and Exchange Commission, or
the SEC, including our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011, as well as those discussed elsewhere in this Quarterly Report
on Form 10-Q, and the following factors:
? our ability to successfully develop, obtain regulatory approval for and
market our products;
? our ability to continue to grow sales revenue of our marketed products;
? risks associated with doing business internationally;
? our ability to generate and maintain sufficient cash resources to fund our
business;
? our ability to enter into strategic alliances with partners for
manufacturing, development and commercialization;
? efforts of our development partners;
? the ability of our manufacturing partners to meet our timelines;
? the ability to timely deliver product supplies to our customers;
? our ability to identify new product candidates and to successfully
integrate those product candidates into our operations;
? the timing and/or results of pending or future clinical trials, and our
reliance on contract research organizations;
? our ability to protect our intellectual property rights;
? competition in the marketplace for our drugs;
? delay in approval of our products or new indications for our products by
the U.S. Food and Drug Administration, or the FDA;
? actions by the FDA and other regulatory agencies, including international
agencies;
? securing positive reimbursement for our products;
? the impact of any product liability, or other litigation to which we are,
or may become a party;
? the impact of legislative or regulatory reform of the healthcare industry
and the impact of recently enacted healthcare reform legislation;
? the availability and price of acceptable raw materials and components from
third-party suppliers, and their ability to meet our demands;
? our ability, and that of our suppliers, development partners, and
manufacturing partners, to comply with laws, regulations and standards,
and the application and interpretation of those laws, regulations and
standards, that govern or affect the pharmaceutical and biotechnology
industries, the non-compliance with which may delay or prevent the
development, manufacturing, regulatory approvals and sale of our products;
? defending against claims relating to improper handling, storage or
disposal of hazardous chemical, radioactive or biological materials which
could be time consuming and expensive;
? our ability to maintain the services of our key executives and technical
and sales and marketing personnel;
? the difficulty in predicting the timing or outcome of product development
efforts and regulatory approvals; and
? demand and market acceptance for our approved products.
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We do not plan to update any such forward-looking statements and expressly
disclaim any duty to update the information contained in this report except as
required by law.
You should read the following discussion of our financial condition and results
of our operations in conjunction with the condensed consolidated financial
statements and the notes to those financial statements included in Item I of
Part 1 of this quarterly report and our audited consolidated financial
statements and related notes for the year ended December 31, 2011 included in
our Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Business Outlook
We are a biotechnology company with fully integrated commercial and drug
development operations with a primary focus in hematology and oncology. Our
strategy is comprised of acquiring, developing and commercializing a broad and
diverse pipeline of late-stage clinical and commercial products. We market two
oncology drugs, ZEVALIN and FUSILEV and have two drugs, apaziquone and
belinostat, in late stage development along with a diversified pipeline of novel
drug candidates. We have assembled an integrated in-house scientific team,
including formulation development, clinical development, medical affairs,
regulatory affairs, biostatistics and data management, and have established a
commercial infrastructure for the marketing of our drug products. We also
leverage the expertise of our worldwide partners to assist in the execution of
our strategy.
The following is an update of our business strategy for 2012, as described in
our Annual Report on Form 10-K for the year ended December 31, 2011 filed with
the SEC.
? Maximizing the growth potential of our marketed drugs, ZEVALIN and
FUSILEV. Our near-term outlook largely depends on sales and marketing
successes for our two marketed drugs. For ZEVALIN, we stabilized sales in
2009 and continue to work on growing the ZEVALIN brand and are working to
expand indications for use through additional trials. Effective April 2,
2012, with the acquisition of licensing rights from Bayer Pharma AG, we
began the sales of ZEVALIN outside of the U.S. For FUSILEV, we are working
to expand usage in colorectal cancer. We have initiated and continue to
build appropriate infrastructure and additional initiatives to facilitate
broad customer reach and to address other market requirements, as
appropriate. We have formed a dedicated commercial organization comprised
of highly experienced and motivated sales representatives, account
managers, and a complement of other support marketing personnel to manage
the sales and marketing of these drugs. In addition our scientific
department supports field activities through various MDs, PhDs and other
medical science liaison personnel.
For FUSILEV, which we launched in August 2008, we were able to benefit from
broad utilization in community clinics and hospitals and recognized a dramatic
increase in sales beginning in the second half of 2010 due to a shortage of
generic leucovorin. While generic leucovorin supplies and utilization have been
negatively impacted by this shortage, we cannot predict how long the shortage
may continue or the extent of the impact the shortage may ultimately have on
FUSILEV utilization. In April of 2011, we received two FDA approvals for
FUSILEV. The first FDA approval was for the use of FUSILEV in combination with
5-fluorouracil in the palliative treatment of patients with advanced metastatic
colorectal cancer. The second FDA approval was for a "Ready-To-Use" formulation,
or RTU, of FUSILEV. We are now actively engaged in marketing FUSILEV for use in
advanced metastatic colorectal cancer and have engaged a focused commercial
sales organization to work with our commercial group to support efforts to grow
FUSILEV sales.
? Optimizing our development portfolio and maximizing the asset values of
its components. While over the recent few years, we have evolved from a
development-stage to a commercial-stage pharmaceutical company, we have
maintained a highly focused development portfolio. Our strategy with
regard to our development portfolio is to focus on late-stage drugs and to
develop them safely and expeditiously to the point of regulatory approval.
We plan to develop some of these drugs ourselves or with our subsidiaries
and affiliates, or secure collaborations with third parties such that we
are able to suitably monetize these assets. We have assembled a drug
development infrastructure that is comprised of highly experienced and
motivated MDs, PhDs, clinical research associates and a complement of
other support personnel to develop these drugs. In April 2012, we
announced that the single instillation Phase 3 clinical trials for
apaziquone did not meet their primary endpoint and a meeting with the FDA
is under consideration. For patients with more invasive and aggressive
bladder cancer, we continue to study patients in multiple instillation
studies.
With regard to our anti-cancer drug belinostat, a novel HDAC inhibitor, we have
to date opened more than 100 sites. We completed enrollment in September 2011,
and expect to file a NDA in late 2012 or early 2013. Belinostat has received
"Fast Track" designation from the FDA, which means, if the FDA agrees, we can
start filing a rolling new-drug application even before the clinical package is
ready, beginning with the filing of pre-clinical data and Chemistry
Manufacturing and Control.
We have several other exciting compounds in earlier stages of development in our
portfolio. Based upon a criteria-based portfolio review, we are in the process
of streamlining our pipeline drugs, allowing for greater focus and integration
of our development and commercial goals.
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? Expanding our pipeline of development stage and commercial drugs through
business development activities. It is our goal to identify new strategic
opportunities that will create strong synergies with our currently
marketed drugs and identify and pursue partnerships for out-licensing
certain of our drugs in development. To this end, we will continue to
explore strategic collaborations as these relate to drugs that are either
in clinical trials or are currently on the market. We believe that such
opportunistic collaborations will provide synergies with respect to how we
deploy our internal resources. In this regard, we intend to identify and
secure drugs that have significant growth potential either through
enhanced marketing and sales efforts or through pursuit of additional
clinical development. In January 2011, we signed a letter of agreement
with Viropro, Inc., for the development of a biosimilar version of the
monoclonal antibody drug rituximab. Biosimilars, or follow-on biologics,
are terms used to describe officially-approved subsequent versions of
innovator biopharmaceutical products made by a different sponsor following
patent and exclusivity expiry. Under the agreement, we paid a nominal
upfront payment and are required to make additional payments based on
certain development, regulatory and sales milestones should we elect to
continue development efforts. We believe our in-licensing of belinostat, a
novel histone deacetylase, or HDAC, inhibitor, is also demonstrative of
such business development efforts outlined above.
? Managing our financial resources effectively. We remain committed to
fiscal discipline, a policy which has allowed us to become well
capitalized among our peers, despite a very challenging capital markets
environment beginning in 2009 and continuing through 2012. This policy
includes the pursuit of dilutive and non-dilutive funding options, prudent
expense management, and the achievement of critical synergies within our
operations in order to maintain a reasonable burn rate. Even with the
continued build-up in operational infrastructure to facilitate the
marketing of our two commercial drugs, we intend to be fiscally prudent in
any expansion we undertake.
In terms of revenue generation, we rely on sales from currently marketed drugs
and intend to pursue out-licensing of select pipeline drugs in select
territories, as discussed above. When appropriate, we may pursue other sources
of financing, including dilutive and non-dilutive financing alternatives. While
we are currently focused on advancing our key drug development programs, we
anticipate that we will make regular determinations as to which other programs,
if any, to pursue and how much funding to direct to each program on an ongoing
basis, based on clinical success and commercial potential, including termination
of our existing development programs, especially if we do not expect value to be
realized from continued development.
? Further enhancing the organizational structure to meet our corporate
objectives. We have highly experienced staff in pharmaceutical operations,
clinical development, regulatory and commercial functions who previously
held positions at both small to mid-size biotech companies, as well as
large pharmaceutical companies. We have strengthened the ranks of our
management team, and will continue to pursue talent on an opportunistic
basis. Finally, we remain committed to running a lean and efficient
organization, while effectively leveraging our critical resources.
Financial Condition
Liquidity and Capital Resources
Our cumulative losses, since inception in 1987 through June 30, 2012, are
approximately $197.3 million. We reported a net profit in 2011 and we have
continued profitable operations through the first half of 2012. We remain
dependent upon revenues from our two commercial drugs, specifically FUSILEV and
ZEVALIN. Our long-term strategy is to continue to generate profits from the sale
and licensing of our drug products.
While we believe that the approximately $193.7 million in cash, equivalents and
investments, which includes long term marketable securities (after payment of
$25.4 million for the purchase of the ZEVALIN Rights), we had available on
June 30, 2012 will allow us to fund our current planned operations for at least
the next twelve to eighteen months, we may, however, seek to obtain additional
capital through the sale of debt or equity securities, if necessary, especially
in conjunction with opportunistic acquisitions or license of drugs. We may be
unable to obtain such additional capital when needed, or on terms favorable to
us or our stockholders, if at all. If we raise additional funds by issuing
equity securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution or such equity securities may
provide for rights, preferences or privileges senior to those of the holders of
our common stock. If additional funds are raised through the issuance of debt
securities, the terms of such securities may place restrictions on our ability
to operate our business. If and when appropriate, just as we have done in the
past, we may pursue non-dilutive financing alternatives as well.
Our expenditures for research and development or R&D consist of direct product
specific costs (such as up-front license fees, milestone payments, active
pharmaceutical ingredients, clinical trials, patent related legal costs, and
product liability insurance, among others) and non-product specific, or
indirect, costs (such as personnel costs, rent, and utilities, among others).
During the six month period ended June 30, 2012, our total research and
development expenditure, including indirect expenditures, was approximately
$18.5 million (net of $5.4 million received from Allergan).
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Our primary focus areas for the foreseeable future, and the programs that are
expected to represent a significant part of our R&D expenditures, are the
on-going registrational clinical trials of apaziquone and belinostat and
additional clinical studies in supporting the expanded utilization of our FDA
products (ZEVALIN and FUSILEV). While we are currently focused on advancing
these key product development programs, we continually evaluate our R&D programs
of other pipeline products in response to the scientific and clinical success of
each product candidate, as well as an ongoing assessment as to the product
candidate's commercial potential. Our anticipated net use of cash for R&D in the
fiscal year ending December 31, 2012, excluding the cost of in-licensing or
acquisitions of additional drugs, if any, is expected to range between
approximately $38 and $42 million.
Under our various existing licensing agreements, we are contingently obligated
to make various regulatory and business milestone payments. In connection with
the development of certain in-licensed drug products, we anticipate the
occurrence of certain of these milestones during 2012. Upon successful
achievement of these milestones, we will likely become obligated to pay up to
approximately $5.6 million during the next twelve months, payable in cash or
stock at our discretion.
Further, while we do not receive any funding from third parties for research and
development that we conduct, co-development and out-licensing agreements with
other companies for any of our drug products may reduce our expenses. In this
regard, we entered into a collaboration agreement with Allergan whereby,
commencing January 1, 2009, Allergan has borne 65% of the development costs of
apaziquone. Additionally, we entered into a collaboration agreement with
TopoTarget, whereby, commencing February 2, 2010, TopoTarget bears, for
belinostat, 100% of the CUP trial costs and 30% of other development costs
unrelated to the PTCL study.
In addition to our present portfolio of drug product candidates, we continually
evaluate proprietary products for acquisition. If we are successful in acquiring
rights to additional products, we may pay up-front licensing fees in cash and/or
common stock and our research and development expenditures would likely
increase.
On April 4, 2012 we entered into a definitive agreement to acquire all of the
outstanding shares of Allos Therapeutics, Inc. for $1.82 per share in cash plus
one Contingent Value Right (CVR). This CVR entitled Allos stockholders to an
additional payment of $0.11 per share in cash if certain European regulatory
approval and commercialization milestones for FOLOTYN were achieved. Effective
as of June 21, 2012, the conditions for the CVR can no longer be met and,
therefore, we will not be obligated to make such additional payment in the
future if the transaction is consummated. The upfront portion of the transaction
is valued at up to $206 million on a fully-diluted basis, and $108 million net
of Allos' cash balance at the end of 2011. We currently intend to finance the
acquisition with a combination of cash on hand and a revolving credit line.
Pursuant to the terms of the agreement, we commenced a tender offer to purchase
all of the outstanding shares of Allos, which tender offer is still pending.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $44.9 million for the first six
months of 2012 which includes net income in the period of $64.6 million adjusted
for net non-cash credits of $27.9 million of which, $31.5 million relates to a
deferred income tax benefit.
Net Cash Provided by Investing Activities
Net cash provided by investing activities of $19.5 million for the first six
months of 2012 was primarily due to the maturities of marketable securities
partially offset by the $25.4 million purchase of the ZEVALIN Ex US rights and
the $622,000 purchase of available for sale securities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $4.4 million for the first six
months of 2012, primarily relates to the $2.5 million in proceeds from the
issuance of common stock as a result of the exercise of 531,355 stock options,
$2.2 million in excess tax benefits from share-based compensation and $372,000
in purchases of shares under our Employee Stock Purchase Plan. These proceeds
were partially offset by the $326,000 repurchase of shares to satisfy minimum
tax withholding for the vesting of restricted stock and the $317,000 purchase of
treasury stock.
Results of Operations
Three months ended June 30, 2012 and 2011
Total Revenues. Total revenues increased $23.3 million, or 51.5%, to $68.7
million in the three months ended June 30, 2012 from $45.4 million in the three
months ended June 30, 2011. We recognized $65.6 million from product sales, of
which $56.6 million related to sales of FUSILEV (each net of estimates for
promotional, price and other adjustments, including adjustment of the allowance
for product returns) and $9.0 million related to worldwide sales of ZEVALIN.
Product revenues recorded in the three months ended June 30, 2011 were $42.3
million, of which $33.9 million related to sales of FUSILEV and $8.4 million
related to sales of ZEVALIN. Revenues from the sales of FUSILEV have increased
due to FDA approval of FUSILEV for use in the treatment of advanced metastatic
colorectal cancer received on April 29, 2011 and a supply disruption of generic
leucovorin. During the three month periods ended June 30, 2012 and 2011, we also
recognized $3.1 million of licensing revenues from the amortization of a $41.5
million upfront payment we received from Allergan in 2008, and $16.0 million
upfront payment we received from Nippon Kayaku and Handok in the first quarter
of 2010.
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Cost of Product Sales. Cost of product sales increased $3.4 million or 42.4% to
$11.6 million in the three months ended June 30, 2012 from $8.1 million in the
three months ended June 30, 2011. The increase in total cost of sales relates
primarily to an increase in product revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased $4.6 million, or 24.9% to $23.3 million, in the three months
ended June 30, 2012 from $18.7 million in the three months ended June 30, 2011.
The increase is due primarily to:
? $2.7 million increase in compensation and associated benefits, of which
$2.2 million of the increase is attributable to sales and marketing
expenses as a result of the expansion of our sales force. We expect sales
and marketing activities will increase as we invest in additional
commercial resources to increase market expansion of both ZEVALIN and
FUSILEV.
? $2.7 million in legal and professional fees related to the Allos tender
offer and $687,000 transaction costs related to the Bayer agreement
licensing rights to market ZEVALIN outside the U.S.
? $563,000 increase for transitional services related to sales of ZEVLIN
outside the U.S.
? $1.4 million increase in advertising, branding, printing, marketing and
promotion
? $360, 000 increase in professional services
These increases were partially offset by:
? $3.6 million decrease in non-cash stock compensation expense primarily
related to the management incentive plan
Research and Development. Research and development expenses increased $1.9
million, or 24.7%, to $9.6 million, in the three months ended June 30, 2012 from
$7.7 million in the three months ended June 30, 2011. The increase is primarily
due to an increase of $755,000 for drug product, $594,000 increase in on-going
clinical trials and $799,000 increase in compensation and associated benefits.
We expect research and development expenses to range between approximately $38
and $42 million for 2012, excluding the cost of in-licensing or acquisitions of
additional drugs, if any.
Amortization of Purchased Intangibles. We incurred a non-cash charge of $1.6
million and $930,000 for the three months ended June 30, 2012 and 2011,
respectively, due to the amortization of intangibles from the acquisition of
ZEVALIN and the rights to market ZEVALIN outside the U.S.
Change in Fair Value of Common Stock Warrant Liability. We recorded a loss of
$1.2 million for the change in the fair value of the warrant obligations during
2011. No warrants recorded as a liability were outstanding in 2012.
Other Net Income (Loss). The principal components of other income (loss) of
($1.5 million) and $174,000 during the three month periods ended June 30, 2012
and 2011, respectively, consisted primarily of an increase in currency exchange
rate losses related to the acquisition of ZEVALIN Rights partially offset by
$58,000 of net interest income earned on outstanding bank balances. In the
current economic environment, our principal investment objective is preservation
of capital. Accordingly, for the foreseeable future we expect to earn minimal
interest yields on our investments, until such time as the credit markets
recover.
Provision for Income Taxes. We recorded a provision for income taxes of $3.0
million in 2012 as compared to $1.7 million recorded in the three months ended
June 30, 2011.
The $3.0 million charge for income taxes during the three months ended June 30,
2012 was due to the generation of $21.1 million of pretax income during the
quarter ended June 30, 2012. The tax expense for the quarter was below the
statutory rate as a result of recognizing $3.2 million of additional research
and experimentation credit carryovers following the completion of an analysis of
prior year credits during the quarter.
Results of Operations
Six months ended June 30, 2012 and 2011
Total Revenues. Total revenues increased $39.6 million, or 44.5%, to $128.6
million in the six months ended June 30, 2012 from $89.0 million in the six
months ended June 30, 2011. We recognized $122.4 million from product sales, of
which $107.8 million related to sales of FUSILEV (each net of estimates for
promotional, price and other adjustments, including adjustment of the allowance
for product returns) and $14.6 million related to sales of ZEVALIN. Product
revenues recorded in the six months ended June 30, 2011 were $82.8 million, of
which $68.6 million related to sales of FUSILEV and $14.3 million related to
sales of ZEVALIN. Revenues from the sales of FUSILEV have increased due to FDA
approval of FUSILEV for use in the treatment of advanced metastatic colorectal
cancer received on April 29, 2011 and a supply disruption of generic leucovorin.
During each of the six months periods ended June 30, 2012 and 2011, we also
recognized $6.2 million of licensing revenues from the amortization of a $41.5
million upfront payment we received from Allergan in 2008, and $16.0 million
upfront payment we received from Nippon Kayaku and Handok in the first quarter
of 2010.
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Cost of Product Sales. Cost of product sales increased $5.5 million or 37.6% to
$20.2 million in the six months ended June 30, 2012 from $14.7 million in the
six months ended June 30, 2011. The increase in total cost of sales relates
primarily to an increase in product revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased $10.2 million, or 32.3%, to $41.6 million in the six months
ended June 30, 2012 from $31.5 million in the six months ended June 30, 2011.
The increase is due primarily to:
? $6.1 million increase in compensation and associated benefits, of which
$4.7 million of the increase is attributable to sales and marketing
expenses as a result of the expansion of our sales force. We expect sales
and marketing activities will increase as we invest in additional
commercial resources to increase market expansion of both ZEVALIN and
FUSILEV.
? $2.6 million increase in advertising, branding, printing, marketing and
promotion
? $3.4 million in legal and professional fees related to the Allos tender
offer and $687,000 transaction costs related to the Bayer agreement
licensing rights to market ZEVALIN outside the U.S.
? $967,000 increase in professional fees
? $506,000 increase in regulatory fees
? $563,000 increase for transitional services related to sales of ZEVLIN
outside the U.S.
These increases were partially offset by:
? $4.7 million decrease in non-cash stock compensation expense primarily due
to the management incentive plan expenses.
Research and Development. Research and development expenses increased $5.0
million, or 36.7%, to $18.5 million, in the six months ended June 30, 2012 from
$13.5 million in the six months ended June 30, 2011. The increase is primarily
due to:
? $3.3 million increase for drug product and a payment related to the
co-development and commercialization agreement with Hamni Pharmaceutical
Company for SPI-2012,
? $1.5 million increase in compensation and associated benefits.
We expect research and development expenses to range between approximately $38
and $42 million for 2012, excluding the cost of in-licensing or acquisitions of
additional drugs, if any.
Amortization of Purchased Intangibles. We incurred a non-cash charge of $2.6
million and $1.9 million for the six months ended June 30, 2012 and 2011,
respectively, due to the amortization of intangibles from the acquisition of
ZEVALIN Rights to market ZEVALIN outside the U.S.
Change in Fair Value of Common Stock Warrant Liability. We recorded a loss of
$6.5 million for the change in the fair value of the warrant obligations during
2011. No warrants recorded as a liability were outstanding in 2012.
Other Net Income. The principal components of other income (loss) of ($1.3
million) and $694,000 during the six month periods ended June 30, 2012 and 2011,
respectively, consisted primarily of an increase in currency exchange rate
losses partially offset by $132,000 of net interest income earned on outstanding
bank balances. In the current economic environment, our principal investment
objective is preservation of capital. Accordingly, for the foreseeable future we
expect to earn minimal interest yields on our investments, until such time as
the credit markets recover.
Provision/Benefit for Income Taxes. We recorded a benefit for income taxes of
$20.3 million in 2012 as compared to a provision of $1.7 million recorded in the
six months ended June 30, 2011.
Based on the weight of both positive and negative evidence, we concluded that it
is more likely than not that the domestic net deferred tax assets will be
realized, and therefore, we have released our domestic valuation allowance
during the quarter ended March 31, 2012. We released approximately $22 million
as part of the projected annual effective tax rate and released the remaining
$24 million of the domestic valuation allowance as a discrete item through
June 30, 2012. We maintained a valuation allowance against our foreign net
deferred tax assets as we continue to conclude it is not more likely than not
that the foreign net deferred tax assets will be realized.
The annual effective rate for fiscal 2012 is below the statutory rate
principally as a result of tax benefits expected to be realized from the release
of our valuation allowance against domestic deferred tax assets based upon
projected current year earnings. The year to date tax benefit of $20.3 million
in 2012 is primarily the result of a $24 million discrete tax benefit recognized
during the quarter ended March 31, 2012 related to the release of our valuation
allowance on domestic deferred tax assets.
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Nature of Each Accrual That Reduces Gross Revenue to Net Revenue
Provisions for product returns, sales discounts and rebates and estimates for
chargebacks are established as a reduction of product sales revenue at the time
revenues are recognized. We consider various factors in determining such
provisions, which are described in detail below. Such estimated amounts are
deducted from our gross sales to determine our net revenues. Provisions for bad
and doubtful accounts are deducted from gross receivables to determine net
receivables. Provisions for chargebacks, returns, rebates and discounts are
classified as part of our accrued obligations. Changes in our estimates, if any,
are recorded in the statement of income in the period the change is determined.
If we materially over or under estimate the amount, there could be a material
impact on our condensed consolidated financial statements.
For the six months ended June 30, 2012 and 2011, the following is a roll forward
of the provisions for return, discounts and rebates and chargebacks allowances
and estimated doubtful account allowances.
Chargebacks Data and
and Distribution Doubtful
Discounts Rebates Returns Fees accounts Total
($ in '000's)
Period ended June 30, 2012:
Balances at beginning of the period $ 1,942 $ 8,114
$ 4,000 $ 5,866 $ 471 $ 20,393
Add provisions/(recovery):
25,607 21,192 (490 ) 8,511 (30 ) 54,790
Less: Credits or actual allowances: (17,771 ) (11,324 ) (10 ) (5,477 ) (29 ) (34,611 )
Balances at the close of the period $ 9,778 $ 17,982
$ 3,500 $ 8,900 $ 412 $ 40,572
Period ended June 30, 2011:
Balances at beginning of period $ 675 $ 14,474
$ 2,000 $ 1,874 $ 339 $ 19,362
Add provisions:
3,026 9,360 1,048 3,226 291 16,951
Less: Credits or actual allowances: (2,378 ) (10,920 ) (48 ) (1,802 ) - (15,148 )
Balances at the close of the period $ 1,323 $ 12,914
$ 3,000 $ 3,298 $ 630 $ 21,165
Amounts recorded as allowances on our condensed consolidated balance sheets for
2012 and 2011 are reflected in the table above. The basis and methods of
estimating these allowances, used by management, are described below.
Chargebacks, discounts and rebates
Chargebacks represent a provision against gross accounts receivable and related
reduction to gross revenue. A chargeback is the difference between the price the
wholesale customer, in our case the wholesaler or distributor, pays (the
wholesale acquisition cost, or WAC) and the price (contracted price) that a
contracted customer (e.g., a Group Purchasing Organization, or GPO, member) pays
for a product. We accrue for chargebacks in the relevant period on the
presumption that all units of product sold to members of the GPOs will be
charged back. We estimate chargebacks at the time of sale of our products to the
members of the GPOs based on:
(1) volume of all products sold via distributors to members of the GPOs and the
applicable chargeback rates for the relevant period;
(2) applicable WAC and the contract prices agreed with the GPOs; and
(3) the information of inventories remaining on hand at the wholesalers and
distributors at the end of the period, actual chargeback reports received from
our wholesalers and distributors as well as the chargebacks not yet billed
(product shipped less the chargebacks already billed back) in the calculation
and validation of our chargeback estimates and reserves.
Discounts (generally prompt payment discounts) are accrued at the end of every
reporting period based on the gross sales made to the customers during the
period and based on their terms of trade for a product. We generally review the
terms of the contracts, specifically price and discount structures, payment
terms in the contracts between the customer and the Company to estimate the
discount accrual.
Customer rebates are estimated at every period end, based on direct purchases,
depending on whether any rebates have been offered. The rebates are recognized
when products are purchased and a periodic credit is given. Medicaid rebates are
based on the data we receive from the public sector benefit providers, which is
based on the final dispensing of our product by a pharmacy to a benefit plan
participant.
We record Medicaid and Medicare rebates based on estimates for such expense.
However, such amounts have not been material to the financial statements.
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Product returns allowances
Customers are typically permitted to return products within thirty days after
shipment, if incorrectly shipped or not ordered, and within a window of time six
months before and twelve months after the expiration of product dating, subject
to certain restocking fees and preauthorization requirements, as applicable. The
returned product is destroyed if it is damaged, quality is compromised or past
its expiration date. Based on our returns policy, we refund the sales price to
the customer as a credit and record the credit against receivables. In general,
returned product is not resold. As of each balance sheet date, we estimate
potential returns, based on several factors, including: inventory held by
distributors, sell through data of distributor sales to end users, customer and
end-user ordering and re-ordering patterns, aging of accounts receivables, rates
of returns for directly substitutable products and pharmaceutical products for
the treatment of therapeutic areas similar to indications served by our
products, shelf life of our products and based on experience of our management
with selling similar oncology products. We record an allowance for future
returns by debiting revenue, thereby reducing gross revenues and crediting a
reserve for returns to other accrued liabilities.
Distribution and Data Fees
Distribution and data fees are paid to authorized wholesalers and specialty
distributors of FUSILEV as a percentage of WAC for products sold. The services
provided include contract administration, inventory management, product sales
reporting by customer, returns for clinics and hospitals. We accrue distribution
and data fees based on a percentage of FUSILEV revenues that are set and
governed by distribution agreements.
Doubtful Accounts
An allowance for doubtful accounts is estimated based on the customer payment
history and a review by management of the aging of the accounts receivables as
of the balance sheet date. We accrue for doubtful accounts by recording an
expense and creating an allowance for such accounts. If we are privy to
information on the solvency of a customer or observe a payment history change,
we estimate the accrual for such doubtful receivables or write the receivable
off.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in material off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
GAAP. These accounting principles require us to make certain estimates,
judgments and assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information available
to us at the time that these estimates, judgments and assumptions are made.
These estimates, judgments and assumptions can affect the reported amounts of
assets and liabilities as of the date of the financial statements as well as the
reported amounts of revenues and expenses during the periods presented. To the
extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
accounting policies that reflect our more significant estimates, judgments and
assumptions and which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
? Revenue recognition
? Fair value of acquired assets
? Research and development
? Fair value measurements
? Amortization and impairment of intangible assets
? Share-based compensation
During the six months ended June 30, 2012, there were no significant changes in
our critical accounting policies and estimates. Please refer to Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2011 for a more complete discussion of our critical
accounting policies and estimates.
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