Summary consolidated
financial data
The tables below summarize our financial data as of the dates
and for the periods indicated. You should read the following
information together with the more detailed information
contained in Selected consolidated financial data,
Managements discussion and analysis of financial
condition and results of operations and our consolidated
financial statements and the accompanying notes included
elsewhere in this prospectus.
The pro forma statement of income and balance sheet data below
gives effect to the conversion of 812,749 shares of our
preferred stock into 1,625,498 shares of common stock. The
pro forma as adjusted balance sheet data below gives further
effect to the sale of 5,000,000 shares of common stock that we
are offering at an assumed initial public offering price of
$20.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses to be paid by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Years Ended
December 31,
|
|
|
Ended
March 31,
|
|
Statement of
income data:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetadote
|
|
$
|
10,722
|
|
|
$
|
18,817
|
|
|
$
|
25,439
|
|
|
$
|
5,799
|
|
|
$
|
7,133
|
|
Kristalose
|
|
|
6,511
|
|
|
|
9,013
|
|
|
|
9,469
|
|
|
|
2,478
|
|
|
|
2,229
|
|
Other(1)
|
|
|
582
|
|
|
|
234
|
|
|
|
167
|
|
|
|
26
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net
revenues(2)
|
|
$
|
17,815
|
|
|
$
|
28,064
|
|
|
$
|
35,075
|
|
|
$
|
8,304
|
|
|
$
|
9,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
2,224
|
|
|
$
|
6,725
|
|
|
$
|
7,282
|
|
|
$
|
1,794
|
|
|
$
|
2,117
|
|
Net income before income taxes
|
|
|
1,708
|
|
|
|
6,469
|
|
|
|
7,310
|
|
|
|
1,762
|
|
|
|
2,037
|
|
Net income attributable to common shareholders
|
|
|
4,404
|
|
|
|
4,044
|
|
|
|
4,766
|
|
|
|
1,395
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common shareholdersbasic
|
|
$
|
0.45
|
|
|
$
|
0.40
|
|
|
$
|
0.47
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
Earnings per share attributable to common
shareholdersdiluted
|
|
$
|
0.27
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
Pro forma earnings per share attributable to common
shareholdersbasic
|
|
|
|
|
|
|
|
|
|
$
|
0.41
|
|
|
|
|
|
|
$
|
0.10
|
|
Pro forma earnings per share attributable to common
shareholdersdiluted
|
|
|
|
|
|
|
|
|
|
$
|
0.29
|
|
|
|
|
|
|
$
|
0.08
|
|
Weighted-average shares outstandingbasic
|
|
|
9,797
|
|
|
|
10,032
|
|
|
|
10,143
|
|
|
|
10,094
|
|
|
|
10,321
|
|
Weighted-average shares outstandingdiluted
|
|
|
16,454
|
|
|
|
16,582
|
|
|
|
16,540
|
|
|
|
16,412
|
|
|
|
16,127
|
|
Pro forma weighted-average shares outstandingbasic
|
|
|
|
|
|
|
|
|
|
|
11,768
|
|
|
|
|
|
|
|
11,947
|
|
Pro forma weighted-average shares outstandingdiluted
|
|
|
|
|
|
|
|
|
|
|
16,540
|
|
|
|
|
|
|
|
16,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Balance sheet
data:
|
|
Actual
|
|
|
Pro
Forma
|
|
|
as
Adjusted(3)
|
|
|
|
|
|
(in thousands)
|
|
|
|
(unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
10,072
|
|
|
$
|
10,072
|
|
|
$
|
95,006
|
|
Working capital
|
|
|
11,262
|
|
|
|
11,262
|
|
|
|
97,029
|
|
Total assets
|
|
|
30,986
|
|
|
|
30,986
|
|
|
|
115,919
|
|
Total long-term debt and other long-term obligations (including
current
portion)(4)
|
|
|
7,261
|
|
|
|
7,261
|
|
|
|
3,094
|
|
Convertible preferred stock
|
|
|
2,604
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
2,669
|
|
|
|
2,669
|
|
|
|
2,669
|
|
Total equity
|
|
|
18,452
|
|
|
|
18,452
|
|
|
|
107,552
|
|
|
|
|
(1)
|
|
Includes revenue from products we
are no longer selling, revenue reduction for promotional costs
to a wholesaler, grant revenue and other miscellaneous revenue.
|
|
(2)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
|
|
|
(3)
|
|
Each $1.00 increase or decrease in
the assumed initial public offering price of $20.00 per share
would increase or decrease, as applicable, our cash and cash
equivalents, working capital, total assets and total
shareholders equity by approximately
|
5
|
|
|
|
|
$4.7 million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions payable by us.
These amounts exclude adjustments related to the expected Option
Transaction as described in the section entitled Certain
relationships and related party transactions. If these
adjustments were included and if the shares to be repurchased in
the first quarter of 2010 were repurchased on March 31,
2009 at the offering price of $20.00 per share, then as of
March 31, 2009, cash and cash equivalents would have been
$81,275, working capital would have been $81,798, total assets
would have been $132,311, total long-term debt and other
long-term obligations (including current portion) would have
been $21,094, and total equity would have been $105,944. These
amounts exclude the effect of payment of the exercise price of
approximately $2.4 million which may be settled in cash or
tender of 119,670 shares (assuming an offering price of
$20.00 per share).
|
|
|
|
(4)
|
|
In connection with this offering,
we will use part of the proceeds to repay approximately
$4.2 million of the term loan. As of March 31, 2009,
the term loan balance was $5.0 million. Subsequent to
March 31, 2009, we have paid approximately
$0.8 million of the term loan during the normal course of
business.
|
6
Risk factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risks, together with
all of the other information included in this prospectus, before
investing in our common stock. If any of the following risks
were to occur, our business, financial condition and results of
operations could be materially and adversely affected. In that
case, the trading price of our common stock could decline, and
you might lose all or part of your investment.
RISKS RELATED TO
OUR BUSINESS
The commercial
launch of Caldolor is subject to many internal and external
challenges and if we cannot overcome these challenges in a
timely manner, our future revenues and profits could be
materially and adversely impacted.
We are dependent on Caldolor for a substantial portion of our
future growth. While Caldolor was approved by the U.S. Food and
Drug Administration, or FDA, in June 2009, we have not
commercialized Caldolor in any jurisdiction. The successful
commercial launch of Caldolor is dependent on our ability to
coordinate large-scale supply, distribution, marketing, sales
and education efforts. We cannot assure you that we will be able
to successfully commercialize Caldolor on our current timeline
or at all.
Internally, the successful launch of Caldolor will depend on our
ability to recruit, train and retain a qualified sales force, to
equip our sales force with effective supportive materials, to
target appropriate markets and to accurately price Caldolor. As
of July 1, 2009, our hospital sales force was comprised of
30 representatives and managers, but none of these has ever sold
Caldolor before. We are planning, and have begun, to add
additional representatives to be able to effectively launch
Caldolor. In addition, as Caldolor is a newly marketed drug, our
sales force will need to be sufficiently trained, credible and
persuasive in order to convince physicians and pharmacists in
target markets to use Caldolor. Finally, we will need to train
our sales force to ensure that a consistent and appropriate
message about Caldolor is being delivered to physicians and
pharmacists. If we are unable to add enough new sales force
representatives, if we are unable to add sufficiently qualified
representatives, or if we are not able to effectively train our
sales force, our ability to successfully launch Caldolor could
be jeopardized. We must also equip our sales force with
effective materials, including clinical papers, sales literature
and formulary kits, to help them inform and educate physicians
and pharmacists about the benefits and risks of Caldolor as well
as the proper administration of the drug. If we are unable to
provide our sales force with convincing supportive materials,
they may not be able to sell Caldolor in sufficient quantities
or at all. We must also ensure that we maximize our sales
efforts for Caldolor by targeting the right hospitals across the
U.S. Any failure in sales force coverage could limit our ability
to generate market acceptance for Caldolor and ultimately, the
successful commercialization of the drug. Finally, we must set a
price for Caldolor that hospitals and other purchasers will be
willing to pay, but that will also generate sufficient profits.
If we set a price for Caldolor that hospitals consider too high,
we may need to subsequently reduce the price for Caldolor. If we
set the initial price for Caldolor too low, we may not generate
adequate profits and may not be able to raise the price of the
drug in the future.
In addition to the extensive internal efforts required, the
successful launch of Caldolor will require the assistance of
many third-parties, including physicians, pharmacists, hospital
pharmacy and therapeutics committees, or P&T committees,
suppliers and distributors, all of whom we have little or no
control over. We expect Caldolor to be administered primarily to
hospitalized patients who are unable to receive oral therapies
for the treatment of pain or fever. Before we can attempt to
sell Caldolor in hospitals, Caldolor must be approved for
addition to a hospitals formulary list by the
hospitals P&T committee. A hospitals
P&T committee generally governs all matters pertaining to
the use of medications within the institution, including review
of medication formulary data and recommendations
7
Risk
factors
of drugs to the medical staff. We cannot guarantee that we will
be successful in getting the approvals we need from enough
P&T committees to be able to optimize hospital sales of
Caldolor. Even if we obtain hospital approval for Caldolor, we
must still convince individual hospital physicians to prescribe
Caldolor repeatedly for its commercialization to be successful.
Because Caldolor is a new drug with little track record, any
mistakes made in the timely supply of Caldolor, education about
how to properly administer Caldolor or any unexpected side
effects that develop from use of the drug, particularly early in
product launch, may lead physicians to not accept Caldolor as a
viable treatment alternative. Similar to physicians, our ability
to sell Caldolor to pharmacists will depend on price and
education efforts, and the lack of a track record for Caldolor
could magnify any delays in delivery or side effects of the drug
and prevent widespread pharmacist acceptance of Caldolor.
The FDA has
approved Caldolor as a treatment for the reduction of pain and
fever in adults in the U.S. and any attempt by us to expand the
potential market for Caldolor is subject to
limitations.
The FDA approved Caldolor for the treatment of pain and fever in
adults in the U.S. In its June 2009 approval letter,
the FDA required us to conduct two additional Phase IV
pediatric studies by 2011 and 2012, respectively. If the results
of these Phase IV clinical studies are not favorable, we
may not be able to expand the market for Caldolor to children
ages 1-16.
We may also experience delays associated with these required
Phase IV clinical studies potentially resulting from, among
other factors, difficulty enrolling pediatric patients. Such
delays could impact our ability to obtain an additional six
months of FDA exclusivity.
In addition, we have only obtained regulatory approval to market
Caldolor in the U.S. In foreign jurisdictions such as
Canada and Australia we have licensed the right to market
Caldolor to third parties. These third parties are responsible
for seeking regulatory approval for Caldolor in their respective
jurisdictions. We have no control over these third parties and
cannot be sure that marketing approval for Caldolor will ever be
obtained outside the U.S.
Sales of
Acetadote and Kristalose currently generate almost all of our
revenues. An adverse development regarding either of these
products could have a material and adverse impact on our future
revenues and profitability.
A number of factors may impact the effectiveness of our
marketing and sales activities and the demand for our products,
including:
|
|
Ø
|
The prices of Acetadote and Kristalose relative to other drugs
or competing treatments;
|
|
Ø
|
Any unfavorable publicity concerning us, Acetadote or
Kristalose, or the markets for these products such as
information concerning product contamination or other safety
issues in either of our product markets, whether or not directly
involving our products;
|
|
Ø
|
Perception by physicians and other members of the healthcare
community of the safety or efficacy of Acetadote, Kristalose or
competing products;
|
|
Ø
|
Regulatory developments related to our marketing and promotional
practices or the manufacture or continued use of Acetadote or
Kristalose;
|
|
Ø
|
The inability of the orphan drug designation of Acetadote (under
which the FDA granted seven years marketing exclusivity for
intravenous treatment of moderate to severe acetaminophen
overdose) to prevent development and marketing of a different
product that competes with Acetadote;
|
|
Ø
|
Changes in intellectual property protection available for
Acetadote or Kristalose or competing treatments;
|
8
Risk
factors
|
|
Ø
|
The availability and level of third-party reimbursement for
sales of Acetadote and Kristalose; and
|
|
Ø
|
The continued availability of adequate supplies of Acetadote and
Kristalose to meet demand.
|
If demand for either Acetadote or Kristalose weakens, our
revenues and profitability will likely decline.
Known adverse effects of our marketed products are documented in
product labeling, including the product package inserts, medical
information disclosed to medical professionals, and all
marketing related materials. No unforeseen or serious adverse
effects outside of those specified in current product labeling
have been directly attributed to our approved products. The most
frequently reported adverse events attributed to Acetadote
include rash, urticaria (hives) and pruritus (itching), and
anaphylactoid reactions. The most frequently reported adverse
events attributed to Kristalose, and reported to us, include
flatulence and nausea.
If any
manufacturer we rely upon fails to produce our products and
product candidates in the amounts we require on a timely basis,
or fails to comply with stringent regulations applicable to
pharmaceutical drug manufacturers, we may face delays in the
commercialization of Caldolor, or may be unable to meet demand
for the product supplied by the manufacturer and may lose
potential revenues.
We do not manufacture any of our products or product candidates,
and we do not currently plan to develop any capacity to do so.
Our dependence upon third parties for the manufacture of
products could adversely affect our profit margins or our
ability to develop and deliver products on a timely and
competitive basis. If for any reason we are unable to obtain or
retain third-party manufacturers on commercially acceptable
terms, we may not be able to sell our products as planned.
Furthermore, if we encounter delays or difficulties with
contract manufacturers in producing our products, the
distribution, marketing and subsequent sales of these products
could be adversely affected. As Caldolor is a new product, the
effect of any delays or failure to deliver could be magnified
due to the lack of a track record for Caldolor with physicians
and pharmacists. In either event, we may choose to or need to
seek an alternative source of supply for, or abandon, a product
line or sell a product line on unsatisfactory terms. We have
agreements with Bioniche Teoranta, or Bioniche, and with Bayer
Healthcare, LLC, or Bayer, for the manufacture and supply of
Acetadote. Our agreement with Bioniche requires us to purchase
minimum amounts of Acetadote.
We also have minimum purchase obligations under our Kristalose
supply agreement with Inalco S.p.A. and Inalco Biochemicals,
Inc., or collectively Inalco. If our purchase obligations exceed
demand for our products, we may be forced to either breach our
contract with that manufacturer or purchase a supply of the
product that we may be unable to sell. Our contract with
Bioniche extends until 2011, and our contract with Inalco
extends until 2021.
Caldolor is manufactured at Hospira Australia Pty. Ltd.s
facility in Australia and Bayers facility in Kansas.
Acetadote is manufactured primarily at a facility in Ireland and
Bayers manufacturing plant in Kansas is an alternative
manufacturing source for Acetadote. The active pharmaceutical
ingredient for Kristalose is manufactured at a single facility
in Italy. If any one of these facilities is damaged or
destroyed, or if local conditions result in a work stoppage, we
could suffer an inability to meet demand for our products.
Kristalose is manufactured through a complex process involving
trade secrets of the manufacturer; therefore, it would be
particularly difficult to find a new manufacturer of Kristalose
on an expedited basis. As a result of these factors, our ability
to manufacture Kristalose may be substantially impaired if the
manufacturer is unable or unwilling to supply sufficient
quantities of the product.
9
Risk
factors
In addition, all manufacturers of our products and product
candidates must comply with current good manufacturing
practices, referred to as cGMP, enforced by the FDA through its
facilities inspection program. These requirements include
quality control, quality assurance and the maintenance of
records and documentation. Manufacturers of our product
candidates may be unable to comply with cGMP requirements and
with other FDA, state and foreign regulatory requirements. We
have no control over our manufacturers compliance with
these regulations and standards. If our third-party
manufacturers do not comply with these requirements, we could be
subject to:
|
|
Ø
|
fines and civil penalties;
|
|
Ø
|
suspension of production or distribution;
|
|
Ø
|
suspension or delay in product approval;
|
|
Ø
|
product seizure or recall; and
|
|
Ø
|
withdrawal of product approval.
|
If we are unable
to maintain and build an effective sales and marketing
infrastructure, we will not be able to commercialize and grow
our products and product candidates successfully.
As we grow, we may not be able to secure sales personnel or
organizations that are adequate in number or expertise to
successfully market and sell our products. For example, in
connection with the commercial launch of Caldolor, we expect we
will need to add approximately 47 new hospital sales
representatives, and we may not be able to hire these
representatives in accordance with our timeline. This risk would
be accentuated if we acquire products in areas outside of acute
care/emergency medicine and gastroenterology, since our sales
forces specialize in these areas. If we are unable to expand our
sales and marketing capability or any other capabilities
necessary to commercialize our products and product candidates,
we will need to contract with third parties to market and sell
our products. If we are unable to establish and maintain
adequate sales and marketing capabilities:
|
|
Ø |
we may not be able to increase our product revenue;
|
|
|
Ø |
we may generate increased expenses; and
|
|
|
Ø |
we may not continue to be profitable.
|
We are dependent
on a variety of other third parties. If these third parties fail
to perform as we expect, our operations could be disrupted and
our financial results could suffer.
We have a relatively small internal infrastructure. We rely on a
variety of third parties, other than our third-party
manufacturers, to help us operate our business. Other third
parties on which we rely include:
|
|
Ø |
Cardinal Health Specialty Pharmaceutical Services, a logistics
and fulfillment company and business unit of Cardinal, which
warehouses and ships our marketed products;
|
|
|
Ø |
Ventiv Commercial Services, LLC, which provides a field sales
force that is the primary selling team for Kristalose; and
|
|
|
Ø |
Vanderbilt University and the Tennessee Technology Development
Corporation, co-owners with us of Cumberland Emerging
Technologies, Inc., or CET, and the universities that
collaborate with us in connection with CETs research and
development programs.
|
If these third parties do not continue to provide services to
us, or collaborate with us, we might not be able to obtain
others who can serve these functions. This could disrupt our
business operations, delay market launch of Caldolor or any
future product candidate, increase our operating expenses or
otherwise adversely affect our operating results.
10
Risk
factors
Competitive
pressures could reduce our revenues and profits.
The pharmaceutical industry is intensely competitive. Our
strategy is to target differentiated products in specialized
markets. However, this strategy does not relieve us from
competitive pressures, and can entail distinct competitive
risks. For example, a new entrant into a smaller market could
have a disproportionately large impact on others in the market.
In addition, certain of our competitors do not aggressively
promote their products in our markets. A relatively modest
increase in promotional activity in our markets could result in
large shifts in market share, adversely affecting us.
Kristalose competes in the U.S. with several other
prescription laxative products, including
Amitiza®,
which is marketed by Sucampo Pharmaceuticals Inc. and Takeda
Pharmaceutical Company Limited. We have an exclusive patent
license that gives us limited protection against direct
competition for Kristalose. Acetadote competes domestically with
several orally administered prescription products for treating
acetaminophen overdose. We are aware of products under
development which could compete with Caldolor, including an
intravenous acetaminophen product for which Cadence
Pharmaceuticals Inc. recently submitted a new drug application
to the FDA and for which the FDA granted a priority review.
Our competitors may sell or develop drugs that are more
effective and useful and less costly than ours, and they may be
more successful in manufacturing and marketing their products.
Many of our competitors have significantly greater financial and
marketing resources than we do. Additional competitors may enter
our markets.
The pharmaceutical industry is characterized by constant and
significant investment in new product development, which can
result in rapid technological change. The introduction of new
products could substantially reduce our market share or render
our products obsolete. The selling prices of pharmaceutical
products tend to decline as competition increases, through new
product introduction or otherwise, which could reduce our
revenues and profitability.
Governmental and private health care payors have recently
emphasized substitution of branded pharmaceuticals with less
expensive generic equivalents. An increase in the sales of
generic pharmaceutical products could result in a decrease in
our revenues. While there are no generic equivalents competing
with Caldolor, Acetadote or Kristalose at this time, in the
future we could face generic competition.
Our future growth
depends on our ability to identify and acquire rights to
products. If we do not successfully identify and acquire rights
to products and successfully integrate them into our operations,
our growth opportunities would be limited.
We acquired rights to Caldolor, Acetadote and Kristalose. Our
business strategy is to continue to acquire rights to
FDA-approved products as well as pharmaceutical product
candidates in the late stages of development. We do not plan to
conduct basic research or pre-clinical product development,
except to the extent of our investment in CET. We have limited
resources to acquire third-party products, businesses and
technologies and integrate them into our current infrastructure.
Many acquisition opportunities involve competition among several
potential purchasers including large multi-national
pharmaceutical companies and other competitors that have access
to greater financial resources than we do. In addition, our bank
credit agreement requires that we obtain the consent of the bank
prior to making acquisitions unless the acquisitions meet
certain criteria. See Managements discussion and
analysis of financial condition and results of
operations Liquidity and capital resources.
With future acquisitions, we may face financial and operational
risks and uncertainties, including:
|
|
Ø |
not realizing the expected economic return or other benefits
from an acquisition;
|
11
Risk
factors
|
|
Ø
|
incurring higher than expected acquisition and integration costs;
|
|
Ø
|
assuming or otherwise being exposed to unknown liabilities;
|
|
Ø
|
developing or integrating new products that could disrupt our
business and divert our managements time and attention;
|
|
Ø
|
not being able to preserve key suppliers or distributors of any
acquired products;
|
|
Ø
|
incurring substantial debt or issuing dilutive securities to pay
for acquisitions; and
|
|
Ø
|
acquiring products that could substantially increase our
amortization expenses.
|
We are not precluded from engaging in a large acquisition in the
future, including an acquisition that entails the investment of
substantially all of the proceeds from this offering. While
large acquisitions potentially present large opportunities, they
also could magnify the risks identified above. As of the date of
this prospectus, we have no commitments or agreements regarding
any potential acquisitions.
We may not be able to engage in future product acquisitions, and
those we do complete may not be beneficial to us in the long
term.
If governmental
or third-party payors do not provide adequate reimbursement for
our products, our revenue and prospects for continued
profitability will be limited.
Our financial success depends, in part, on the availability of
adequate reimbursement from third-party healthcare payors. Such
third-party payors include governmental health programs such as
Medicare and Medicaid, managed care providers and private health
insurers. Third-party payors are increasingly challenging the
pricing of medical products and services, while governments
continue to propose and pass legislation designed to reduce the
cost of healthcare. Adoption of such legislation could further
limit reimbursement for pharmaceuticals. For example, in
December 2003, Congress enacted a limited prescription drug
benefit for Medicare beneficiaries in the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003. Under this
program, drug prices for certain prescription drugs are
negotiated by drug plans, with the goal to lower costs for
Medicare beneficiaries. Future cost control initiatives could
decrease the price that we would receive for any products, which
would limit our revenue and profitability. In addition,
legislation and regulations affecting the pricing of
pharmaceuticals might change.
Reimbursement practices of third-party payors might preclude us
from achieving market acceptance for our products or maintaining
price levels sufficient to realize an appropriate return on our
investment in product acquisition and development. If we cannot
obtain adequate reimbursement levels, our business, financial
condition and results of operations would be materially and
adversely affected.
Formulary
practices of third-party payors could adversely affect our
competitive position.
Many managed health care organizations are now controlling the
pharmaceutical products listed on their formulary lists. The
benefit of having products listed on these formulary lists
creates competition among pharmaceutical companies which, in
turn, has created a trend of downward pricing pressure in our
industry. In addition, many managed care organizations are
pursuing various ways to reduce pharmaceutical costs and are
considering formulary contracts primarily with those
pharmaceutical companies that can offer a full line of products
for a given therapy sector or disease state. Our products might
not be included on the formulary lists of managed care
organizations, and downward pricing pressure in our industry
generally could negatively impact our operations.
12
Risk
factors
Continued
consolidation of distributor networks in the pharmaceutical
industry as well as increases in retailer concentration may
limit our ability to profitably sell our products.
We sell most of our products to large pharmaceutical
wholesalers, who in turn sell to, thereby supplying, hospitals
and retail pharmacies. The distribution network for
pharmaceutical products has become increasingly consolidated in
recent years. Today, three large wholesalers control most of the
market. Further consolidation among, or any financial
difficulties of, pharmaceutical wholesalers or retailers could
result in the combination or elimination of warehouses, which
could cause product returns to us. In addition, further
consolidation or financial difficulties could also cause our
customers to reduce the amounts of our products that they
purchase, which would materially and adversely affect our
business, financial condition and results of operations.
Our CET joint
initiative may not result in our gaining access to commercially
viable products.
Our CET joint initiative with Vanderbilt University and
Tennessee Technology Development Corporation is designed to help
us investigate, in a cost-effective manner, early-stage products
and technologies. However, we may never gain access to
commercially viable products from CET for a variety of reasons,
including:
|
|
Ø
|
CET investigates early-stage products, which have the greatest
risk of failure prior to FDA approval and commercialization;
|
|
Ø
|
In some programs, we do not have pre-set rights to product
candidates developed by CET. We would need to agree with CET and
its collaborators on the terms of any product license to, or
acquisition by, us;
|
|
Ø
|
We rely principally on government grants to fund CETs
research and development programs. If these grants were no
longer available, we or our co-owners might be unable or
unwilling to fund CET operations at current levels or at
all;
|
|
Ø
|
We may become involved in disputes with our co-owners regarding
CET policy or operations, such as how best to deploy CET assets
or which product opportunities to pursue. Disagreement could
disrupt or halt product development; and
|
|
Ø
|
CET may disagree with one of the various universities with which
CET is collaborating on research. A disagreement could disrupt
or halt product development.
|
The size of our
organization and our activities are growing, and we may
experience difficulties in managing growth.
As of July 1, 2009, we had 59 full-time employees,
which includes 30 hospital sales force representatives and
managers. In connection with the commercial launch of Caldolor,
we expect to add an additional 47 hospital sales force
representatives. We may need to continue to expand our
managerial, operational, financial and other resources in order
to increase our marketing efforts with regard to our currently
marketed products, continue our business development and product
development activities and commercialize our product candidates.
We have experienced, and may continue to experience, rapid
growth in the scope of our operations in connection with the
commercial launch of new products, including Caldolor. Our
financial performance will depend, in part, on our ability to
manage any such growth effectively. Our management, personnel,
systems and facilities currently in place may not be adequate to
support this future growth.
13
Risk
factors
We depend on our
key personnel, the loss of whom would adversely affect our
operations. If we fail to attract and retain the talent required
for our business, our business will be materially
harmed.
We are a relatively small company, and we depend to a great
extent on principal members of our management and scientific
staff. If we lose the services of any key personnel, in
particular, A.J. Kazimi, our Chief Executive Officer, it could
have a material adverse effect on our business prospects. We
currently have a key man life insurance policy covering the life
of Mr. Kazimi. We have entered into agreements with each of
our employees that contain restrictive covenants relating to
non-competition and non-solicitation of our customers and
suppliers for one year after termination of employment.
Nevertheless, each of our officers and key employees may
terminate his or her employment at any time without notice and
without cause or good reason, and so as a practical matter these
agreements do not guarantee the continued service of these
employees. Our success depends on our ability to attract and
retain highly qualified scientific, technical and managerial
personnel and research partners. Competition among
pharmaceutical companies for qualified employees is intense, and
we may not be able to retain existing personnel or attract and
retain qualified staff in the future. If we experience
difficulties in hiring and retaining personnel in key positions,
we could suffer from delays in product development, loss of
customers and sales and diversion of management resources, which
could adversely affect operating results.
We face potential
product liability exposure, and if successful claims are brought
against us, we may incur substantial liability for a product or
product candidate and may have to limit its
commercialization.
We face an inherent risk of product liability lawsuits related
to the testing of our product candidates and the commercial sale
of our products. An individual may bring a liability claim
against us if one of our product candidates or products causes,
or appears to have caused, an injury. If we cannot successfully
defend ourselves against the product liability claim, we may
incur substantial liabilities. Liability claims may result in:
|
|
Ø
|
decreased demand for our products;
|
|
Ø
|
injury to our reputation;
|
|
Ø
|
withdrawal of clinical trial participants;
|
|
Ø
|
significant litigation costs;
|
|
Ø
|
substantial monetary awards to or costly settlement with
patients;
|
|
Ø
|
product recalls;
|
|
Ø
|
loss of revenue; and
|
|
Ø
|
the inability to commercialize our product candidates.
|
We are highly dependent upon medical and patient perceptions of
us and the safety and quality of our products. We could be
adversely affected if we or our products are subject to negative
publicity. We could also be adversely affected if any of our
products or any similar products sold by other companies prove
to be, or are asserted to be, harmful to patients. Also, because
of our dependence upon medical and patient perceptions, any
adverse publicity associated with illness or other adverse
effects resulting from the use or misuse of our products or any
similar products sold by other companies could have a material
adverse impact on our results of operations.
We have product liability insurance that covers our clinical
trials and the marketing and sale of our products up to a
$10 million annual aggregate limit, subject to specified
deductibles. Our current or future insurance coverage may prove
insufficient to cover any liability claims brought against us.
14
Risk
factors
Because of the increasing costs of insurance coverage, we may
not be able to maintain insurance coverage at a reasonable cost
or obtain insurance coverage that will be adequate to satisfy
any liability that may arise.
We have never
paid cash dividends on our capital stock, and we do not
anticipate paying any cash dividends in the foreseeable
future.
We have never paid cash dividends on our capital stock. We do
not anticipate paying cash dividends to our shareholders in the
foreseeable future. The availability of funds for distributions
to shareholders will depend substantially on our earnings.
Furthermore, our loan agreement places certain restrictions on
payment of dividends. Even if we become able to pay dividends in
the future, we expect that we would retain such earnings to
enhance capital
and/or
reduce long-term debt.
RISKS RELATING TO
GOVERNMENT REGULATION
We are subject to
stringent government regulation. All of our products face
regulatory challenges.
Virtually all aspects of our business activities are regulated
by government agencies. The manufacturing, processing,
formulation, packaging, labeling, distribution, promotion and
sampling, and advertising of our products, and disposal of waste
products arising from such activities, are subject to
governmental regulation. These activities are regulated by one
or more of the FDA, the Federal Trade Commission, or the FTC,
the Consumer Product Safety Commission, the U.S. Department
of Agriculture and the U.S. Environmental Protection
Agency, or the EPA, as well as by comparable agencies in foreign
countries. These activities are also regulated by various
agencies of the states and localities in which our products are
sold. For more information, see BusinessGovernment
Regulation.
Like all pharmaceutical manufacturers, we are subject to
regulation by the FDA under the authority of the Federal Food,
Drug and Cosmetic Act, or the FDC Act. All new drugs
must be the subject of an FDA-approved new drug application, or
NDA, before they may be marketed in the U.S. The FDA has the
authority to withdraw existing NDA approvals and to review the
regulatory status of products marketed under the enforcement
policy. The FDA may require an approved NDA for any drug product
marketed under the enforcement policy if new information reveals
questions about the drugs safety and effectiveness. All
drugs must be manufactured in conformity with cGMP, and drug
products subject to an approved NDA must be manufactured,
processed, packaged, held and labeled in accordance with
information contained in the NDA. Since we rely on third parties
to manufacture our products, cGMP requirements directly affect
our third party manufacturers and indirectly affect us. The
manufacturing facilities of our third-party manufacturers are
continually subject to inspection by such governmental agencies,
and manufacturing operations could be interrupted or halted in
any such facilities if such inspections prove unsatisfactory.
Our third-party manufacturers are subject to periodic inspection
by the FDA to assure such compliance.
Pharmaceutical products must be distributed, sampled and
promoted in accordance with FDA requirements. The FDA also
regulates the advertising of prescription drugs. The FDA has the
authority to request post-approval commitments that can be
time-consuming and expensive to comply with.
Under the FDC Act, the federal government has extensive
enforcement powers over the activities of pharmaceutical
manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to, the authority to
initiate court action to seize unapproved or non-complying
products, to enjoin non-complying activities, to halt
manufacturing operations that are not in compliance with cGMP,
and to seek civil monetary and criminal penalties. The
initiation of any of these enforcement
15
Risk
factors
activities, including the restriction or prohibition on sales of
our products, could materially adversely affect our business,
financial condition and results of operations.
Any change in the FDAs enforcement policy could have a
material adverse effect on our business, financial condition and
results of operations.
We cannot determine what effect changes in regulations or
statutes or legal interpretation, when and if promulgated or
enacted, may have on our business in the future. Such changes
could, among other things, require:
|
|
Ø
|
changes to manufacturing methods;
|
|
Ø
|
expanded or different labeling;
|
|
Ø
|
recall, replacement or discontinuance of certain products;
|
|
Ø
|
additional record keeping; and
|
|
Ø
|
expanded documentation of the properties of certain products and
scientific substantiation.
|
Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of
operations.
RISKS RELATING TO
INTELLECTUAL PROPERTY
Our strategy to
secure and extend marketing exclusivity or patent rights may
provide only limited protection from competition.
We seek to secure and extend marketing exclusivity for our
products through a variety of means, including FDA exclusivity
and patent rights. Acetadote has been designated as an
orphan drug and is indicated to prevent or lessen
hepatic (liver) injury when administered intravenously within
eight to ten hours after ingesting quantities of acetaminophen
that are potentially toxic to the liver. The FDA is authorized
to grant orphan drug designation to drugs intended to treat a
rare disease or condition. If a product that has orphan drug
designation subsequently receives the first FDA approval for the
disease for which it has such designation, the product is
entitled to orphan drug exclusivity, which means that the FDA
may not approve any other applications to market another drug
using the same active ingredients for the same indication,
except in very limited circumstances, for seven years. To this
extent, Acetadote is protected until 2011 against competition
from another drug using the same active ingredient to treat the
same indication. Orphan drug marketing exclusivity does not,
however, protect a drug from competition by a different drug
marketed for the same indications.
We do not have composition of matter or
use patents for our marketed products. We do have a
U.S. patent, No. 6,727,286 for Caldolor, and some
related international patents, which are directed to ibuprofen
solution formulations, methods of making the same, and methods
of using the same, and which are related to our formulation and
manufacture of Caldolor. Additionally, the active ingredient in
Caldoloribuprofenis in the public domain, and if a
competitor were to develop a sufficiently distinct formulation,
it could develop and seek FDA approval for an ibuprofen product
that competes with Caldolor. Upon receipt of FDA approval in
June 2009, we received three-years of marketing exclusivity for
Caldolor.
Kristalose is manufactured under a contract with Inalco, which
owns U.S. Patent No. 5,480,491, related to the manufacture
of Kristalose. This patent is not directed to the composition or
use of Kristalose and does not prevent a competitor from
developing a formulation and developing and seeking FDA approval
for a product that competes with Kristalose.
16
Risk
factors
While we consider patent protection when evaluating product
acquisition opportunities, any products we acquire in the future
may not have significant patent protection. Neither the
U.S. Patent and Trademark Office nor the courts have a
consistent policy regarding the breadth of claims allowed or the
degree of protection afforded under many pharmaceutical patents.
Patent applications in the U.S. and many foreign
jurisdictions are typically not published until 18 months
following the filing date of the first related application, and
in some cases not at all. In addition, publication of
discoveries in scientific literature often lags significantly
behind actual discoveries. Therefore, neither we nor our
licensors can be certain that we or they were the first to make
the inventions claimed in our issued patents or pending patent
applications, or that we or they were the first to file for
protection of the inventions set forth in these patent
applications. In addition, changes in either patent laws or in
interpretations of patent laws in the U.S. and other countries
may diminish the value of our intellectual property or narrow
the scope of our patent protection. Furthermore, our competitors
may independently develop similar technologies or duplicate
technology developed by us in a manner that does not infringe
our patents or other intellectual property. As a result of these
factors, our patent rights may not provide any commercially
valuable protection from competing products.
If we are unable
to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products could be
adversely affected.
In addition to patents, we rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation
where we do not believe patent protection is appropriate or
attainable. For example, the manufacturing process for
Kristalose involves substantial trade secrets and proprietary
know-how. We have entered into confidentiality agreements with
certain key employees and consultants pursuant to which such
employees and consultants must assign to us any inventions
relating to our business if made by them while they are our
employees, as well as certain confidentiality agreements
relating to the acquisition of rights to products.
Confidentiality agreements can be breached, though, and we might
not have adequate remedies for any breach. Also, others could
acquire or independently develop similar technology.
We depend on our
licensors for the maintenance and enforcement of our
intellectual property and have limited, if any, control over the
amount or timing of resources that our licensors devote on our
behalf.
When we license products, we often depend on our licensors to
protect the proprietary rights covering those products. We have
limited, if any, control over the amount or timing of resources
that our licensors devote on our behalf or the priority they
place on maintaining patent or other rights and prosecuting
patent applications to our advantage. While any such licensor is
expected to be under contractual obligations to us to diligently
prosecute its patent applications and allow us the opportunity
to consult, review and comment on patent office communications,
we cannot be sure that it will perform as required. If a
licensor does not perform and if we do not assume the
maintenance of the licensed patents in sufficient time to make
required payments or filings with the appropriate governmental
agencies, we risk losing the benefit of all or some of those
patent rights.
If the use of our
technology conflicts with the intellectual property rights of
third parties, we may incur substantial liabilities, and we may
be unable to commercialize products based on this technology in
a profitable manner or at all.
Third parties, including our competitors, could have or acquire
patent rights that they could enforce against us. In addition,
we may be subject to claims from others that we are
misappropriating their trade secrets or confidential proprietary
information. If our products conflict with the intellectual
17
Risk
factors
property rights of others, they could bring legal action against
us or our licensors, licensees, manufacturers, customers or
collaborators. If we were found to be infringing a patent or
other intellectual property rights held by a third party, we
could be forced to seek a license to use the patented or
otherwise protected technology. We might not be able to obtain
such a license on terms acceptable to us or at all. If an
infringement or misappropriation legal action were to be brought
against us or our licensors, we would incur substantial costs in
defending the action. If such a dispute were to be resolved
against us, we could be subject to significant damages, and the
manufacturing or sale of one or more of our products could be
enjoined.
We may be
involved in lawsuits to protect or enforce our patents or the
patents of our collaborators or licensors, which could be
expensive and time consuming.
Competitors may infringe our patents or the patents of our
collaborators or licensors. To counter infringement or
unauthorized use, we may be required to file infringement
claims, which can be expensive and time-consuming. In addition,
in an infringement proceeding, a court may decide that a patent
of ours is not valid or is unenforceable, or may refuse to stop
the other party from using the technology at issue on the
grounds that our patents do not cover the technology in
question. An adverse result in any litigation or defense
proceeding could put one or more of our patents at risk of being
invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.
Interference proceedings brought by the U.S. Patent and
Trademark Office may be necessary to determine the priority of
inventions with respect to our patent applications or those of
our collaborators or licensors. Litigation or interference
proceedings may fail and, even if successful, may result in
substantial costs and distract our management. We may not be
able, alone or with our collaborators and licensors, to prevent
misappropriation of our proprietary rights, particularly in
countries where the laws may not protect such rights as fully as
in the U.S.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation,
some of our confidential information could be disclosed during
this type of litigation. In addition, there could be public
announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or
investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock.
If we breach any
of the agreements under which we license rights to our products
and product candidates from others, we could lose the ability to
continue commercialization of our products and development and
commercialization of our product candidates.
We have exclusive licenses for the marketing and sale of certain
products and may acquire additional licenses. Such licenses may
terminate prior to expiration if we breach our obligations under
the license agreement related to these pharmaceutical products.
For example, the licenses may terminate if we fail to meet
specified quality control standards, including cGMP with respect
to the products, or commit a material breach of other terms and
conditions of the licenses. Such early termination could have a
material adverse effect on our business, financial condition and
results of operations.
Our agreement with Inalco appoints us as the exclusive marketer,
seller and distributor of Kristalose in the U.S. Either we or
Inalco may terminate this agreement upon the breach of any
material provision of the agreement if the breach is not cured
within 45 days following written notice. If our agreement
with Inalco were terminated, we would lose our right to continue
commercialization of Kristalose in the U.S.
Under an agreement between us and Vanderbilt University, we have
received certain clinical data to support regulatory approval
for Caldolor. Either we or Vanderbilt may terminate this
agreement upon substantial breach of the agreement if the breach
is not cured within 45 days following written notice. If
18
Risk
factors
our agreement with Vanderbilt were terminated, we would lose our
right to use the data, and this loss might hinder our ability to
commercialize Caldolor in accordance with our plans.
RISKS RELATED TO
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operating
results are likely to fluctuate from period to period.
We are a relatively new company seeking to capture significant
growth. While our revenues and operating income have increased
over time, we anticipate that there may be fluctuations in our
future operating results. Potential causes of future
fluctuations in our operating results may include:
|
|
Ø |
Caldolor and other new product launches, which could increase
revenues but also increase sales and marketing expenses;
|
|
|
Ø
|
acquisition activity and other charges (such as for inventory
expiration);
|
|
Ø
|
increases in research and development expenses resulting from
the acquisition of a product candidate that requires significant
additional development;
|
|
Ø
|
changes in the competitive, regulatory or reimbursement
environment, which could drive down revenues or drive up sales
and marketing or compliance costs; and
|
|
Ø
|
unexpected product liability or intellectual property claims and
lawsuits.
|
See also Managements discussion and analysis of
financial condition and results of operations
Liquidity and capital resources. Fluctuation in operating
results, particularly if not anticipated by investors and other
members of the financial community, could add to volatility in
our stock price.
Our focus on
acquisitions as a growth strategy has created a large amount of
intangible assets whose amortization could negatively affect our
results of operations.
Our total assets include intangible assets related to our
acquisitions. As of March 31, 2009, intangible assets
relating to product and data acquisitions represented
approximately 27% of our total assets. We may never realize the
value of these assets. Generally accepted accounting principles
require that we evaluate on a regular basis whether events and
circumstances have occurred that indicate that all or a portion
of the carrying amount of the asset may no longer be
recoverable, in which case we would write down the value of the
asset and take a corresponding charge to earnings. Any
determination requiring the write-off of a significant portion
of unamortized intangible assets would adversely affect our
results of operations.
We may need
additional funding and may be unable to raise capital when
needed, which could force us to delay, reduce or eliminate our
product development or commercialization and marketing
efforts.
We may need to raise additional funds in order to meet the
capital requirements of running our business and acquiring and
developing new pharmaceutical products. If we require additional
funding, we may seek to sell common stock or other equity or
equity-linked securities, which could result in dilution to
purchasers of common stock in this offering. We may also seek to
raise capital through a debt financing, which would result in
ongoing debt-service payments and increased interest expense.
Any financings would also likely involve operational and
financial restrictions being imposed on us. We might also seek
to sell assets or rights in one or more commercial products or
product development programs. Additional capital might not be
available to us when we need it on acceptable terms or at all.
If we are unable to raise additional capital when needed, we
could be forced to scale back our operations to conserve cash.
19
Risk
factors
We have a
relatively short history of profitability and may not be able to
sustain or increase our net income levels.
We were incorporated in 1999 and incurred operating losses until
2004. We recorded our first year of profitability in 2004 and
have remained profitable in each of 2005, 2006, 2007 and 2008.
As of March 31, 2009, we had retained earnings of
$2.7 million, representing the amount by which our
historical profits have exceeded our historical losses. We may
not be able to maintain or improve our current levels of revenue
or net income. In such event, investors are likely to lose
confidence in our ability to grow, and our stock price would
suffer.
RISKS RELATED TO
THIS OFFERING AND AN INVESTMENT IN OUR STOCK
As a new
investor, you will experience immediate and substantial dilution
in the net tangible book value of your shares.
The initial public offering price of our common stock in this
offering is considerably more than the net tangible book value
per share of our outstanding common stock. Investors purchasing
shares of common stock in this offering will pay a price that
substantially exceeds the value of our tangible assets after
subtracting liabilities. As a result, investors in this offering
will:
|
|
Ø |
incur immediate dilution of $14.16 per share, based on an
assumed initial public offering price of $20.00 per share;
|
|
|
Ø |
contribute 85.9% of the total amount invested to date to fund
our company based on an assumed initial offering price to the
public of $20.00 per share;
|
|
|
Ø |
but will own only 29.3% of the shares of common stock
outstanding after the offering.
|
These percentages do not give effect to the exercise of options
and warrants to purchase up to an aggregate of
7,276,205 shares of common stock or the vesting of 6,550
shares of restricted stock, of which we have received notice
that 4,377,090 options will be exercised immediately prior to
this offering. See Dilution.
We may conduct substantial additional equity offerings or issue
equity as consideration in an acquisition or otherwise. These
future equity issuances, together with the exercise of
outstanding options or warrants, could result in future dilution
to investors.
The market price
of our common stock may fluctuate substantially.
The initial public offering price for the shares of our common
stock sold in this offering has been determined by negotiation
between the representatives of the underwriters and us. This
price may not reflect the market price of our common stock
following this offering. The price of our common stock may
decline. In addition, the market price of our common stock is
likely to be highly volatile and may fluctuate substantially.
The realization of any of the risks described in these
Risk factors could have a dramatic and material
adverse impact on the market price of our common stock. In
addition, securities class action litigation has often been
instituted against companies whose securities have experienced
periods of volatility in market price. Any such securities
litigation brought against us could result in substantial costs
and a diversion of managements attention and resources,
which could negatively impact our business, operating results
and financial condition.
20
Risk
factors
We will incur
increased costs as a result of operating as a public company,
and our management will be required to devote additional time to
new compliance initiatives.
We will incur increased costs as a result of operating as a
public company, and our management will be required to devote
additional time to new compliance initiatives. As a public
company, we will incur legal, accounting and other expenses that
we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well
as rules subsequently implemented by the SEC and Nasdaq, have
imposed various requirements on public companies, including
requiring establishment and maintenance of effective disclosure
and financial controls and changes in corporate governance
practices. These rules and regulations will increase our legal
and financial compliance costs and will render some activities
more time-consuming and costly.
The Sarbanes-Oxley Act will require, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must
perform system and process evaluation and testing of our
internal controls over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal controls over financial
reporting, beginning with our Annual Report on Form 10-K
for the fiscal year ending December 31, 2010, as required
by Section 404 of the Sarbanes-Oxley Act. Our testing, or
the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses.
Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management
efforts. Moreover, if we are not able to comply with the
requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identifies
deficiencies in our internal controls over financial reporting
that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to sanctions or
investigations by Nasdaq, the SEC or other regulatory
authorities, which would require additional financial and
management resources.
There may not be
a viable public market for our common stock.
Prior to this offering, there has been no public market for our
common stock, and a regular trading market might not develop or
continue after this offering. Moreover, the market price of our
common stock might decline below the initial public offering
price.
We will have
broad discretion in how we use the proceeds of this offering,
and we may not use these proceeds effectively, which could
affect our results of operations and cause our stock price to
decline.
We will have broad discretion over the use of proceeds from this
offering. We intend to use the net proceeds from this offering
to acquire new products and product candidates, to fund
continued development of Caldolor as well as other research,
marketing and development activities, and to fund working
capital, capital expenditures, reduction of bank debt and other
general corporate purposes. We have no present agreements with
respect to any such product acquisitions. We will have
considerable discretion in the application of the net proceeds,
and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for purposes
that do not increase our operating results or market value.
Until the net proceeds are used, they may be placed in
investments that do not produce significant income or that lose
value.
Future sales of
our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in
the public market after this offering or the perception that
these sales may occur could cause the market price of our common
stock to decline.
21
Risk
factors
In addition, the sale of these shares in the public market could
impair our ability to raise capital through the sale of
additional common or preferred stock. After this offering, we
will have 17,091,191 shares of common stock outstanding. Of
these shares, all shares sold in the offering, other than
shares, if any, purchased by our affiliates, will be freely
tradable.
Some provisions
of our third amended and restated charter, bylaws, credit
facility and Tennessee law may inhibit potential acquisition
bids that you may consider favorable.
Our corporate documents contain provisions that may enable our
board of directors to resist a change in control of our company
even if a change in control were to be considered favorable by
you and other shareholders. These provisions include:
|
|
Ø
|
the authorization of undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without shareholder approval;
|
|
Ø
|
advance notice procedures required for shareholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of shareholders;
|
|
Ø
|
limitations on persons authorized to call a special meeting of
shareholders;
|
|
Ø
|
a staggered board of directors;
|
|
|
Ø |
a restriction prohibiting shareholders from removing directors
without cause;
|
|
|
Ø
|
a requirement that vacancies in directorships are to be filled
by a majority of the directors then in office and the number of
directors is to be fixed by the board of directors; and
|
|
Ø
|
no cumulative voting.
|
These and other provisions contained in our third amended and
restated charter and bylaws could delay or discourage
transactions involving an actual or potential change in control
of us or our management, including transactions in which our
shareholders might otherwise receive a premium for their shares
over then current prices, and may limit the ability of
shareholders to remove our current management or approve
transactions that our shareholders may deem to be in their best
interests and, therefore, could adversely affect the price of
our common stock.
Under our bank credit agreement, it is an event of default if
any person or entity obtains ownership or control, in one or a
series of transactions, of more than 30% of our common stock or
30% of the voting power entitled to vote in the election of
members of our board of directors.
In addition, we are subject to control share acquisitions
provisions and affiliated transaction provision of the Tennessee
Business Corporation Act, the applications of which may have the
effect of delaying or preventing a merger, takeover or other
change in control of us and therefore could discourage attempts
to acquire our company. For more information, see
Description of capital stockAnti-takeover effects of
Tennessee law and provisions of our charter and bylaws.
Some of our
shareholders have registration rights, which could impair our
ability to raise capital or involve us in disputes.
Holders of our preferred stock have rights to be included in
registration statements we file with the U.S. SEC. These
rights could interfere with our ability to raise capital. To the
extent that these rights might have applied to this offering, we
have obtained waivers from preferred holders for all but
approximately 1% of our shares to be outstanding after this
offering. We do not believe that these rights apply to this
offering, although the non-waiving parties might claim otherwise.
22
Special note
regarding forward-looking statements
Statements in this prospectus that are not historical factual
statements are forward-looking statements.
Forward-looking statements include, among other things,
statements regarding our intent, belief or expectations, and can
be identified by the use of terminology such as may,
will, expect, believe,
intend, plan, estimate,
should, seek, anticipate and
other comparable terms or the negative thereof. In addition, we,
through our senior management, from time to time make
forward-looking oral and written public statements concerning
our expected future operations and other developments. While
forward-looking statements reflect our good-faith beliefs and
best judgment based upon current information, they are not
guarantees of future performance and are subject to known and
unknown risks and uncertainties, including those mentioned in
Risk factors, Managements discussion and
analysis of financial condition and results of operations
and elsewhere in this prospectus. Actual results may differ
materially from the expectations contained in the
forward-looking statements as a result of various factors. Such
factors include, without limitation:
|
|
Ø
|
legislative, regulatory or other changes in the healthcare
industry at the local, state or federal level which increase the
costs of, or otherwise affect our operations;
|
|
Ø
|
changes in reimbursement available to us by government or
private payers, including changes in Medicare and Medicaid
payment levels and availability of third-party insurance
coverage;
|
|
Ø
|
competition; and
|
|
Ø
|
changes in national or regional economic conditions, including
changes in interest rates and availability and cost of capital
to us.
|
23
Use of proceeds
We estimate that the net proceeds to us from the sale of the
5,000,000 shares of common stock offered hereby will be
approximately $89.1 million, assuming an initial public
offering price of $20.00, which is the midpoint of the range
listed on the cover page of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment
option in full, we estimate that our net proceeds will be
approximately $103.1 million. Each $1.00 increase
(decrease) in the assumed initial public offering price of
$20.00 per share would increase (decrease) the net proceeds
to us from this offering by approximately $4.7 million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
Depending on market conditions at the time of pricing of this
offering and other considerations, we may sell fewer or more
shares than the number set forth on the cover page of this
prospectus.
We plan to use the net proceeds from this offering principally
for acquisitions of product candidates, new products,
intellectual property rights to products or companies that
complement our business. We actively seek out acquisitions in
the markets in which we have developed our sales
forceshospital acute care and gastroenterology. We
concentrate our efforts on products that are in the late stages
of development or that are currently marketed. We do not
currently have a letter of intent or definitive purchase
agreement for any potential target. We may undertake one large
acquisition, utilizing substantially all of the net proceeds
from this offering, or we may engage in one or more smaller
acquisitions. It is also possible that we do not identify and
complete any acquisitions. Our bank credit agreement requires
that we obtain the consent of the bank prior to making
acquisitions unless the acquisitions meet certain criteria. See
Managements discussion and analysis of financial
condition and results of operations Liquidity and
capital resources.
Subject to the foregoing, we currently expect to use our net
proceeds from this offering as follows:
|
|
Ø |
the majority for potential acquisition of rights to additional
products or product candidates, as discussed above;
|
|
|
Ø |
approximately $3.1 million for ongoing clinical work,
product development and other costs related to Caldolor;
|
|
|
Ø |
approximately $8.4 million for expected commercial
introduction of Caldolor to the U.S. market;
|
|
|
Ø |
approximately $6.6 million for expansion of our hospital
sales force to a total of approximately 77 representatives and
managers;
|
|
|
Ø |
approximately $4.2 million for repayment of the term loan
under our Third Amended and Restated Loan Agreement with Bank of
America;
|
|
|
Ø
|
approximately $1.0 million for product development by CET,
our 85%-owned subsidiary; and
|
|
Ø
|
the remainder to fund working capital and for general corporate
purposes.
|
The expected uses of net proceeds of this offering represent our
current intentions based upon our present plans and business
conditions. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses for the net proceeds
to be received upon completion of this offering. Accordingly,
our management will have broad discretion in the application of
the net proceeds, and you will be relying on the judgment of our
management regarding the application of the proceeds of this
offering.
The amounts we actually expend for the above-specified purposes
may vary depending on a number of factors, including the extent
of our success in identifying and completing acquisitions,
changes in our business strategy, the amount of our future
revenues and expenses and our future cash flow. If our
24
Use of
proceeds
future revenues or cash flow are less than we currently
anticipate, we may need to support our ongoing business
operations with net proceeds from this offering that we would
otherwise use to support acquisitions and other methods of
growth.
Until we use the net proceeds from this offering for the above
purposes, we intend to invest the funds in short-term,
investment-grade, interest-bearing securities as directed by our
investment policy. Our goals with respect to the investment of
these net proceeds are capital preservation and liquidity so
that such funds are readily available.
Dividend policy
We have not declared or paid any cash dividends on our common
stock and do not anticipate paying cash dividends on our common
stock for the foreseeable future. We currently intend to retain
any future earnings for use in the operation of our business and
to fund future growth. The payment of dividends by us on our
common or preferred stock is limited by our loan agreement with
Bank of America. Any future decision to declare and pay
dividends will be at the sole discretion of our board of
directors.
25
Capitalization
The following table sets forth our capitalization as of
March 31, 2009:
|
|
Ø
|
on an actual basis;
|
|
Ø
|
on a pro forma basis to give effect to the conversion of all of
our outstanding preferred stock into 1,625,498 shares of
common stock; and
|
|
|
Ø |
on a pro forma as adjusted basis to give further effect to the
sale of 5,000,000 shares of common stock that we are
offering at an assumed initial public offering price of
$20.00 per share, which is the midpoint of the range listed
on the cover page of this prospectus, after deducting
underwriting discounts and commissions and estimated offering
expenses to be paid by us.
|
You should read the following table in conjunction with our
consolidated financial statements and related notes and
Managements discussion and analysis of financial
condition and results of operations appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro
Forma
|
|
|
as
Adjusted(1)
|
|
|
|
|
|
(in
thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
10,072
|
|
|
$
|
10,072
|
|
|
$
|
95,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and long-term obligations (less current portion)
|
|
$
|
5,545
|
|
|
$
|
5,545
|
|
|
$
|
2,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no par value; 3,000,000 shares
authorized, 812,749 shares issued and outstanding, actual;
and 3,000,000 shares authorized, no shares issued or
outstanding, pro forma and pro forma as
adjusted(2)
|
|
|
2,604
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 100,000,000 shares authorized,
10,465,693 shares issued and outstanding, actual;
100,000,000 shares authorized, 12,091,191 shares
issued and outstanding, pro forma; and 100,000,000 shares
authorized, 17,091,191 shares issued and outstanding, pro
forma as
adjusted(3)
|
|
|
13,191
|
|
|
|
15,795
|
|
|
|
104,895
|
|
Retained earnings
|
|
|
2,669
|
|
|
|
2,669
|
|
|
|
2,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
18,464
|
|
|
|
18,464
|
|
|
|
107,564
|
|
Noncontrolling interests
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity(4)
|
|
|
18,452
|
|
|
|
18,452
|
|
|
|
107,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization(4)
|
|
$
|
23,997
|
|
|
$
|
23,997
|
|
|
$
|
109,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Each $1.00 increase or decrease in
the assumed initial public offering price of $20.00 per
share would increase or decrease, as applicable, the amount of
cash and cash equivalents, total shareholders equity,
total equity and total capitalization by approximately
$4.7 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions payable by us. These amounts exclude adjustments
related to the expected Option Transaction as described in the
section entitled Certain relationships and related party
transactions. If these adjustments were included and if
the shares to be repurchased in the first quarter of 2010 were
repurchased on March 31, 2009 at the offering price of
$20.00 per share, then as of March 31, 2009, cash and
cash equivalents would have been $81,275, long-term debt and
long-term obligations (less current portion) would have been
$18,712, common stock outstanding would have been
19,939,520 shares, common stock (in dollars) would have
been $104,442, retained earnings would have been $1,513, total
shareholders equity would have been $105,956, total equity
would have been $105,944, and total capitalization would have
been $124,655. These amounts exclude the effect of payment of
the exercise price of approximately $2.4 million which may
be settled in cash or tender of 119,670 shares (assuming an
offering price of $20.00 per share).
|
|
|
|
(2)
|
|
Upon the completion of this
offering, the outstanding shares of preferred stock will convert
into an aggregate of 1,625,498 shares of common stock.
|
26
Capitalization
|
|
|
|
Ø
|
6,550 shares of unvested restricted
common stock;
|
|
|
|
|
Ø
|
7,207,247 shares of common
stock issuable upon exercise of outstanding options at a
weighted-average exercise price of $2.04 per share for which we
have received notice that, upon the pricing of this offering,
certain holders will exercise options to purchase an aggregate
of 4,377,090 shares and that they are electing to use a
net-share settlement that permits option holders to use
1,452,321 shares acquired upon exercise to satisfy their
minimum statutory withholding requirements of approximately
$29.0 million;
|
|
|
|
|
Ø
|
2,361,322 shares of common
stock reserved for future issuance under our current incentive
plans;
|
|
|
|
|
Ø
|
68,958 shares of common stock
issuable upon the exercise of outstanding warrants at a
weighted-average exercise price of $6.17 per share; and
|
|
|
|
|
Ø
|
10,000 shares of common stock
issuable to a research institution as a result of FDA approval
of Caldolor.
|
|
|
|
(4)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
27
Dilution
Our net tangible book value as of March 31, 2009 was
$10.7 million, or $1.02 per share. Net tangible book value
per share represents the amount of our total tangible assets
less total liabilities, divided by the total number of shares of
common stock outstanding. Our pro forma net tangible book value
per share as of March 31, 2009 was $0.89. Pro forma net
tangible book value per share gives effect to the conversion of
all of our preferred stock into 1,625,498 shares of our
common stock, which will occur upon completion of this offering.
After giving further effect to the sale by us of
5,000,000 shares of common stock in this offering at an
assumed initial public offering price of $20.00 per share,
which is the midpoint of the range listed on the cover page of
this prospectus, and after taking into account the automatic
conversion of our preferred stock upon completion of this
offering, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma as adjusted net tangible book value as of
March 31, 2009 would have been approximately
$99.8 million, or approximately $5.84 per share. This
amount represents an immediate increase in pro forma net
tangible book value of $4.95 per share to our existing
shareholders and an immediate dilution in pro forma net tangible
book value of approximately $14.16 per share to new
investors purchasing shares of common stock in this offering. We
determine dilution by subtracting the pro forma as adjusted net
tangible book value per share after this offering from the
amount of cash that a new investor paid for a share of common
stock.
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
20.00
|
|
Net tangible book value per share as of March 31, 2009
|
|
$
|
1.02
|
|
|
|
|
|
Effect on net tangible book value per share on conversion of
preferred stock into common stock
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of March 31,
2009
|
|
|
0.89
|
|
|
|
|
|
Increase per share attributable to this offering
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
5.84
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
14.16
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $20.00 per share would increase
(decrease) our pro forma as adjusted net tangible book value as
of March 31, 2009 by approximately $4.7 million, the
pro forma as adjusted net tangible book value per share after
this offering by $0.27 and the dilution in pro forma as adjusted
net tangible book value to new investors in this offering by
$0.73 per share, assuming the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
In addition, the above discussion and table do not account for
the vesting of 6,550 shares of restricted stock or the exercise
of stock options and warrants after March 31, 2009. As of
March 31, 2009, we had outstanding options to purchase a
total of 7,207,247 shares of common stock at a
weighted-average exercise price of $2.04 per share and
outstanding warrants to purchase a total of 68,958 shares of
common stock at a weighted-average exercise price of
$6.17 per share. If all such options and warrants had been
exercised and the restricted stock had vested as of
March 31, 2009, pro forma as adjusted net tangible book
value per share, exclusive of the expected future tax benefit
(deferred tax asset) of approximately $40.0 million arising
from the exercise of certain options, would have been
$4.72 per share, and dilution to new investors would have
been $15.28 per share. We have received notice that, upon
the closing of this offering, in connection with the Option
Transaction as described in the section Certain
relationships and related party transactions, certain
holders will exercise options to purchase 4,377,090 of these
shares using a net-share settlement providing for the option
holders to use
28
Dilution
1,452,321 shares acquired upon exercise to satisfy the
minimum statutory withholding requirements of approximately
$29.0 million.
The following table summarizes, as of March 31, 2009, the
differences between the number of shares purchased from us, the
total consideration paid to us and the average price per share
that existing shareholders and new investors paid. The table
gives effect to the conversion of all of our outstanding
preferred stock into 1,625,498 shares of common stock,
which will occur upon completion of this offering. The
calculation below is based on an assumed initial public offering
price of $20.00 per share, which is the midpoint of the
range listed on the cover page of this prospectus, and before
deducting underwriting discounts and commissions and estimated
offering expenses that we must pay.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Total
Shares
|
|
|
Total
Consideration
|
|
|
Price
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
per
Share
|
|
|
|
|
Existing shareholders
|
|
|
12,091,191
|
|
|
|
70.7
|
%
|
|
$
|
16,425,468
|
|
|
|
14.1
|
%
|
|
$
|
1.36
|
|
New investors
|
|
|
5,000,000
|
|
|
|
29.3
|
%
|
|
|
100,000,000
|
|
|
|
85.9
|
%
|
|
|
20.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,091,191
|
|
|
|
100.0
|
%
|
|
$
|
116,425,468
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming that the 6,550 shares of restricted stock had vested,
that all options and warrants outstanding as of March 31,
2009 had been exercised for 7,276,205 shares of common
stock, and the aggregate exercise price of approximately
$15.1 million had been applied to repurchase
756,423 shares of common stock (at a repurchase price equal
to the assumed initial public offering price of $20.00 per
share, which is the midpoint of the range listed on the cover
page of this prospectus), new investors would have purchased
21.2% of our shares of common stock outstanding after this
offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of $20.00 per share would increase
(decrease) total consideration paid to us by investors
participating in this offering by approximately
$4.7 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
The discussion and tables above assume no exercise of the
underwriters over-allotment option. If the
underwriters over-allotment option is exercised in full
(but assuming no exercise of outstanding options or warrants or
vesting of restricted stock), the number of shares of common
stock held by existing shareholders would be reduced to 67.8% of
the total number of shares of common stock to be outstanding
after this offering, and the number of shares of common stock
held by investors participating in this offering would be 32.2%
of the total number of shares of common stock to be outstanding
after this offering.
29
Selected
consolidated financial data
The selected consolidated financial data set forth below should
be read in conjunction with the consolidated financial
statements and related notes and Managements
discussion and analysis of financial condition and results of
operation and other financial information appearing
elsewhere in this prospectus. The consolidated statement of
income data for the years ended December 31, 2006, 2007 and
2008 and consolidated balance sheet data as of December 31,
2007 and 2008 are derived from consolidated financial statements
audited by KPMG LLP and are included elsewhere in this
prospectus. The consolidated statements of income data for the
years ended December 31, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2004, 2005 and 2006
have been derived from our audited consolidated financial
statements that do not appear in this prospectus. The
consolidated statements of income data for the three months
ended March 31, 2008 and 2009 and the consolidated balance
sheet data as of March 31, 2009 have been derived from our
unaudited financial statements which are included elsewhere in
this prospectus. Our unaudited consolidated financial statements
include, in the opinion of management, all adjustments
consisting of only normal recurring adjustments necessary for a
fair presentation of these statements. The historical results
are not necessarily indicative of the results to be expected for
any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
Statement of
income
data(1):
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
Net revenues
|
|
$
|
12,032
|
|
|
$
|
10,690
|
|
|
$
|
17,815
|
|
|
$
|
28,064
|
|
|
$
|
35,075
|
|
|
$
|
8,304
|
|
|
$
|
9,405
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
816
|
|
|
|
533
|
|
|
|
2,399
|
|
|
|
2,670
|
|
|
|
3,046
|
|
|
|
755
|
|
|
|
733
|
|
Selling and marketing
|
|
|
6,802
|
|
|
|
5,647
|
|
|
|
7,349
|
|
|
|
10,053
|
|
|
|
14,387
|
|
|
|
3,364
|
|
|
|
4,140
|
|
Research and development
|
|
|
746
|
|
|
|
1,158
|
|
|
|
2,233
|
|
|
|
3,694
|
|
|
|
4,429
|
|
|
|
1,110
|
|
|
|
770
|
|
General and administrative
|
|
|
2,358
|
|
|
|
2,588
|
|
|
|
2,999
|
|
|
|
4,138
|
|
|
|
5,140
|
|
|
|
1,083
|
|
|
|
1,445
|
|
Amortization of product license rights
|
|
|
|
|
|
|
|
|
|
|
515
|
|
|
|
687
|
|
|
|
687
|
|
|
|
172
|
|
|
|
172
|
|
Other
|
|
|
6
|
|
|
|
13
|
|
|
|
96
|
|
|
|
97
|
|
|
|
104
|
|
|
|
26
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
10,729
|
|
|
|
9,940
|
|
|
|
15,592
|
|
|
|
21,338
|
|
|
|
27,793
|
|
|
|
6,510
|
|
|
|
7,288
|
|
Gain on insurance recovery
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,569
|
|
|
|
750
|
|
|
|
2,224
|
|
|
|
6,725
|
|
|
|
7,282
|
|
|
|
1,794
|
|
|
|
2,117
|
|
Interest income
|
|
|
1
|
|
|
|
89
|
|
|
|
209
|
|
|
|
383
|
|
|
|
241
|
|
|
|
82
|
|
|
|
18
|
|
Interest expense
|
|
|
(1,012
|
)
|
|
|
(63
|
)
|
|
|
(722
|
)
|
|
|
(640
|
)
|
|
|
(213
|
)
|
|
|
(114
|
)
|
|
|
(98
|
)
|
Other expense
|
|
|
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
558
|
|
|
|
770
|
|
|
|
1,708
|
|
|
|
6,469
|
|
|
|
7,310
|
|
|
|
1,762
|
|
|
|
2,037
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
1,184
|
|
|
|
2,697
|
|
|
|
(2,424
|
)
|
|
|
(2,544
|
)
|
|
|
(367
|
)
|
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
558
|
|
|
|
1,954
|
|
|
|
4,404
|
|
|
|
4,044
|
|
|
|
4,766
|
|
|
|
1,395
|
|
|
|
1,206
|
|
Net loss at subsidiary attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
558
|
|
|
$
|
1,954
|
|
|
$
|
4,404
|
|
|
$
|
4,044
|
|
|
$
|
4,766
|
|
|
$
|
1,395
|
|
|
$
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common shareholdersbasic
|
|
$
|
0.06
|
|
|
$
|
0.21
|
|
|
$
|
0.45
|
|
|
$
|
0.40
|
|
|
$
|
0.47
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Selected
consolidated financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
Statement of
income
data(1):
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
Earnings per share attributable to common
shareholdersdiluted
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.27
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstandingbasic
|
|
|
9,082
|
|
|
|
9,496
|
|
|
|
9,797
|
|
|
|
10,032
|
|
|
|
10,143
|
|
|
|
10,094
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstandingdiluted
|
|
|
15,482
|
|
|
|
16,306
|
|
|
|
16,454
|
|
|
|
16,582
|
|
|
|
16,540
|
|
|
|
16,412
|
|
|
|
16,127
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
As of
March 31,
|
|
Balance sheet
data:
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
(in
thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
516
|
|
|
$
|
5,536
|
|
|
$
|
6,255
|
|
|
$
|
10,815
|
|
|
$
|
11,830
|
|
|
$
|
10,072
|
|
Working capital
|
|
|
262
|
|
|
|
5,640
|
|
|
|
3,945
|
|
|
|
6,669
|
|
|
|
10,104
|
|
|
|
11,262
|
|
Total assets
|
|
|
4,507
|
|
|
|
10,173
|
|
|
|
26,481
|
|
|
|
28,919
|
|
|
|
31,119
|
|
|
|
30,986
|
|
Total long-term debt and other long-term obligations (including
current portion)
|
|
|
2,436
|
|
|
|
2,398
|
|
|
|
10,543
|
|
|
|
7,623
|
|
|
|
7,666
|
|
|
|
7,261
|
|
Convertible preferred stock
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,743
|
|
|
|
2,604
|
|
|
|
2,604
|
|
Retained earnings (accumulated deficit)
|
|
|
(13,719
|
)
|
|
|
(11,764
|
)
|
|
|
(7,360
|
)
|
|
|
(3,316
|
)
|
|
|
1,451
|
|
|
|
2,669
|
|
Total equity (deficit)
|
|
|
(22
|
)
|
|
|
6,234
|
|
|
|
11,126
|
|
|
|
16,746
|
|
|
|
17,555
|
|
|
|
18,452
|
|
31
Managements
discussion and analysis of financial condition and results of
operations
The following discussion and analysis of our financial
position and results of operations should be read together with
our audited consolidated financial statements and related notes
appearing elsewhere in this prospectus. This discussion and
analysis may contain forward-looking statements that involve
risks and uncertainties. You should review the Risk
factors section of this prospectus for a discussion of
important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements described in the following discussion
and analysis.
OVERVIEW
We are a specialty pharmaceutical company focused on the
acquisition, development and commercialization of branded,
prescription products. We are building our product portfolio
primarily by acquiring rights to FDA-approved and late-stage
development products and marketing them to specialty physician
segments. Our primary target markets are hospital acute care and
gastroenterology. Our current portfolio consists of two products
marketed in the United States and one product recently approved
by the FDA.
We pursued the development of Acetadote for the treatment of
acetaminophen poisoning and acquired rights to clinical data to
support its approval. Approval of the product was obtained in
January 2004 and we began to market Acetadote in the second
quarter of 2004 and launched the product with a dedicated
hospital sales force. In March 2006, we received approval from
the FDA for the use of Acetadote in pediatric patients.
We gained access to marketed gastroenterology products by
negotiating co-promotion agreements with the original developers
of these products. These agreements allowed us to enter the
gastroenterology market with minimal up-front costs and limited
ongoing operating risk. In 2005, we made a strategic decision to
de-emphasize our reliance on co-promotion agreements as a
primary growth driver. In April 2006, we acquired exclusive
commercial rights in the U.S. to Kristalose, a
gastroenterology product we had previously co-promoted under an
arrangement with Bertek Pharmaceuticals Inc., a subsidiary of
Mylan Laboratories Inc. In September 2006, we re-launched
Kristalose under the Cumberland brand with a dedicated field
sales force targeting gastroenterologists and other high
prescribers of laxative products.
Our research and development expenses have continued to grow
because of our program to develop Caldolor. We completed the
clinical program for Caldolor intended to support regulatory
approval in 2008 and received that approval in June 2009.
We expect research and development expenses to continue to be
significant as we continue clinical work related to Caldolor and
other products.
We have funded our operations with private equity capital of
approximately $14 million since our inception in 1999. We
have supplemented this equity funding by re-investing our
profits and utilizing our credit facilities in order to support
our operations.
Prior to 2007, our sales forces were contracted to us by a third
party. In January 2007, we brought the hospital sales force
in-house via our wholly-owned subsidiary, Cumberland Pharma
Sales Corp. We continue to outsource the dedicated
gastroenterology sales force. All expenses associated with the
sales forces are included in selling and marketing expense.
In 2000, we formed CET with Vanderbilt University and Tennessee
Technology Development Corporation to identify early-stage drug
development activities. CET partners with universities and other
research organizations to advance promising, early-stage product
candidates through the development process and on to
commercialization.
32
Managements
discussion and analysis of financial condition and results of
operations
Our operating results have fluctuated in the past and are likely
to fluctuate in the future. These fluctuations can result from
competitive factors, new product acquisitions or introductions,
the nature, scope and results of our research and development
programs, pursuit of our growth strategy and other factors. As a
result of these fluctuations, our historical financial results
are not necessarily indicative of future results.
We were incorporated in 1999 and have been headquartered in
Nashville, Tennessee since inception.
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND
ESTIMATES
Accounting
Estimates and Judgments
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the period. We base our estimates on past
experience and on other factors we deem reasonable given the
circumstances. Past results help form the basis of our judgments
about the carrying value of assets and liabilities that are not
determined from other sources. Actual results could differ from
these estimates. These estimates, judgments and assumptions are
most critical with respect to our accounting for revenue
recognition, provision for income taxes, stock-based
compensation, research and development accounting, and
intangible assets.
As of March 31, 2009, we have capitalized $3.5 million
of costs associated with our initial public offering in
accordance with SEC Staff Accounting Bulletin Topic 5A. If
events or circumstances were to change, we may be required to
expense these costs in a future period.
Revenue
Recognition
We recognize revenue in accordance with the SECs Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, as amended by Staff Accounting
Bulletin No. 104 (together, SAB 101), and
Statement of Financial Accounting Standards No. 48,
Revenue Recognition When Right of Return Exists
(SFAS 48).
Our revenue is derived primarily from the product sales of
Acetadote and Kristalose. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectability is probable.
Delivery is considered to have occurred upon either shipment of
the product or arrival at its destination based on the shipping
terms of the transaction. When these conditions are satisfied,
we recognize gross product revenue, which is the price we charge
generally to our wholesalers for a particular product.
Our net product revenue reflects the reduction of gross product
revenue at the time of initial sales recognition for estimated
accounts receivable allowances for chargebacks, discounts and
damaged product as well as provisions for sales related accruals
of rebates, product returns and administrative fees and fee for
services. Our financial statements reflect accounts receivable
allowances of $0.1 million, $0.1 million and
$0.1 million as of December 31, 2007 and 2008 and
March 31, 2009, respectively, for chargebacks, discounts
and allowances for product damaged in shipment. We had accrued
liabilities of $0.7 million, $1.0 million and
$1.3 million as of December 31, 2007 and 2008 and
March 31, 2009, respectively, for rebates, product returns,
service fees, and administrative fees.
33
Managements
discussion and analysis of financial condition and results of
operations
The following table reflects our sales-related accrual activity:
|
|
|
|
|
|
|
Sales Related
Accruals
|
|
|
Balance as of December 31, 2006
|
|
$
|
742,678
|
|
Current Provision
|
|
|
1,194,869
|
|
Current Provision for Prior Period Sales
|
|
|
(44,252
|
)
|
Actual Returns/Credits
|
|
|
(1,154,933
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
738,362
|
|
Current Provision
|
|
|
1,690,134
|
|
Current Provision for Prior Period Sales
|
|
|
(73,960
|
)
|
Actual Returns/Credits
|
|
|
(1,314,333
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
1,040,203
|
|
Current Provision
|
|
|
626,890
|
|
Current Provision for Prior Period Sales
|
|
|
58,000
|
|
Actual Returns/Credits
|
|
|
(424,911
|
)
|
|
|
|
|
|
Balance as of March 31, 2009
|
|
$
|
1,300,182
|
|
|
|
|
|
|
The allowances for chargebacks, discounts, and damaged products
and sales related accruals for rebates and product returns are
determined on a
product-by-product
analysis and are established by management as our best estimate
at the time of sale based on each products historical
experience, adjusted to reflect known changes in the factors
that impact such allowances and accruals. Additionally, these
allowances and accruals are established based on the contractual
terms with customers; analysis of historical levels of
discounts, returns, chargebacks and rebates; communication with
customers, and purchased information about the rate of
prescriptions being written and the level of inventory remaining
in the distribution channel, if known; as well as expectations
about the market for each product, including any anticipated
introduction of competitive products.
The allowances for chargebacks and accruals for rebates and
product returns are the most significant estimates used in the
recognition of our revenue from product sales. Of the accounts
receivable allowances and our sales related accruals, our
accrual for rebates and product returns represent the majority
of the balance. Sales related accrued liabilities totaled
$0.7 million, $1.0 million and $1.3 million as of
December 31, 2007 and 2008 and March 31, 2009,
respectively. Of these amounts, our estimated liability for
rebates represented $0.3 million, $0.1 million and
$0.2 million, respectively, while our accrual for product
returns totaled $0.3 million, $0.6 million and
$0.7 million, respectively. If the actual amount of cash
discounts, chargebacks, rebates, and product returns differ from
the amounts estimated by management, material differences may
result from the amount of our revenue recognized from product
sales. A change in our rebate estimate of one percentage point
would have impacted net sales by approximately $96,000 and
$102,000 for the years ended December 31, 2007 and 2008,
respectively. A change in our product return estimate of one
percentage point would have impacted net sales by $302,000 and
$377,000 for the years ended December 31, 2007 and 2008,
respectively. Our product returns for expired product are not
tracked against specific periods. Any expired product return
would be from a prior period, given the shelf-life of the
products.
From January 2006 through part of April 2006, we recorded
contract sales revenue which was based on co-promotion
agreements primarily with Bertek Pharmaceuticals Inc., for the
sales of Kristalose. Co-promotion fees were calculated based on
a percent of gross sales or similar calculation. Contract sales
revenue is included in net revenues.
34
Managements
discussion and analysis of financial condition and results of
operations
In 2005, we allowed customers to purchase additional product
prior to a scheduled price increase. Revenue for shipments of
these purchases was recognized in accordance with our stated
revenue recognition policy. As a general rule, effective
January 1, 2006, we no longer offer these or any other type
of incentive purchases to our customers. We occasionally make an
exception to this policy, when we offer odd-lot quantities at a
slightly reduced price or when a customer opens a new facility
and requests special terms on their initial purchase. To date,
we believe these types of transactions have not been material.
Moreover, when we offer special terms, we review the transaction
against our revenue recognition policy for proper treatment. If
we determine such transactions become material, we will disclose
the impact in the notes to our financial statements.
While we do not have regular access to our customers
inventory levels, we review each order from all of our
customers. To the extent that an order reflects more than a
normal purchasing pattern, management discusses the order with
the customer prior to agreeing to process the order.
Other income, which is included in net revenues, includes rental
and grant income. Other income was less than one percent of net
revenues in 2008.
Income
Taxes
We provide for deferred taxes using the asset and liability
approach. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
operating loss and tax credit carry-forwards and differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Our
principal differences are related to the timing of deductibility
of certain items such as depreciation, amortization, and expense
for options issued to nonemployees. Deferred tax assets and
liabilities are measured using managements estimate of tax
rates expected to apply to taxable income in the years in which
management believes those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. In order to
fully utilize the deferred tax asset of $1.5 million as of
December 31, 2008, we will need to generate future taxable
income of approximately $7.2 million prior to the
expiration of the net operating loss carry-forwards in 2023.
Stock-Based
Compensation
We determine our share value on a contemporaneous basis when we
issue shares of common stock and options to purchase shares of
our common stock. Our board of directors establishes a share
value of the common stock based on a recommendation by
management and its assessment of several factors, including:
|
|
Ø
|
the fact that, prior to this offering, our common stock has not
traded on a public market;
|
|
Ø
|
reports by management of arms length negotiations with
third parties who accept our common stock as consideration for
services rendered;
|
|
Ø
|
our performance and the status of our research and product
development efforts;
|
|
Ø
|
review of third-party valuation analysis secured from time to
time by management, such as those secured from Morgan Joseph
& Co. Inc. most recently in December 2008; and
|
35
Managements
discussion and analysis of financial condition and results of
operations
|
|
Ø |
the boards consideration of the timing of a liquidity
event (such as an initial public offering, merger, or sale of
our company), given our boards consideration of existing
market conditions.
|
In preparing its recommendation for our board, our management
analyzes our revenue and expense projections, along with
financial assumptions (including anticipation of future events).
We have historically estimated a range for the value of our
company as an enterprise, based on multiples of revenues,
EBITDA, and earnings. We then adjust the range of enterprise
values for cash and debt in order to determine the range of
equity values of our company. We divide the equity values by the
total number of common shares outstanding or subject to issuance
upon the exercise or conversion of all outstanding options,
warrants, and shares of preferred stock to establish the per
share price range. In allocating equity value to preferred and
common shares, we consider the features of common and preferred
shares, recognizing that dividend and voting rights are the same
for each and that the primary difference is a liquidation
preference of $3.25 per share for preferred shares. After
considering the range of values in December 2008, we determined
that the equity value of our company was approximately
$254 million. In the event of liquidation, aggregate
preferential payments to holders of our preferred stock would be
less than $2.7 million. We have evaluated the preference
related to these potential payments and determined that its
value is not material in relation to our companys overall
equity value or on a per share basis. In recommending a specific
price within the range of values, management makes subjective
judgments based upon its current assessment of our historical
and projected performance, general market conditions, and
similar subjective criteria that management deems appropriate.
All valuation analyses are performed contemporaneously. Most
recently in December 2008, Morgan Joseph & Co. Inc.,
acting in connection with its role as our financial advisor,
assisted management in preparing its valuation analysis for
board review.
Prior to January 1, 2006, we applied the
intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FIN No. 44, Accounting
for Certain Transactions Involving Stock
Compensation an interpretation of APB Opinion
No. 25, to account for our stock options issued under
the 1999 Stock Option Plan. Under this method, compensation
expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise
price. Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation,
and SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment
of FASB Statement No. 123, established accounting and
disclosure requirements using a fair-value-based method of
accounting for stock-based compensation plans. As permitted by
then-existing accounting standards, we elected to continue to
apply the intrinsic-value-based method of accounting described
above, and adopted only the disclosure requirements of
SFAS No. 123, as amended for options issued to
employees. We applied the fair-value method prescribed by
SFAS 123 for options issued to nonemployees.
Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payments, which
revises SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS 123(R) requires that all share-based payment
transactions with employees be recognized in the financial
statements based on their fair value and recognized as
compensation expense over the vesting period. We adopted
SFAS 123(R) effective January 1, 2006, prospectively
for new equity awards issued subsequent to December 31,
2005, or existing awards that were modified, repurchased, or
cancelled subsequent to the adoption of SFAS 123(R).
The 1999 Stock Option Plan was superseded and replaced by the
2007 Long-Term Incentive Compensation Plan (the 2007 Plan) and
2007 Directors Incentive Plan (the Directors
Plan). The terms
36
Managements
discussion and analysis of financial condition and results of
operations
of the awards granted under the 1999 Stock Option Plan were not
impacted by the implementation of the new plans.
Information on employee and non-employee stock options granted
in 2007, 2008 and 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
Average
|
|
|
Weighted-Average
|
|
|
|
Stock Options
|
|
|
Average
|
|
|
Intrinsic
Value
|
|
|
Fair Value of
|
|
Grants made
during quarter ended
|
|
Granted
|
|
|
Exercise
Price
|
|
|
per
Share(1)
|
|
|
Option (per
Share)
|
|
|
|
|
March 31, 2007
|
|
|
90,920
|
|
|
$
|
11.00
|
|
|
$
|
2.00
|
|
|
$
|
7.21
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
134,100
|
|
|
$
|
13.29
|
|
|
|
|
|
|
$
|
6.27
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
138,340
|
|
|
$
|
13.28
|
|
|
|
|
|
|
$
|
6.28
|
|
|
|
|
(1)
|
|
Calculated as of March 31, 2009
|
The fair value of employee options granted during 2007, 2008 and
2009 were estimated using the Black-Scholes option-pricing model
and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
Dividend yield
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
Expected term (years)
|
|
|
5.5 - 6.4
|
|
|
|
3.5 - 6.0
|
|
|
|
3.7 - 6.2
|
|
Expected volatility
|
|
|
58% - 64%
|
|
|
|
49% - 51%
|
|
|
|
50% - 52%
|
|
Risk-free interest rate
|
|
|
4.6% - 4.8%
|
|
|
|
3.1%
|
|
|
|
1.4% - 1.9%
|
|
The fair value of non-employee options granted during 2007, 2008
and 2009, were estimated using the Black-Scholes option-pricing
model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
Dividend yield
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
Expected term (years)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Expected volatility
|
|
|
74%
|
|
|
|
68%
|
|
|
|
67%
|
|
Risk-free interest rate
|
|
|
4.83%
|
|
|
|
3.7%
|
|
|
|
2.7%
|
|
For employee stock option grants, the weighted-average expected
option terms for 2007, 2008 and 2009 represent the application
of the simplified method as defined in SEC Staff Accounting
Bulletin (SAB) No. 107 issued in March 2005, as amended by
SAB 110 issued in December 2007. The simplified method
defines the expected life as the average of the contractual term
of the option and the weighted-average vesting period for the
option. For non-employee stock option grants, the expected
option terms for 2007, 2008 and 2009 represent the contractual
term.
We estimated volatility for 2007, 2008 and 2009 in accordance
with SAB No. 107. As there has been no public market
for our common stock prior to this offering, and therefore, a
lack of company-specific historical or implied volatility data,
we have determined the share-price volatility based on an
analysis of certain publicly-traded companies that we consider
to be our peers. The comparable peer companies used for our
estimated volatility are publicly-traded companies with
operations which we believe to be similar to ours. When
identifying companies as peers, we consider such characteristics
as the type of
37
Managements
discussion and analysis of financial condition and results of
operations
industry, size
and/or type
of product(s), research
and/or
product development capabilities, and stock-based transactions.
We intend to continue to consistently estimate our volatility in
this manner until sufficient historical information regarding
the volatility of our own shares becomes available, or
circumstances change such that the identified entities are no
longer similar to us. In this latter case, we would utilize
other similar entities whose share prices are publicly available.
As of March 31, 2009, we had approximately
$1.6 million of unrecognized share-based compensation
expense related to unvested option awards. Additionally, as of
March 31, 2009, we had outstanding vested options to
purchase 6,836,332 shares of our common stock and unvested
options to purchase 370,915 shares of our common stock.
Furthermore, as of March 31, 2009, we had 68,958 warrants
outstanding to purchase shares of our common stock.
Research and
Development
We account for research and development costs and accrue
expenses based on estimates of work performed, patient
enrollment, or fixed-fee-for-services. As work is performed
and/or
invoices are received, we adjust our estimates and accruals. To
date, our accruals have been within our estimates.
Total research and development costs are a function of studies
being conducted and will increase or decrease, depending on the
level of activity in any particular year.
Intangible
Assets
Intangible assets include license agreements, product rights,
and other identifiable intangible assets. We assess the
impairment of identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. In determining the recoverability of our
intangible assets, we must make assumptions regarding estimated
future cash flows and other factors. If the estimated
undiscounted future cash flows do not exceed the carrying value
of the intangible assets, we must determine the fair value of
the intangible assets. If the fair value of the intangible
assets is less than the carrying value, an impairment loss will
be recognized in an amount equal to the difference.
38
Managements
discussion and analysis of financial condition and results of
operations
RESULTS OF
OPERATIONS
The following table sets forth, for the periods indicated,
certain items from our statement of operations expressed as a
percentage of net revenues, as well as the period-to-period
change in these items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
|
%
Change
|
|
|
Ended
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2006-2007
|
|
|
2007-2008
|
|
|
2008-2009
|
|
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
57.5
|
%
|
|
|
25.0
|
%
|
|
|
13.3
|
%
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
13.5
|
|
|
|
9.5
|
|
|
|
8.7
|
|
|
|
9.1
|
|
|
|
7.8
|
|
|
|
11.3
|
|
|
|
14.1
|
|
|
|
(2.9
|
)
|
Selling and marketing
|
|
|
41.2
|
|
|
|
35.8
|
|
|
|
41.0
|
|
|
|
40.5
|
|
|
|
44.0
|
|
|
|
36.8
|
|
|
|
43.1
|
|
|
|
23.1
|
|
Research and development
|
|
|
12.5
|
|
|
|
13.2
|
|
|
|
12.6
|
|
|
|
13.4
|
|
|
|
8.2
|
|
|
|
65.4
|
|
|
|
19.9
|
|
|
|
(30.6
|
)
|
General and administrative
|
|
|
16.8
|
|
|
|
14.7
|
|
|
|
14.7
|
|
|
|
13.0
|
|
|
|
15.4
|
|
|
|
38.0
|
|
|
|
24.2
|
|
|
|
33.4
|
|
Amortization of product license rights
|
|
|
2.9
|
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
33.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Other
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
8.0
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
87.5
|
|
|
|
76.0
|
|
|
|
79.2
|
|
|
|
78.4
|
|
|
|
77.5
|
|
|
|
36.9
|
|
|
|
30.2
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
12.5
|
|
|
|
24.0
|
|
|
|
20.8
|
|
|
|
21.6
|
|
|
|
22.5
|
|
|
|
202.4
|
|
|
|
8.3
|
|
|
|
18.0
|
|
Interest income
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
0.2
|
|
|
|
83.5
|
|
|
|
(37.0
|
)
|
|
|
(78.6
|
)
|
Interest expense
|
|
|
(4.1
|
)
|
|
|
(2.3
|
)
|
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
|
|
(1.0
|
)
|
|
|
(11.4
|
)
|
|
|
(66.7
|
)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
9.6
|
|
|
|
23.0
|
|
|
|
20.8
|
|
|
|
21.2
|
|
|
|
21.7
|
|
|
|
278.7
|
|
|
|
13.0
|
|
|
|
15.6
|
|
Income tax benefit (expenses)
|
|
|
15.1
|
|
|
|
(8.6
|
)
|
|
|
(7.3
|
)
|
|
|
(4.4
|
)
|
|
|
(8.8
|
)
|
|
|
(189.9
|
)
|
|
|
4.9
|
|
|
|
126.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
24.7
|
|
|
|
14.4
|
|
|
|
13.6
|
|
|
|
16.8
|
|
|
|
12.8
|
|
|
|
(8.2
|
)
|
|
|
17.8
|
|
|
|
(13.6
|
)
|
Net loss at subsidiary attributable to noncontrolling interests
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders.
|
|
|
24.7
|
|
|
|
14.4
|
|
|
|
13.6
|
|
|
|
16.8
|
|
|
|
13.0
|
|
|
|
(8.2
|
)
|
|
|
17.8
|
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
Description of
operating accounts
Net revenues consist of net product revenue, revenue from
co-promotion agreements, and other revenue. Net product revenue
consists primarily of gross revenue less discounts and
allowances, such as cash discounts, rebates, chargebacks, and
returns. Revenue from co-promotion agreements includes product
promotion fees. Other income includes rental and grant income.
Cost of products sold consists principally of the cost to
acquire each unit of product sold. Cost of products sold also
includes expense associated with the write-off of slow moving or
expired product.
Selling and marketing expense consists primarily of
expense relating to the promotion, distribution and sale of
products, including royalty expense, salaries and related costs.
Research and development expense consists primarily of
clinical trial expenses, salary and wages and related costs of
materials and supplies, and certain activities of third-party
providers participating in our clinical studies.
General and administrative expense includes finance and
accounting expenses, executive expenses, office expenses, and
business development expenses, including salaries and related
costs.
Amortization of product license rights resulted from our
acquisition of the exclusive U.S. commercialization rights
to Kristalose.
Interest income consists primarily of interest income
earned on cash deposits.
39
Managements
discussion and analysis of financial condition and results of
operations
Interest expense consists primarily of interest incurred
on debt and other long-term obligations.
Income tax benefit in 2006 consists primarily of the
realization of our deferred tax assets less taxes incurred on
income. Income tax expense in 2007 and 2008 consists
primarily of current and deferred income taxes on our taxable
income for financial reporting purposes.
Three months
ended March 31, 2009 compared to the three months ended
March 31, 2008
Net revenues. Net revenues for the three
months ended March 31, 2009 totaled approximately
$9.4 million, representing an increase of approximately
$1.1 million, or 13%, over the same period in 2008. The
increase in net revenues is primarily due to increased sales of
Acetadote as we continued to gain market share and expand our
target markets. Net revenues related to Kristalose decreased
$0.2 million during the first quarter of 2009 as compared
to the same period in 2008. The decrease in volume was primarily
due to lower orders from a wholesaler as they implemented a new
inventory ordering system.
For the three months ended March 31, 2009, gross sales were
reduced by approximately $1.0 million, of which
approximately $0.2 million related to cash discounts,
approximately $0.3 million related to damaged and expired
product returns, approximately $0.3 million related to
fee-for-services
and approximately $0.2 million related to rebates. For the
three months ended March 31, 2008, gross sales were reduced
by approximately $0.6 million, of which approximately
$0.2 million related to cash discounts and approximately
$0.3 million related to damaged and expired product returns.
Cost of products sold. Cost of products sold
for the three months ended March 31, 2009 totaled
approximately $0.7 million, representing a decrease of
approximately $22,000, or 3%, over the same period in 2008. As a
percentage of net revenues, cost of products sold decreased from
9.1% of net revenues for the three months ended March 31,
2008 to 7.8% of net revenues for the three months ended
March 31, 2009. The decrease in cost of products sold, in
dollars, is directly related to the strengthening of the U.S.
dollar for inventory purchases during the three months ended
March 31, 2009 as compared to the same period in 2008. The
decrease in cost of products sold as a percentage of net
revenues was primarily due to a change in the sales mix and the
strengthening of the U.S. dollar.
Selling and marketing. Selling and marketing
expense for the three months ended March 31, 2009 totaled
approximately $4.1 million, representing an increase of
approximately $0.8 million, or 23%, over the same period in
2008. Of the increase, approximately $0.4 million related
to the expansion of our sales forces and approximately
$0.3 million related to new marketing campaigns for our
products. We expect selling and marketing expense to increase in
the second half of 2009 as we expand our sales force for the
launch of Caldolor.
Research and development. Research and
development expense for the three months ended
March 31, 2009 totaled approximately
$0.8 million, representing a decrease of approximately
$0.3 million, or 31%, over the same period in 2008. The
decrease was primarily due to fewer clinical studies for our
products in the first quarter of 2009 as compared to the same
period in 2008.
General and administrative. General and
administrative expense for the three months ended March 31,
2009 totaled approximately $1.4 million, representing an
increase of approximately $0.4 million, or 33%, over the
same period in 2008. The increase is primarily due to increased
payroll tax expense of $0.1 million, increased stock
compensation expense of $0.1 million and increased legal
and audit-related fees of $0.1 million.
Income tax expense. Income tax expense for the
three months ended March 31, 2009 totaled approximately
$0.8 million, representing an increase of approximately
$0.5 million, or 126%, over the same period in 2008. As a
percentage of net income before income taxes, income tax expense
increased
40
Managements
discussion and analysis of financial condition and results of
operations
from 20.8% for the three months ended March 31, 2008 to
40.8% for the three months ended March 31, 2009. The
increase was primarily due to the recognition in the first
quarter of 2008 of approximately $0.4 million of previously
unrecognized tax benefits.
Year ended
December 31, 2008 compared to year ended December 31,
2007
Net revenues. Net revenues for 2008 totaled
$35.1 million, representing an increase of
$7.0 million, or 25%, over the same period in 2007. Of this
increase, approximately $6.6 million related to Acetadote
and $0.5 million related to Kristalose. Increases were
partially offset by lower grant revenue in 2008. The increase in
revenues for Acetadote and Kristalose was primarily due to
increased volume as our products continued to grow in our target
markets.
Gross product sales were reduced by $2.8 million and
$2.4 million in 2008 and 2007, respectively. In 2008, this
reduction included $1.1 million for damaged and expired
product returns, $0.7 million for cash discounts,
$0.7 million related to fee-for-service costs and
$0.3 million for estimated rebates, chargebacks and
discounts related to Kristalose. For 2007 this reduction
included $1.1 million for damaged and expired product
returns, $0.6 million for cash discounts, $0.4 million
related to fee-for-service costs and $0.2 million for
estimated rebates, chargebacks and discounts related to
Kristalose.
Cost of products sold. Cost of products sold
totaled $3.0 million, representing an increase of
$0.4 million, or 14%, over cost of products sold in 2007 of
$2.7 million. Of this increase, approximately
$0.3 million related to Acetadote and $0.1 million
related to Kristalose. As a percentage of net revenues, cost of
products sold decreased from 9.5% in 2007 to 8.7% for 2008. The
decrease in cost of products sold, as a percentage of net
revenues, was due to a shift in the sales mix between the
periods.
Selling and marketing. Selling and marketing
expense for 2008 totaled $14.4 million, representing an
increase of $4.3 million, or 43%, over 2007. Selling and
marketing expense as a percentage of net revenue was 41.0% and
35.8% in 2008 and 2007, respectively. The increase was primarily
due to $3.1 million for the expansion and ongoing costs of
our sales forces as we continue to grow our products in our
target markets and expand our territories. We also incurred an
increase of $0.4 million in advertising expense primarily
associated with a new marketing campaign for Kristalose and
$0.4 million of additional royalty expense. We anticipate
selling and marketing expenses to continue to increase as we
expand both sales forces as well as our product lines.
Research and development. Research and
development expense for 2008 totaled $4.4 million,
representing an increase of $0.7 million, or 20%, over
2007. The increase was primarily due to $1.2 million
expended for the application fee associated with regulatory
approval of one of our products, and was offset by a decrease in
clinical studies and supplies expense as we completed
development activity intended to support regulatory approval of
that product.
General and administrative. General and
administrative expense for 2008 totaled $5.1 million,
representing an increase of $1 million, or 24%, over
general and administrative expenses in 2007 of
$4.1 million. The increase was primarily due to increased
rent expense as we acquired additional office space, increased
business development expense as we evaluated potential
acquisition candidates and agreements and increased salary and
related expenses, including share-based compensation, due to
personnel additions.
Interest income. Interest income totaled
$0.2 million for 2008, representing a decrease of
$0.1 million, or 37%, over 2007. The decrease was primarily
due to lower interest rates and lower cash balance requirements
due to the repayment of our remaining product license right
obligation in April 2008.
Interest expense. Interest expense totaled
$0.2 million for 2008, representing a decrease of
$0.4 million, or 67%, over 2007. The decrease was primarily
due to lower outstanding debt during
41
Managements
discussion and analysis of financial condition and results of
operations
2008 as compared to 2007. In April 2008, we amended our
agreement to pay the remaining obligation related to the
purchase of the product license right, resulting in lower
interest expense in 2008 associated with this obligation.
Income tax expense. Income tax expense for
2008 totaled $2.5 million, representing a decrease of
$0.1 million, or 5%, over 2007. As a percentage of net
income before income taxes, income tax expense decreased from
37.5% for 2007 to 34.8% for 2008. The decrease in the tax rate
was primarily due to the recognition in 2008 of previously
unrecognized tax benefits associated with the reversal of our
FIN 48 reserve.
Year ended
December 31, 2007 compared to year ended December 31,
2006
Net revenues. Net revenues in 2007 totaled
$28.1 million, representing an increase of
$10.2 million, or 57.5%, over 2006. Of this increase,
$8.1 million was attributable to increased sales of
Acetadote, and $2.8 million was attributable to increased
sales of Kristalose. These increases were partially offset by a
$0.6 million decrease in co-promotion and other revenue. In
April 2006, we entered into an agreement to acquire the
exclusive U.S. commercial rights to Kristalose and began
recording revenue based on shipments of the product. Prior to
April 2006, we co-promoted Kristalose and recorded a
co-promotion fee based on a percentage of the products
sales. The increase in sales of Acetadote was primarily due to
increased market share in our target area for the treatment of
acetaminophen toxicity, a one-time sale to an international
customer for $0.9 million and the impact of additional
sales representatives. Other income in 2006 was primarily
comprised of co-promotion fees related to Kristalose and grant
related activity.
Gross product sales were reduced by $2.4 million and
$2.1 million in 2007 and 2006, respectively. In 2007, this
reduction included $1.1 million for damaged and expired
product returns, $0.6 million for cash discounts,
$0.4 million related to fee-for-service costs and
$0.2 million for estimated rebates, chargebacks, and
discounts related to Kristalose. For 2006, this reduction
included $0.7 million related to damaged and expired
product returns, $0.3 million related to cash discounts,
$0.2 million related to fee-for-service costs and
$1.0 million related to estimated rebates, chargebacks, and
discounts related to Kristalose.
Cost of products sold. Cost of products sold
totaled approximately $2.7 million in 2007, representing an
increase of approximately $0.3 million, or 11%, over cost
of products sold in 2006 of approximately $2.4 million. Of
the increase, approximately 52% related to Acetadote and 48%
related to Kristalose. Cost of products sold as a percentage of
net revenues decreased from 13.5% in 2006 to 9.5% in 2007. The
decrease in the cost of products sold as a percentage of net
revenue was due to the shift in the sales mix. Acetadote cost of
products sold as a percentage of Acetadote net revenue was not
materially different between 2007 and 2006.
Selling and marketing. Selling and marketing
expense totaled approximately $10.1 million in 2007,
representing an increase of approximately $2.7 million, or
37%, over selling and marketing expense in 2006. Selling and
marketing expense as a percentage of net revenue was 35.8% and
41.2% in 2007 and 2006, respectively. The dollar increase was
primarily due to $2.0 million in additional costs related
to the new sales force created to promote Kristalose.
Additionally, we incurred approximately $0.7 million of
increased royalty expense, of which $0.4 million related to
Acetadote and $0.3 million related to Kristalose. We
anticipate selling and marketing expense will grow as we expand
both sales forces as well as our product lines.
Research and development. Research and
development expense for 2007 totaled approximately
$3.7 million, representing an approximate
$1.5 million, or 65%, increase over research and
development expense in 2006 of approximately $2.2 million.
The increase was primarily due to the increased clinical studies
in 2007 as we worked towards completing the studies of Caldolor.
We expect
42
Managements
discussion and analysis of financial condition and results of
operations
research and development expense in 2008 to remain consistent
with 2007 expense, and expect to include the NDA filing fee for
Caldolor.
General and administrative. General and
administrative expense totaled $4.1 million in 2007,
representing a $1.1 million, or 38%, increase over general
and administrative expense in 2006 of $3.0 million. General
and administrative expense as a percentage of net revenue was
14.7% and 16.8% in 2007 and 2006, respectively. The dollar
increase was primarily due to increased personnel expense of
$0.5 million, increased stock compensation expense of
$0.3 million, increased audit fees of $0.2 million,
and increased rent of $0.1 million.
Amortization of product license
rights. Amortization of product licensing rights
increased $0.2 million in 2007 as compared to 2006. The
increase was due to recording twelve months of expense in
2007 compared to recording nine months in 2006 as the licensing
rights were not acquired until April 2006. We expect to incur
annual amortization expense relating to these product license
rights through March 2021.
Interest income. Interest income in 2007
totaled $0.4 million, representing a $0.2 million, or
84%, increase over interest income in 2006 of $0.2 million.
The increase in interest income was due to larger cash
equivalent balances in 2007 as compared to 2006.
Interest expense. Interest expense totaled
$0.6 million in 2007 as compared to $0.7 million in
2006. The decrease in interest expense in 2007 was due to lower
outstanding term debt balances during 2007 as compared to 2006.
Income tax expense. Income tax expense totaled
$2.4 million in 2007 as compared to an income tax benefit
of $2.7 million in 2006. The income tax expense in 2007 was
primarily due to current and deferred income taxes on our
taxable income for financial reporting purposes. In 2006, the
income tax benefit was primarily due to the reversal of our
deferred tax asset valuation allowance after determining that it
was more likely than not that we would realize the benefits of
the deferred tax asset.
LIQUIDITY AND
CAPITAL RESOURCES
Our primary sources of liquidity are cash flows provided by our
operations and our borrowings. We believe that our internally
generated cash flows and amounts available under our debt
agreements will be adequate to service existing debt, finance
internal growth and fund capital expenditures.
As of March 31, 2009, cash and cash equivalents was
$10.1 million, working capital was $11.3 million and
our current ratio (current assets to current liabilities) was
2.77 to 1. Management expects funds for our operating and
capital requirements will be provided by continuing operations,
existing cash balances, and availability under our credit
facilities. As of March 31, 2009, we had an additional
$5.7 million available to us on our line of credit. Upon
completion of this offering, we expect to have substantial
proceeds.
In connection with the Option Transaction as described in the
section entitled Certain relationships and related party
transactions, effective July 2009, we expect to amend our
debt agreement with Bank of America to provide for
$18.0 million in term debt and a $4.0 million
revolving credit facility. We expect to use the proceeds from
the term debt to pay in part the minimum statutory tax
withholding requirements of approximately $29.0 million due
from option holders who have submitted notice that prior to or
at the pricing of this offering, they are exercising options to
purchase shares of our common stock. The consideration for that
payment will be the transfer to us of 1,452,321 shares of
our common stock of the option holders. In connection with the
Option Transaction, we expect to generate a deferred tax asset
of approximately $30.1 million to offset future tax
liabilities.
43
Managements
discussion and analysis of financial condition and results of
operations
The following table summarizes our net changes in cash and cash
equivalents for the years ended December 31, 2006, 2007 and
2008 and three months ended March 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Years Ended
December 31,
|
|
|
Ended
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,163
|
|
|
$
|
8,627
|
|
|
$
|
6,397
|
|
|
$
|
1,870
|
|
|
$
|
(1,735
|
)
|
Investing activities
|
|
|
(6,553
|
)
|
|
|
(163
|
)
|
|
|
(134
|
)
|
|
|
(46
|
)
|
|
|
(32
|
)
|
Financing activities
|
|
|
5,109
|
|
|
|
(3,904
|
)
|
|
|
(5,248
|
)
|
|
|
(726
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents(1)
|
|
$
|
719
|
|
|
$
|
4,559
|
|
|
$
|
1,015
|
|
|
$
|
1,098
|
|
|
$
|
(1,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
The net decrease in cash and cash equivalents of
$1.8 million for the three months ended
March 31, 2009 was primarily due to cash used in
operating activities. The cash used in operating activities was
primarily due to the recognition of the excess tax benefit of
approximately $2.8 million on the exercise of nonqualified
options in the first quarter of 2009 as a cash outflow from
operations offset by net income of approximately
$1.2 million for the three months ended March 31,
2009. The excess tax benefit is included as a cash inflow from
financing activities that was substantially offset by the cash
paid to repurchase shares to settle the minimum statutory tax
withholding requirements from the exercise of those options.
In April 2006, we entered into an agreement with Inalco to
acquire exclusive U.S. commercial rights for Kristalose. In
order to complete this transaction, we obtained funding from
Bank of America in the form of a three-year term loan for
$5.5 million and a two-year revolving line of credit
agreement, both with an interest rate of LIBOR plus 2.5%. The
borrowings were collateralized by a first lien against all of
our assets. We were paying off the term loan in quarterly
installments, with the final payment due in 2009. In addition to
the three-year term loan, we deferred $4.5 million of the
purchase price, of which $1.5 million was paid in April
2007 and $3.0 million was originally due in 2009. In April
2008, we paid the remaining obligation for an 8% discount on the
$3.0 million face value of the obligation.
In conjunction with the original line of credit agreement and
term loan agreement, we issued to the lender warrants to
purchase up to 3,958 shares of common stock at $9.00 per
share. The warrants expire in April 2016. The estimated fair
value of these warrants of $25,680, as determined using the
Black- Scholes model, has been recorded in the accompanying
financial statements as permanent equity in accordance with
Emerging Issues Task Force (EITF),
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
In December 2008, we refinanced the remaining term loan balance
with Bank of America of $917,000 and borrowed an additional
$4,083,000 as well as establishing a new $7.5 million line
of credit via the Third Amendment to the Loan Agreement. Both
the line of credit and the term loan carried an interest rate of
LIBOR plus an applicable margin, as defined in the agreement
(4.42% as of December 31, 2008). The borrowings were
collateralized by a first lien against all our assets. We have
been paying off the term loan in quarterly installments, with
the final payment due in 2011. The line of credit was also due
in 2011. This agreement contained various covenants, all of
which we were in compliance with as of December 31, 2008.
44
Managements
discussion and analysis of financial condition and results of
operations
In connection with the Option Transaction as described in the
section entitled Certain relationships and related party
transactions, effective July 2009, we expect to refinance
the remaining term loan balance with Bank of America of
$4.2 million as of July 15, 2009 with a new term loan
of $18.0 million, and amend the revolving credit facility
via the Fourth Amended and Restated Loan Agreement to provide
for a $4.0 million line of credit. Both the line of credit
and the term loan are expected to carry an interest rate of
LIBOR plus an applicable margin, as defined in the agreement.
The borrowings will be collateralized by a first lien against
all our assets. The loan agreement will require us to pay off
the term loan in quarterly installments, with the final payment
due in December 2012. We may be required to make additional
principal payments on the term loan if our leverage ratio, as
defined, exceeds 1.75 to 1.0 on an annual basis. The line of
credit will be due in December 2012.
Under our agreements with Inalco and Bioniche for the
manufacturing of Kristalose and Acetadote, we are obligated to
purchase minimum amounts of inventory each year. These
obligations required us to purchase approximately
$2.6 million of Kristalose and $0.1 million of
Acetadote during 2009, $3.0 million of Kristalose and
$0.1 million of Acetadote during 2010, and
$2.4 million of Kristalose during 2011. In April 2009, we
amended our agreement with Inalco so that our minimum purchase
requirements for Kristalose will be not less than 25% of the
purchases in the immediately preceding calendar year. We expect
our normal inventory purchasing levels to be above the required
minimum amounts. As of December 31, 2008, we had met our
purchase obligations for 2008 under these agreements.
During 2001, we signed an agreement with Cato Research Ltd., or
Cato, to cover a variety of development efforts related to
Caldolor, including preparation of submissions to the FDA. Under
the terms of the agreement, we deferred a portion of each bill
from Cato. One-third of the deferred amount accrued interest at
an annual rate of 12.5% and was due after eighteen months. The
remaining two-thirds will be due upon specific milestone events.
Upon meeting the first milestone, an amount equal to one-third
of the original deferred amount, or approximately
$0.2 million, will become due and payable. Upon completion
of the final milestone event, an amount equal to five times
one-third of the original deferred amount, or approximately
$1.0 million, will become due and payable to Cato. Since
the application of these factors is contingent upon specific
events which may or may not occur in the future and which did
not occur as of December 31, 2006, the expense for these
factors was not recognized in the 2006 consolidated financial
statements. During the third quarter of 2007, we progressed our
studies and NDA application to the extent that we determined it
is probable the first milestone will be met. As such, we
recorded the obligation related to the first milestone of
approximately $0.2 million as a current liability as of
December 31, 2007. As of December 31, 2008, the total
liability recorded related to Cato was approximately
$0.6 million. Upon FDA approval of Caldolor in June 2009,
we were required to pay approximately $1.6 million to Cato
under the agreement in connection with the fulfillment of this
remaining milestone. Additionally, because the FDA approved the
product within eighteen months of acceptance of the NDA, Cato
vested in options to acquire up to 60,000 shares of our
common stock.
45
Managements
discussion and analysis of financial condition and results of
operations
The following table sets forth a summary of our contractual cash
obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by
Year
|
|
Contractual
obligations(1)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013+
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
Amounts reflected in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
loan(2)
|
|
$
|
5,000
|
|
|
$
|
1,250
|
|
|
$
|
1,667
|
|
|
$
|
2,083
|
|
|
|
|
|
|
|
|
|
Line of
credit(3)
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
Estimated interest on
debt/obligations(4)(5)
|
|
|
630
|
|
|
|
244
|
|
|
|
217
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
Other contractual
obligations(6)
|
|
|
616
|
|
|
|
410
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other cash obligations not reflected in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
1,678
|
|
|
|
590
|
|
|
|
559
|
|
|
|
138
|
|
|
|
93
|
|
|
|
298
|
|
Purchase
obligations(7)
|
|
|
8,343
|
|
|
|
2,143
|
|
|
|
2,999
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,093
|
|
|
$
|
4,638
|
|
|
$
|
5,648
|
|
|
$
|
7,416
|
|
|
$
|
93
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The sum of the individual amounts
may not agree due to rounding.
|
|
|
|
(2)
|
|
In July 2009, we expect to amend
our loan agreement with Bank of America. Had this table
reflected the effect of the amendment, payments due under the
term loan would have been $833, $6,000, $6,000, $6,000 and $0
for 2009, 2010, 2011, 2012 and 2013+, respectively.
|
|
|
|
(3)
|
|
In July 2009, we expect to amend
our loan agreement with Bank of America. Had this table
reflected the effect of the amendment, payments due under the
line of credit would have been $0, $0, $0, $1,826 and $0 for
2009, 2010, 2011, 2012 and 2013+, respectively.
|
|
|
|
(4)
|
|
Represents estimated interest
payments on our companys line of credit and term loan
based on the December 31, 2008 interest rate of LIBOR plus
an applicable margin, as defined in the agreement (4.42%).
Interest payments are due and payable quarterly in arrears. The
line of credit becomes due and payable in December 2011.
Estimated interest for the line of credit is based on the
assumption of a consistent outstanding balance. The term loan
matures in December 2011 with principal payments due and payable
quarterly.
|
|
|
|
(5)
|
|
In July 2009, we expect to amend
our loan agreement with Bank of America. Had this table
reflected the effect of that amendment, estimated payments for
interest would have been $683, $1,040, $685, $330 and $0 for
2009, 2010, 2011, 2012 and 2013+.
|
|
|
|
(6)
|
|
Includes undiscounted cash flows as
the imputed interest is included in these amounts.
|
|
|
|
(7)
|
|
Represents minimum purchase
obligations under Kristalose and Acetadote manufacturing
agreements. Beginning in October 2011 and continuing through the
life of the agreement, which expires in 2021, one of the
manufacturing and supply agreements requires minimum purchases
of not less than 65% of the average purchases in each of the
three immediately preceding annual periods. Using minimum
purchase requirements and the current pricing structure, these
obligations would be approximately $1.9 million in 2012 and
approximately $8.1 million in years 2013 - 2021.
|
OFF-BALANCE SHEET
ARRANGEMENTS
During 2006, 2007 and 2008 and the three months ended
March 31, 2009, we did not engage in any off-balance sheet
arrangements.
RECENTLY ADOPTED
ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141
(revised), Business Combinations (SFAS 141(R)).
SFAS 141(R) relates to business combinations and requires
the acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the
acquisition date measured at fair values on the acquisition
date. This statement was adopted for our company for all
business combinations occurring on or after January 1,
2009. The impact of adoption of SFAS 141(R) will depend on
future acquisitions.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), which defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. More
specifically, this statement clarifies the definition of fair
value, establishes a fair
46
Managements
discussion and analysis of financial condition and results of
operations
valuation hierarchy based upon observable (e.g. quoted prices,
interest rates, yield curves) and unobservable market inputs,
and expands disclosure requirements to include the inputs used
to develop estimates of fair value and the effects of the
estimates on income for the period. This statement does not
require any new fair value measurements. This pronouncement was
effective for us on January 1, 2008. The adoption of
SFAS 157 did not have a material impact on our results of
operations and financial position.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which permits entities to measure many financial
instruments and certain other items at fair value. The objective
of the statement is to improve financial reporting by allowing
entities to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without
applying complex hedge accounting provisions. The fair value
option provided by this statement may be applied on an
instrument by instrument basis, is irrevocable, and may be
applied only to entire instruments and not portions of
instruments. This statement was effective for us beginning in
2008. As of the date of adoption, we elected to recognize our
financial assets and liabilities at historical cost. We may
elect, on a case-by-case basis, to recognize new assets acquired
or liabilities assumed at fair value.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements
- an amendment to ARB No. 51 (SFAS 160). This
statement establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. It also requires
consolidated results of operations to include amounts
attributable to both the parent and noncontrolling interest,
with disclosure on the consolidated statement of operations of
the amounts attributable to the parent and noncontrolling
interest. The statement also requires that equity transactions
by and between each part be accounted for as equity transactions
unless the parent company loses its controlling interest in the
subsidiary. In the event the parent company loses its
controlling interest, the investment in the subsidiary will be
adjusted to fair value, and a gain or loss on investment will be
recognized in the statement of operations. The adoption of
SFAS 160 will result in the allocation of future operating
results of CET, including losses, to the noncontrolling interest
of CET. The adoption of SFAS 160 did not have a material
impact on our results of operations and financial position.
In December 2007, the FASB issued EITF
07-1,
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property
(EITF 07-1),
that prohibits companies from applying the equity method of
accounting to activities performed outside a separate legal
entity by a virtual joint venture. Instead, revenues and costs
incurred with third parties in connection with the collaborative
arrangement should be presented gross or net by the
collaborators based on the criteria in EITF
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, and other applicable accounting literature. EITF 07-1
should be applied to collaborative arrangements in existence at
the date of adoption using a modified retrospective method that
requires reclassification in all periods presented for those
arrangements still in effect at the transition date, unless that
application is impracticable. EITF 07-1 was effective for our
company beginning on January 1, 2009. Our company currently
collaborates with certain research institutions to identify and
pursue promising pre-clinical programs. We have negotiated
rights to develop and commercialize these product candidates.
The adoption of EITF 07-1 did not have a material impact on
our financial position or results of operations.
In June 2007, the FASB issued
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities (EITF 07-3). The scope of this issue is limited
to nonrefundable advance payments for goods and services related
to research and
47
Managements
discussion and analysis of financial condition and results of
operations
development activities.
EITF 07-3
addresses whether such advanced payments should be expensed as
incurred or capitalized. Our company was required to adopt
EITF 07-3
effective January 1, 2008. The adoption of
EITF 07-3
did not have a material impact on our results of operations or
financial position.
QUANTITATIVE AND
QUALITATIVE DISCLOSURE OF MARKET RISKS
Interest Rate
Risk
We are exposed to market risk related to changes in interest
rates on our revolving credit facility, and our term note
payable. We do not utilize derivative financial instruments or
other market risk-sensitive instruments to manage exposure to
interest rate changes. The main objective of our cash investment
activities is to preserve principal while maximizing interest
income through low-risk investments. Our investment policy
focuses on principal preservation and liquidity.
The interest rate risk related to borrowings under our credit
facility and term debt is a variable rate of the LIBOR rate plus
an applicable margin, as defined in the loan agreement (4.5% at
March 31, 2009). As of March 31, 2009, we had
outstanding borrowings of $6.8 million under our Credit
Facility and Term Debt combined. If interest rates increased by
1.0%, our annual interest expense on our borrowings would
increase by approximately $68,000.
Exchange Rate
Risk
While we operate primarily in the U.S., we are exposed to
foreign currency risk. Acetadote is manufactured largely by a
supplier that denominates supply prices in Canadian dollars.
Additionally, much of our research and development is performed
abroad. As of March 31, 2009, our outstanding payables
denominated in a foreign currency totaled $0.2 million.
One of our supply agreements for Caldolor is denominated in
Australian dollars. As of March 31, 2009, we have not
incurred any costs for purchases related to Caldolor from this
supplier; however, we expect Caldolor purchases from this
supplier to increase over time. The extent of our exposure to
foreign currency gains or losses will depend on the quantity of
our purchases and the exchange rate at the time the invoices are
paid.
Currently, we do not utilize financial instruments to hedge
exposure to foreign currency fluctuations. We believe our
exposure to foreign currency fluctuation is minimal as our
purchases in foreign currency have a maximum exposure of
90 days based on invoice terms with a portion of the
exposure being limited to 30 days based on the due date of
the invoice. Foreign currency exchange losses were immaterial
for 2006, 2007, 2008 and the quarter ended March 31, 2009.
Neither a 5% increase nor decrease from current exchange rates
would have a material effect on our operating results or
financial condition.
48
Business
OVERVIEW
We are a profitable and growing specialty pharmaceutical company
focused on the acquisition, development and commercialization of
branded prescription products. Our primary target markets are
hospital acute care and gastroenterology, which are
characterized by relatively concentrated physician prescriber
bases that we believe can be penetrated effectively by
relatively small, targeted sales forces. In June 2009, we
received FDA approval for Caldolor, our lead product for use in
the hospital market. In addition to Caldolor, we market and sell
Acetadote and Kristalose through our dedicated hospital and
gastroenterology sales forces, which together comprise 66 sales
representatives and managers as of July 1, 2009. For the
years 2006, 2007 and 2008, our net revenue was
$17.8 million, $28.1 million and $35.1 million,
respectively, and our net income was $4.4 million,
$4.0 million and $4.8 million, respectively.
Since our inception in 1999, we have successfully funded the
acquisition and development of our product portfolio with
limited external investment and maintained profitable operations
over the past five years. Unlike many emerging pharmaceutical
and biotechnology companies, we have established both product
development and commercialization capabilities, and believe our
organizational structure can be efficiently expanded to
accommodate our expected growth. Our management team consists of
pharmaceutical industry veterans with significant experience in
business development, clinical and regulatory affairs, and sales
and marketing.
Our key products include:
|
|
|
|
|
|
|
Product
|
|
Indication
|
|
Delivery
|
|
Status
|
|
|
Caldolortm
|
|
Pain and Fever
|
|
Injectable
|
|
FDA Approved
|
Acetadote®
|
|
Acetaminophen Poisoning
|
|
Injectable
|
|
Marketed
|
Kristalose®
|
|
Chronic and Acute Constipation
|
|
Oral Solution
|
|
Marketed
|
|
|
Caldolor, our intravenous formulation of ibuprofen, is
the first injectable product approved in the United States for
the treatment of both pain and fever. To support Caldolors
regulatory approval, we completed a comprehensive clinical
program, which culminated in an NDA filing in December 2008. We
received FDA approval to market Caldolor in the United States in
June 2009. We plan to promote Caldolor in the United States
through a dedicated hospital sales force of 77 experienced
representatives and managers and internationally through
alliances with marketing partners. We are currently preparing
for the commercial launch of Caldolor in the United States,
which we expect to initiate in the fourth quarter of 2009. We
believe Caldolor represents our most significant market
opportunity to date.
Injectable analgesics, or pain relievers, currently available in
the U.S. include opioids, such as morphine and meperdine, and
ketorolac, a non-steroidal anti-inflammatory drug, or NSAID.
According to IMS Health Inc., or IMS Health, opioids accounted
for over 93% of injectable analgesic market volume in 2008 with
approximately 635 million units sold. Opioids are, however,
known to cause undesirable side effects, including nausea,
vomiting and cognitive impairment. Ketorolac, the only
non-opioid injectable analgesic approved for sale in the United
States, is also known to cause unwanted side effects, including
an increased risk of bleeding. Despite strong safety warnings
from the FDA, use of ketorolac in the United States has grown
from approximately 38 million units sold in 2004 (5% of the
market) to approximately 46 million units sold in 2008 (7%
of the market) according to IMS Health. Based on the results of
our clinical studies to date, we believe Caldolor represents a
potentially safer alternative therapy to ketorolac. Caldolor is
the only approved injectable treatment for fever in the U.S.
49
Business
Acetadote is an intravenous formulation of
N-acetylcysteine, or NAC, indicated for the treatment of
acetaminophen poisoning. According to the American Association
of Poison Control Centers National Poison Data System,
acetaminophen was the leading cause of toxic drug ingestions
reported to poison control centers in the U.S. in 2007. In
January 2004, Acetadote received FDA approval as an orphan drug,
a designation which provides for seven years of marketing
exclusivity from date of approval. Since its launch in June
2004, we have consistently grown product sales for Acetadote.
According to Wolters Kluwer Health
Sourcetm
Pharmaceutical Audit Suite, or Wolters Kluwer, Acetadote sales
to hospitals grew 33% from 2007 to 2008. Total sales to
hospitals in 2008 were $24.3 million. We believe that we can
continue to expand market share, and that our Acetadote sales
and marketing platform should help facilitate the commercial
launch of Caldolor.
Kristalose, a prescription laxative product, is a
crystalline form of lactulose designed to enhance patient
acceptance and compliance. Based on data from IMS Health, the
market for prescription laxatives in the U.S. grew from
approximately $269 million in 2004 to $344 million in
2008, driven largely by new product introductions and increased
promotional activity by our competitors. We acquired exclusive
U.S. commercialization rights to Kristalose in 2006,
assembled a new dedicated field sales force and re-launched the
product in September 2006 under the Cumberland brand. Wholesaler
sales of Kristalose to pharmacies were $9.4 million in
2008. We believe that Kristalose has competitive advantages over
competing prescription laxatives, such as fewer potential side
effects and contraindications, as well as lower cost, and that
the potential for growth of this product is significant.
Early-stage product candidates. Our
pre-clinical product candidates are being developed through
Cumberland Emerging Technologies, Inc., or CET, our 85%-owned
subsidiary. CET collaborates with leading research institutions
to identify and pursue promising pre-clinical programs within
our target market segments. We have negotiated rights to develop
and commercialize these product candidates. Current CET projects
include an improved treatment for fluid buildup in the lungs of
cancer patients and an anti-infective for treating fungal
infections in immuno-compromised patients. In conjunction with
these research institutions, we have obtained nearly
$1 million in grant funding from the National Institutes of
Health to support the development of these programs.
OUR COMPETITIVE
STRENGTHS
Significant
product opportunity in Caldolor
We believe Caldolor currently represents our most significant
product opportunity based on the large potential markets for
intravenous treatment of pain and fever, as well as clinical
results for the product to date. We conducted a comprehensive
clinical program to support regulatory approval of this product,
which we received from the FDA in June 2009. Based on our
clinical results, we believe Caldolor represents a potentially
safer alternative to ketorolac, which is the only injectable
non-opioid analgesic currently on the U.S. market, with
approximately 46 million units sold in 2008. We have
retained exclusive commercialization rights for Caldolor in the
U.S. and plan to market the product through expansion of our
existing hospital sales force. In addition, we hold
international patent rights for Caldolor, and in connection with
certain current and potential future third-party partners, we
intend to seek regulatory approval for and market Caldolor
outside of the U.S.
Strong growth
potential of our existing marketed products, Acetadote and
Kristalose
We believe that there is significant opportunity to increase
sales of our two currently approved products, Acetadote and
Kristalose. Since its launch in June 2004, we have consistently
grown product sales for Acetadote. During 2008, hospital
purchases of Acetadote grew 33% to approximately
$24 million. Kristalose competes in the high growth
U.S. prescription laxatives market which, based on
50
Business
data from IMS Health, grew from approximately $269 million
in 2004 to $344 million in 2008, or a compound annual
growth rate of approximately 6%. After acquiring exclusive U.S.
rights to Kristalose in April 2006, we assembled an experienced,
dedicated sales force and designed a new marketing program,
re-launching the product in September 2006. We believe both
Kristalose and Acetadote have favorable competitive profiles,
and that we can increase market share for each.
Focus on
underserved niche markets
We focus our efforts on specialty physician segments where we
believe we can leverage our industry expertise and sales
capability to deliver products that address unmet medical needs.
Currently, our primary target markets are hospital acute care
and gastroenterology. We consider these markets attractive
because of their relatively concentrated physician prescriber
bases, which allow us to reach target prescribers with a small
number of sales representatives. Moreover, we believe these
markets are less prone to competition from larger pharmaceutical
companies than other pharmaceutical sectors.
Profitable
business with a history of fiscal discipline
We have been profitable since 2004, during which time we have
generated sufficient cash flows to fund our development and
marketing programs without the need for significant external
financing. As an emerging pharmaceutical company with limited
resources, we have historically focused on product opportunities
with relatively low acquisition, development, and
commercialization costs. Further, we believe that our
third-party manufacturing and distribution relationships allow
us to outsource these functions efficiently while directing most
of our resources to our core competencies of business
development, clinical and regulatory affairs, and sales and
marketing.
Integrated
specialty pharmaceutical company with extensive management
expertise
Our executives have significant pharmaceutical industry
experience in business development, clinical and regulatory
affairs, and sales and marketing. This team is augmented by our
Pharmaceutical and Medical Advisory Boards, which consist of
highly experienced healthcare professionals.
|
|
Ø |
Our business development team is led by our CEO and our Senior
Vice President and Chief Commercial Officer, and is comprised of
a multi-disciplinary group of executives. This team sources
product opportunities independently as well as through our
international network of pharmaceutical and medical industry
insiders. Their efforts have resulted in acquisition, license,
co-promotion and strategic alliance agreements, and have
provided us with rights to our current portfolio. This group is
also responsible for acquiring rights to early-stage product
candidates through CET.
|
|
|
Ø |
Our clinical, regulatory affairs and product development team is
led by three professionals with substantial experience advancing
late-stage clinical candidates successfully through the FDA
approval process. This team was directly responsible for
obtaining FDA approval for Acetadote and Caldolor. We have
established internal capabilities to develop proprietary product
formulations, design and manage our clinical trials, prepare all
regulatory submissions and manage our medical call center.
|
|
|
Ø |
Our sales and marketing team is led by four executives who have
broad experience marketing branded pharmaceuticals. They manage
the dedicated hospital and gastroenterology sales forces that
promote our products and that together are comprised of 66 sales
representatives and managers as of July 1, 2009. Our
executives also direct our national marketing campaigns and
manage relationships with key accounts.
|
51
Business
OUR
STRATEGY
Our objective is to develop, acquire and commercialize branded
pharmaceutical products for specialty physician market segments.
Specifically, we plan to:
Successfully
launch and commercialize Caldolor
We believe that there is significant market potential for
Caldolor in both pain and fever. We intend to penetrate the
U.S. hospital market with our existing hospital sales force
and to commercialize the product internationally through
alliances with marketing partners. We have performed extensive
market research, including consultation with leading pain and
fever specialists, in depth message development for carefully
selected targets, and price sensitivity research. A
comprehensive marketing campaign and training program are being
developed, and we plan to launch Caldolor in the U.S. by the
fourth quarter of 2009.
Maximize sales of
our marketed products
Over the past three years, we have employed an effective
marketing campaign resulting in consistent sales growth for our
product Acetadote. We are expanding our hospital sales force in
preparation for the launch of Caldolor and believe we can
leverage this expanded sales force to increase Acetadote sales.
We are also supporting several studies to explore other
potential indications for Acetadote. In September 2006, we
re-launched Kristalose under the Cumberland brand with a new
marketing program and dedicated sales force. This marketing
program is designed to enhance brand awareness through increased
promotional activity and highlights Kristaloses many
positive, competitive attributes. In addition to our sales
efforts, we may also pursue co-promotion arrangements with third
parties to support growth of our products.
Expand our
product portfolio by acquiring rights to additional products and
late-stage product candidates
We intend to build a portfolio of complementary, niche products
largely through product acquisitions. We focus on
under-promoted, FDA-approved drugs with existing brand
recognition as well as late-stage development products which
address unmet medical needs, a strategy which we believe helps
minimize our exposure to the significant risk, cost and time
associated with drug discovery and research. We plan to continue
to target products that are competitively differentiated, have
valuable trademarks or other intellectual property, and allow us
to leverage our existing infrastructure. We also plan to explore
opportunities to seek approval for new uses of existing
pharmaceutical products.
Expand sales
force operations
We believe that continuing to build our sales and marketing
infrastructure will help drive prescription volume and product
sales. We currently utilize two distinct sales teams:
|
|
Ø |
We promote Acetadote, and plan to promote Caldolor,
through our dedicated hospital sales team consisting of 30
representatives and managers. This team covers approximately
1,768, or 32%, of all U.S. hospitals. We are currently
expanding this sales force to 77 representatives and managers in
order to more fully capitalize on the market potential of
Acetadote and Caldolor.
|
|
|
Ø |
We promote Kristalose through a dedicated contract field
sales force of 36 sales representatives and district managers as
of July 1, 2009. These representatives are now covering
approximately 8,000 target physicians who are prescribers of
Kristalose, and who are responsible for approximately 71% of
total retail Kristalose prescriptions nationally. By investing
in our marketing program and expanding this sales force, we
believe that we will be able to increase market share for
Kristalose.
|
52
Business
Develop a
pipeline of early-stage products through CET
In order to build our product pipeline, we are supplementing our
acquisition and late-stage development activities with the
early-stage drug development activities of CET, our
majority-owned subsidiary. CET partners with universities and
other research organizations to cost-effectively develop
promising, early-stage product candidates. Current pre-clinical
projects nearing clinical-stage development include:
|
|
Ø |
a palliative treatment for fluid buildup in the lungs of cancer
patients, in collaboration with Vanderbilt University, and
|
|
|
Ø |
a highly purified anti-infective for treating fungal infections
in immuno-compromised patients, in collaboration with the
University of Mississippi, and
|
|
|
Ø |
a novel treatment to reduce or eliminate asthmatic reaction in
pediatric patients in collaboration with the University of
Tennessee.
|
INDUSTRY
The hospital
market
According to IMS Health, U.S. hospitals accounted for
approximately $31 billion, or 11%, of
U.S. pharmaceutical sales in 2008. IMS Health also reports
that in 2008, marketing and promotional efforts focused on
hospital-use drugs represented only about $484 million, or
2%, of approximately $21 billion total pharmaceutical
industry spending on promotional activity. The majority of
promotional spending is directed towards large outpatient
markets promoting drugs intended for chronic use rather than
short-term use in the hospital setting. We believe the lack of
promotional emphasis on the hospital marketplace indicates that
the hospital market is underserved. We also believe that the
hospital market is highly concentrated, with a small number of
large institutions responsible for the majority of
pharmaceutical spending, and consequently that it can be
penetrated effectively without large-scale promotional activity
by a small, dedicated sales force.
Market for
injectable analgesics
Therapeutic agents used to treat pain are collectively known as
analgesics. Physicians prescribe injectable analgesics for
hospitalized patients who have high levels of acute pain,
require rapid pain relief or cannot take oral analgesics.
According to IMS Health, the U.S. market for injectable
analgesics exceeded $332 million, or 681 million
units, in 2008. This market is comprised principally of generic
opioids and the NSAID ketorolac. Injectable opioids such as
morphine, meperidine, hydromorphone and fentanyl accounted for
approximately 635 million units sold in 2008. While opioids
are widely used for acute pain management, they are associated
with a variety of unwanted side effects including sedation,
nausea, vomiting, constipation, headache, cognitive impairment,
reduced GI motility and respiratory depression. Respiratory
depression, if not monitored closely, can be deadly.
Opioid-related side effects can warrant dosing limitations,
which may reduce overall effectiveness of pain relief. Side
effects from opioids can cause a need for further medication or
treatment, and can increase lengths of stay in post-anesthesia
care units as well as overall hospital stay, which can lead to
increased costs for hospitals and patients.
Despite having a poor safety profile, usage of ketorolac, the
only non-opioid injectable analgesic available in the U.S., has
grown from approximately 38 million units in 2004, or 5% of
the market, to approximately 46 million units in 2008,
representing 7% of the market, according to IMS Health. The FDA
specifically warns that ketorolac should not be used in various
patient populations that are at-risk for bleeding, as a
prophylactic analgesic prior to major surgery or for
intraoperative administration when stoppage of bleeding is
critical.
53
Business
Fever
Significant fever is generally defined as a temperature of
greater than 102 degrees Fahrenheit. High fevers can cause
hallucinations, confusion, convulsions and death. Hospitalized
patients are subject to increased risk for developing fever,
especially from exposure to infectious agents. Patients with
endotracheal intubation, sedation, reduced gastric motility,
nausea or recent surgery are frequently unable to ingest,
digest, absorb, or tolerate oral products to reduce fever.
Treatment for these patients ranges from rectal delivery of
medication to physical cooling measures such as tepid baths, ice
packs and cooling blankets. In the U.S., there is currently no
FDA-approved intravenous medication for the treatment of fever
other than Caldolor.
Acetaminophen
poisoning
Acetaminophen is one of the most widely used drugs for oral
treatment of pain and fever in the U.S. and can be found in many
common
over-the-counter,
or OTC products and prescription narcotics. Though safe at
recommended doses, the drug can cause liver damage with
excessive use. According to the American Association of Poison
Control Centers National Poison Data System, acetaminophen
poisoning was the leading cause of toxic drug ingestions
reported to poison control centers in 2007 in the U.S.
In a study published in 2005 that examined acute liver failure,
researchers concluded that acetaminophen poisoning was
responsible for acute liver failure in over half the patients
examined in 2003, up from 28% in 1998. While an estimated 48% of
cases were due to the accidental use of acetaminophen over
several days, causing chronic liver failure, an estimated 44% of
the cases were intentional overdoses, causing acute liver
failure.
According to the FDA, four grams of acetaminophen is the daily
maximum dosage recommended for adults. Ingesting eight grams of
acetaminophen in a single day causes a significant number of
people, whose livers have been previously stressed by a virus,
medication or alcohol, to experience more serious complications.
When used in conjunction with opiates, acetaminophen can be
effective in relieving pain after surgery or injury; however,
some patients who take acetaminophen/opiate combination drugs on
a chronic basis eventually require increasing amounts to achieve
the same level of pain relief, which can also lead to liver
failure.
Market for the
treatment of acetaminophen overdose
NAC is widely accepted as the standard of care for acetaminophen
overdose. Throughout Europe and much of the rest of the world,
NAC has been available in an injectable formulation for over
25 years. Until the 2004 approval of Acetadote, however,
the only FDA-approved form of NAC available in the U.S. was
an oral preparation. Prior to the approval of Acetadote, many
U.S. hospitals prepared an off-label, IV form of NAC from
the oral solution to treat patients suffering from acetaminophen
poisoning. For a number of these patients, an IV product is
the only reasonable route of administration due to nausea and
vomiting associated with the administration of oral NAC for the
overdose. Moreover, IV treatment requires fewer doses and a
shorter treatment protocol, reducing treatment from three days
to one day.
Acetaminophen poisoning treatment is typically initiated in the
emergency department and continued in the intensive care unit.
NAC is marketed to emergency physicians and nurses, critical
care physicians, clinical and medical toxicologists and poison
control centers. According to The Medical Letter on Drugs and
Therapeutics, NAC is virtually 100% effective in preventing
severe liver damage, renal failure and death if administered
within eight to ten hours of the overdose.
54
Business
The
gastrointestinal market
According to the National Institute of Diabetes, Digestive and
Kidney Diseases, gastrointestinal diseases result in
approximately 50 million physician visits and
14 million hospitalizations annually. Many of these
physician visits are to one of the only 11,700
gastroenterologists in the U.S.
There are over 40 common, well-defined gastrointestinal
conditions recognized in the U.S., including constipation,
chronic liver disease and cirrhosis, gastroesophageal reflux
disease, infectious diarrhea, irritable bowel syndrome, lactose
intolerance, pancreatitis and peptic ulcers. Because the market
for gastrointestinal diseases is broad in patient scope, yet
relatively narrow in physician base, we believe that it is an
attractive specialty focus which can provide a wide variety of
product opportunities but can be penetrated with a modest sales
force.
Prescription
laxative market
Constipation is a common condition in the U.S., affecting
approximately 20% of the population each year. While many
occurrences are non-recurring, a significant number are chronic
in nature and require some treatment to control or resolve.
Constipation treatments are sold in both the OTC and
prescription segments. We believe that the prescription laxative
market in which Kristalose competes has historically consisted
of a few highly promoted brands including
MiraLax®
(polyethylene glycol 3350), which is now being sold as an OTC
product, and
Amitiza®,
as well as several generic forms of liquid lactulose. In
addition, Novartis AG marketed
Zelnorm®
as a prescription laxative until the company announced its
withdrawal from the U.S. market in April 2008 following the
announcement of adverse safety findings in 2007. According to
data from IMS Health, the prescription laxative market grew from
approximately $269 million in 2004 to $344 million in
2008, a compound annual growth rate of approximately 6%. This
increase in sales resulted primarily from new product
introductions and increased promotion of branded products.
PRODUCTS
Our key products include:
|
|
|
|
|
|
|
Product
|
|
Indication
|
|
Delivery
|
|
Status
|
|
|
Caldolortm
|
|
Pain and Fever
|
|
Injectable
|
|
FDA Approved
|
Acetadote®
|
|
Acetaminophen Poisoning
|
|
Injectable
|
|
Marketed
|
Kristalose®
|
|
Chronic and Acute Constipation
|
|
Oral Solution
|
|
Marketed
|
|
|
Caldolor
Caldolor is an intravenous formulation of ibuprofen approved by
the FDA in June 2009 for the treatment of both pain and fever.
It is the first and only approved intravenous therapy for both
pain and fever. Caldolor is indicated for use in adults for the
management of mild to moderate pain, the management of moderate
to severe pain as an adjunct to opioid analgesics, and for the
reduction of fever. We expect Caldolor to be administered
primarily to hospitalized patients who are unable to receive
oral therapies for these indications.
Injectable analgesics, or pain relievers, currently available in
the United States include opioids, such as morphine and
meperidine, and ketorolac, a non-steroidal anti-inflammatory
drug, or NSAID. According to IMS Health, opioids accounted for
93% of injectable analgesic market volume in 2008 with
approximately 635 million units sold. Opioids are, however,
known to cause undesirable side effects including sedation,
nausea, vomiting, cognitive impairment and respiratory
depression. These side
55
Business
effects can necessitate increased length of hospital stay for
patients as well as the use of additional drugs to manage side
effects such as nausea and vomiting, all of which contribute to
increased hospital costs.
Ketorolac is the only non-opioid injectable analgesic approved
in the United States. However, it has been associated with
increased risk of bleeding as well as gastrointestinal and renal
complications. The FDA specifically warns that ketorolac should
not be used in patient populations that are at high risk for
bleeding, as a prophylactic analgesic prior to major surgery or
in patients where stoppage of bleeding is critical. Despite
strong safety warnings from the FDA, use of ketorolac in the
United States has grown from approximately 38 million units
sold in 2004 to approximately 46 million units sold in 2008
according to IMS Health.
We believe there is a need for an alternative to existing
injectable therapies for treatment of pain in the United States,
and there are currently no
U.S.-approved
injectable treatments for fever other than Caldolor.
Clinical
Development Overview
Ibuprofen, an NSAID, continues to be a widely-used product
administered orally for pain relief and fever reduction.
According to IMS Health, U.S. hospitals purchased
180 million units of oral ibuprofen in 2007. Until now,
ibuprofen has been not been approved in an injectable
formulation in the United States for these indications.
In May 1999, we acquired from Vanderbilt University an
exclusive, worldwide license to clinical trial data on the use
of intravenous ibuprofen for treatment of hospitalized patients
with severe sepsis syndrome, a complex inflammatory condition
often resulting in high fever due to infection. Published in the
New England Journal of Medicine, this data indicated that
intravenous ibuprofen was effective in reducing high fever in
critically ill patients who were largely unable to receive oral
medication. Based upon efficacy and safety data generated from
this study, we met with the FDA to determine the requirements
for gaining FDA approval of intravenous ibuprofen through a
505(b)(2) application. Following discussion with and
recommendations by the FDA, we implemented a development program
for Caldolor that was designed to obtain approval for a dual
indication for the productmanagement of acute pain and
reduction of fever. We performed extensive formulation work
resulting in a patented, proprietary product and conducted a
number of clinical studies evaluating the safety and efficacy of
Caldolor for treatment of pain and fever.
56
Business
More than 1,400 subjects, including over 800 receiving IV
Ibuprofen, have been studied in seven clinical trials supporting
our NDA filing. A summary of clinical trials supporting our NDA
filing for Caldolor is provided below.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Study
Name
|
|
Subjects
|
|
|
Setting
|
|
Study
Results
|
|
|
Pharmacokinetic Study
|
|
|
36
|
|
|
Healthy volunteers
|
|
Similar PK parameters between oral and Caldolor
|
|
|
|
|
|
|
|
|
|
Adult Safety Study
|
|
|
12
|
|
|
Healthy volunteers
|
|
Safe and well-tolerated IV infusion of Caldolor
|
|
|
|
|
|
|
|
|
|
Sepsis Study IND
32803(1)
|
|
|
455
|
|
|
Hospitalized patients with severe sepsis
|
|
Significant and sustained reduction of temperature in patients
with high fever
(p<0.01)(3)
|
|
|
|
|
|
|
|
|
|
Adult Malaria Fever Study
|
|
|
60
|
|
|
Hospitalized adult malaria patients
|
|
Significant reduction in temperature over 24 hours of
treatment (p=0.002)
|
|
|
|
|
|
|
|
|
|
Phase III Adult Fever
Study(2)
|
|
|
120
|
|
|
Hospitalized adult febrile patients
|
|
Significant, dose-dependent, reduction in temperature supporting
400mg dose (p=0.0003)
|
|
|
|
|
|
|
|
|
|
Phase III Adult Dose Ranging Pain
Study(2)
|
|
|
406
|
|
|
Hospitalized adult abdominal and orthopedic post-operative
patients
|
|
Dose-dependent, morphine sparing effect (22%) supporting 800mg
dose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant reduction in pain intensity scores
(VAS)(4)
over 24 hours of treatment (p=0.001)
|
|
|
|
|
|
|
|
|
|
Phase III Adult Abdominal Hysterectomy Pain
Study(2)
|
|
|
319
|
|
|
Hospitalized adult abdominal hysterectomy patients
|
|
Significant, morphine-sparing effect (19%, p<0.001)
Significant reduction in pain intensity scores (VAS) over 24 hours of treatment (p=0.011)
|
|
|
Total
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Study data licensed from Vanderbilt
University; Cumberland report filed 2003
|
|
|
|
(3)
|
|
P-value <0.05 represents
statistical significance
|
We have also completed a pediatric fever study (N=30), a
pharmacokinetic study in healthy volunteers (N=12) and a pain
study in post-operative orthopedic patients (N=185). In
addition, we are conducting a study to support marketing of
Caldolor for treatment of pain and fever in hospitalized burn
patients (N=60). We expect this study to be completed in the
fourth quarter of 2009.
57
Business
Safety
Summary
Extensive use and worldwide literature support the strong safety
profile of oral ibuprofen. Building on the oral safety profile,
we have assembled an integrated IV ibuprofen safety
database combining data from our clinical trials as well as
previously published study data. We used this data to support
our NDA filing and will continue to use and update the data as a
part of our ongoing safety evaluation. In addition, this data
will be used by our sales force and in our marketing materials
to promote Caldolor.
In clinical trials supporting our proposed indications, no
serious adverse events have been directly attributed to
Caldolor. The number and percentage of all patients in pivotal
studies who reported treatment emergent adverse events was
comparable between IV ibuprofen and placebo treatment
groups. Additionally, there have been no safety related
differences between Caldolor and placebo involving side effects
sometimes observed with oral NSAIDs, such as changes in renal
function, bleeding events or gastrointestinal disorders.
Clinical Studies
for Pain
After receiving FDA guidance through a Special Protocol
Assessment, we conducted a Phase III, multi-center, randomized,
double-blind, placebo-controlled study to evaluate Caldolor for
treatment of pain.
Phase III
Adult Dose Ranging Pain Study
Hospitalized patients, all with access to patient controlled
analgesia (PCA) with morphine, were randomized to also receive
one of two doses (400mg or 800mg) of Caldolor (multi-modal
therapy) or placebo treatment (standard therapy) four times
daily for up to five days. The first dose was administered
intra-operatively at the initiation of surgical closure. The
primary endpoint of this study was reduction in morphine use
after 24 hours of treatment.
We enrolled 406 adult surgical patients undergoing a variety of
abdominal and orthopedic surgeries. Statistical testing of the
data for the primary efficacy endpoint demonstrated the data was
not normally distributed. As a result, appropriate
transformations of the data were conducted to provide
appropriate models for statistical testing of significance, and
analog non-parametric procedures were applied. This analysis
shows that the p-value for the 800mg dose of Caldolor versus
placebo was significant (p=0.030), but that the placebo versus
400mg dose comparison was not significant for the primary
endpoint (p=0.458).
The FDA acknowledged that data were not normally distributed,
that transformation of the data was appropriate and that median
values could reflect the data more accurately. However, FDA
concluded that the statistical analysis plan did not
sufficiently pre-specify for the non-parametric analyses of the
data. Therefore, the data was not included in the package insert
for Caldolor.
In this study, we also investigated the efficacy of Caldolor in
reducing pain as measured by a Visual Analog Scale (VAS). In
addition to using less morphine, patients receiving 800mg of
Caldolor reported a 20% reduction in pain intensity over the
24 hours following surgery (p=0.001; at rest Area Under the
Curve (AUC) of VAS). Patients receiving 400mg of Caldolor
reported a 7% reduction in pain intensity over the 24 hours
following surgery (p=0.057; at rest AUC of VAS). At
24 hours after the first dose of ibuprofen was
administered, patients receiving 800mg of Caldolor reported a
33% reduction in pain measured at rest (p=0.009) and 18%
reduction with movement (p<0.005).
Morphine-Sparing
Effect of Caldolor, 24 Hours Post-Surgery
|
|
|
|
|
|
|
|
|
|
|
400 mg
|
|
|
800 mg
|
|
|
|
|
% Decrease*
|
|
|
3%
|
|
|
|
22%
|
|
p-value¥
|
|
|
p=0.458
|
|
|
|
p=0.030
|
|
58
Business
Reduction
in Pain Intensity: Effect of Caldolor 24 Hours
Post-Surgery
|
|
|
|
|
|
|
|
|
|
|
400 mg
|
|
|
800 mg
|
|
|
|
|
% Decrease* at hour-24, at rest
|
|
|
0%
|
|
|
|
33%
|
|
p-value
|
|
|
p=0.419
|
|
|
|
p=0.009
|
|
% Decrease* at hour-24, with movement
|
|
|
−2%
|
|
|
|
18%
|
|
p-value
|
|
|
p=0.894
|
|
|
|
p=0.005
|
|
|
|
|
*
|
|
Percent decrease in patients
receiving ibuprofen multi-modal therapy compared to standard,
morphine only therapy.
|
|
|
|
|
|
Analysis based on a linear 4-way
ANOVA model with fixed effects for age group, weight group,
randomization center, and treatment group. P-values based on the
difference in Least Squares Means from the final ANOVA model and
are adjusted for multiple comparisons using Dunnetts
method. The non-transformed data resulted in a non-significant
reduction in morphine use.
|
|
|
|
¥
|
|
Data transformed using the rank
transformation.
|
The data from this study provided a rationale for the selection
of the 800mg dose for evaluation in a subsequent clinical trial
presented below.
Phase III
Adult Abdominal Hysterectomy Pain Study
Based on preliminary analyses of the first pain study, we
initiated our second Phase III pain study using a similar
design in post-operative adult patients who had undergone an
abdominal hysterectomy. Patients, all with access to patient
controlled analgesia (PCA) with morphine, were randomized to
also receive either 800mg of Caldolor (multi-modal therapy) or
placebo treatment (standard therapy) four times daily for up to
five days. The first dose was administered intra-operatively at
the initiation of surgical closure. Again, the primary endpoint
of this study was reduction in morphine use after 24 hours
of treatment.
We enrolled 319 patients in the safety population. As shown
in the table below, there was a significant reduction in
morphine use by those receiving the 800mg dose. Similar to our
first Phase III pain study, we also investigated the
efficacy of Caldolor in improving patient pain intensity scores
using VAS. In addition to using less morphine, patients
receiving 800mg of Caldolor reported a 21% reduction in pain
intensity following surgery through study hour 24 (p=0.011; at
rest Area Under the Curve of VAS). As shown in the table below,
24 hours after the first dose of Caldolor was administered
patients receiving 800mg of Caldolor reported a 31% reduction in
pain measured at rest (p=0.048) and a 20% reduction with
movement (p=0.002).
Morphine-Sparing
Effect of Caldolor in Abdominal Hysterectomy Surgery
Post-Surgery
|
|
|
|
|
|
|
800 mg
|
|
|
|
|
% Decrease*
|
|
|
19%
|
|
p-value
|
|
|
p<0.001
|
|
Reduction
in Pain Intensity: Effect of Caldolor in Abdominal Hysterectomy
Surgery 24 Hours Post-Surgery
|
|
|
|
|
|
|
800 mg
|
|
|
|
|
% Decrease* at hour-24, at rest
|
|
|
31%
|
|
p-value
|
|
|
p=0.048
|
|
% Decrease* at hour-24, with movement
|
|
|
20%
|
|
p-value
|
|
|
p=0.002
|
|
|
|
|
*
|
|
Percent decrease in patients
receiving ibuprofen multi-modal therapy compared to standard,
morphine only therapy.
|
|
|
|
|
|
Analysis is based on a linear 4-way
ANOVA model with fixed effects for age group, weight group,
randomization center, and treatment group. P-values based on the
difference in Least Squares Means from the final ANOVA model.
|
59
Business
Phase III
Adult Orthopedic Pain Study
Based on analyses of the first pain study, we also initiated a
Phase III pain study using a similar design in
post-operative adult patients who had undergone orthopedic
surgical procedures. Patients, all with access to patient
controlled analgesia (PCA) with morphine, were randomized to
also receive either 800mg of Caldolor (multi-modal therapy) or
placebo treatment (standard therapy) four times daily for up to
five days. The first dose in this study was administered prior
(pre-operatively) to the surgical procedure. The primary
endpoint of this study was reduction in patient pain intensity
scores using VAS measured with movement.
We enrolled 185 patients in the safety population. As shown
in the table below there was a significant reduction in patient
pain intensity scores using VAS. Patients receiving 800mg of
Caldolor reported a 26% reduction in pain intensity after
24 hours (p<0.001; with movement Area Under the Curve
of VAS). As shown in the table below, at 24 hours after the
first dose of Caldolor was administered patients receiving 800mg
of Caldolor reported a 32% reduction in pain measured at rest
(p<0.001) and 26% reduction with movement (p<0.001).
In this study, we also investigated the efficacy of Caldolor in
reducing morphine use by patients receiving the 800mg dose. As
shown in the table below there was a significant reduction in
morphine use by those receiving 800mg of Caldolor after surgery
and through hour 24.
Reduction
in Pain Intensity: Effect of Caldolor in Orthopedic
Surgery
|
|
|
|
|
|
|
800 mg
|
|
|
|
|
Pain Reduction* according to VAS, with movement
|
|
|
26%
|
|
p-value
|
|
|
p<0.001
|
|
Pain Reduction* according to VAS, at rest
|
|
|
32%
|
|
p-value
|
|
|
p<0.001
|
|
Morphine-Sparing
Effect of Caldolor, in Orthopedic Surgery
|
|
|
|
|
|
|
800 mg
|
|
|
|
|
% Decrease*
|
|
|
31%
|
|
p-value
|
|
|
p<0.001
|
|
|
|
|
*
|
|
Percent decrease in patients
receiving ibuprofen multi-modal therapy compared to standard,
morphine only therapy.
|
|
|
|
|
|
Analysis based on a linear 4-way
ANOVA model with fixed effects for age group, weight group,
randomization center, and treatment group. P-values based on the
difference in Least Squares Means from the final ANOVA model.
|
60
Business
Clinical Studies
for Fever
We have licensed the data to a prospective, multi-center,
randomized, placebo-controlled, double-blind study of
intravenous ibuprofen that was conducted in 455 critically ill,
hospitalized patients with severe sepsis syndrome. Patients with
severe sepsis syndrome often experience high fever due to
infection. Patients were randomized to receive up to 800mg
of IV ibuprofen or placebo treatment for a total maximum
daily dose of 3200mg ibuprofen administered intravenously over
48 hours. The following graph shows that febrile patients
receiving ibuprofen had a significant reduction in temperature
compared to placebo. Statistical significance was detected at
the first temperature measurement collected at two hours
(p=0.001) and continued throughout the duration of treatment.
Safety analyses were performed with specific attention given to
any potential renal or bleeding adverse events. The study showed
no differences in renal or bleeding-related adverse events
between patients receiving ibuprofen and those receiving
placebo. The occurrence of other adverse events was also similar
between groups.
61
Business
We conducted a pivotal Phase III, multi-center, randomized,
double-blind, parallel, placebo-controlled dose-ranging study to
evaluate the efficacy, safety and pharmacokinetics of Caldolor
in adult febrile subjects. One hundred twenty critically ill and
non-critically ill hospitalized patients were randomized to
receive 100mg, 200mg or 400mg of Caldolor or placebo treatment
over 24 hours. As shown in the graph below, patients
receiving 400mg of Caldolor had a significant reduction in fever
compared to patients receiving placebo at the primary endpoint
of four hours (p=0.0003). Further, the 400mg dose was the most
effective dose in returning a patients temperature to a
normal range.
We also conducted a single-center, randomized, double-blind,
placebo-controlled study to evaluate the efficacy and safety of
Caldolor in 60 hospitalized, febrile adult patients with
malaria. Patients were randomized to receive 400mg of Caldolor
or placebo treatment over 72 hours. As shown in the table
below, subjects receiving Caldolor had a significant reduction
in temperature compared to those receiving placebo treatment
after 24 hours (area under the curve AUC calculation).
|
|
Reduction
in Temperature:
|
Effect of
Caldolor on Fever in Malaria Model
(AUC: Effect over 24 Hours of Treatment)
|
|
|
|
|
|
|
|
|
|
|
|
Placebo
|
|
|
Caldolor
|
|
|
|
|
AUC-T° (0-24) (°C x hour)
Mean (±SD)
|
|
|
16.44 (±11.60)
|
|
|
|
7.49 (±7.94)
|
|
p-value, compared to placebo treatment
|
|
|
|
|
|
|
0.002
|
|
To satisfy the FDAs requirement for pediatric data, we
designed a study to compare 10 mg/kg of Caldolor to
15 mg/kg oral or rectal acetaminophen for the treatment of
fever. The primary endpoint of the study was to determine
clinical equivalence between the two treatments. Both treatments
demonstrated a statistically significant reduction in fever,
with Caldolor reducing fever more in the first two hours. While
the two treatments were not shown to be significantly different
with respect to the primary endpoint, the study did not enroll
an adequate number of patients to statistically demonstrate
equivalence.
62
Business
Required
Pediatric Assessment
The required pediatric assessment for the Caldolor NDA was
deferred until 2011 for the treatment of fever and until 2012
for the management of pain. Further, the FDA issued a formal
Written Request, pursuant to Section 505A of the Federal
Food, Drug and Cosmetic Act. By conducting pediatric clinical
studies and supplying requested data to FDA, Cumberland has the
opportunity to obtain up to an additional six months of
marketing exclusivity for Caldolor. We intend to commence the
first pediatric study in the second half of 2009. If the results
of these trials are not favorable, we would not be eligible for
additional pediatric exclusivity; however, unfavorable pediatric
results would not impact our marketing status for use in adults.
No additional Phase IV Commitments were assigned by the FDA.
Additional
Data
We conducted a randomized, double-blind, placebo-controlled,
single dose crossover study of the pharmacokinetics, safety and
tolerability of Caldolor in healthy adult volunteers. Twelve
subjects were randomized in equal proportions to receive a
single dose of 800 mg Caldolor, administered over 5-7
minutes, and oral placebo administered concurrently, followed by
a wash-out period of a single dose of 800 mg oral ibuprofen
and intravenous placebo given concurrently.
There were no serious adverse events nor any adverse events
classified as moderate or severe. The most common adverse event,
which was classified as mild, was infusion site pain in three
subjects.
As shown in the graph below, the mean
Cmax
of Caldolor was approximately twice that of the oral dose and
the median
Tmax
for Caldolor was 6.5 minutes compared to 1.5 hours for the
oral product. The AUC was similar between the two products.
63
Business
Comparative
Studies in Literature
We referenced the abundant safety and efficacy history of oral
ibuprofen in support of our 505(b)(2) application to the FDA for
approval of our intravenous formulation.
We also conducted a comprehensive literature review and analysis
of published clinical trials conducted by third parties and
identified a total of 74 published clinical studies in adults
and children comparing oral ibuprofen to oral/rectal
acetaminophen for treatment of pain
and/or
fever. Of the 74 publications, 50 presented comparative data for
treatment of pain and 34 presented comparative data for
reduction of feversome publications assessing both. In 50
pain studies, 30 concluded that, overall, ibuprofen was superior
to acetaminophen and 20 concluded the drugs were equivalent. In
34 fever studies, 18 concluded that, overall, ibuprofen was
superior to acetaminophen and 16 concluded that they were
equivalent. None of the 74 publications concluded that, overall,
acetaminophen was superior to ibuprofen.
Clin Drug Invest published results of the PAIN Study:
Paracetamol, Aspirin and Ibuprofen New Tolerability Study. This
was a blinded, multi-center study that evaluated 8,677 adult
subjects2,888 paracetamol (acetaminophen), 2,900 aspirin,
2,886 ibuprofenassessing the tolerability of the study
drugs administered orally for up to 7 days for treatment of
pain associated with musculoskeletal or back pain, sore throat,
the common cold and flu. The primary endpoint of the study was
the rate of significant adverse events (resulting in treatment
discontinuation or a physician visit). Rates of significant
adverse events were paracetamol 14.5%, aspirin 18.7% and
ibuprofen 13.7%. The study demonstrated that the tolerability of
ibuprofen was statistically equivalent to that of paracetamol
and that both ibuprofen and paracetamol were significantly
better- tolerated than aspirin (p<0.001). The study further
noted that acute toxicity of ibuprofen during intended or
accidental overdose is much lower than that of paracetamol.
Pediatrics, the official journal of the American Academy
of Pediatrics, published the results of a randomized clinical
study comparing orally administered ibuprofen, acetaminophen and
codeine for the treatment of pain from acute musculoskeletal
injuries in children. Three hundred subjects (100 in each
treatment group) were evaluated and investigators reported that
ibuprofen provided the best pain relief of the three study
drugs. Patients in the ibuprofen group had a significantly
greater improvement in pain score (VAS) than those in the
codeine and acetaminophen groups at 60 minutes. In addition,
more patients in the ibuprofen group achieved adequate pain
relief than the other groups. As shown in the table below,
ibuprofen had a statistically significant effect in decreasing
pain scores.
Change in pain
score (VAS) from baseline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ibuprofen
vs.
|
|
|
|
Ibuprofen
|
|
|
Acetaminophen
|
|
|
Codeine
|
|
|
|
|
|
|
|
|
|
(mean)
|
|
|
(mean)
|
|
|
(mean)
|
|
|
Acetaminophen
|
|
|
Codeine
|
|
|
|
|
60 Minutes
|
|
|
−24
|
|
|
|
−12
|
|
|
|
−11
|
|
|
|
P=0.001
|
|
|
|
P<0.001
|
|
90 Minutes
|
|
|
−29
|
|
|
|
−17
|
|
|
|
−13
|
|
|
|
P=0.016
|
|
|
|
P=0.001
|
|
120 Minutes
|
|
|
−31
|
|
|
|
−20
|
|
|
|
−17
|
|
|
|
P=0.026
|
|
|
|
P=0.006
|
|
There were no differences in adverse events observed among the
three treatment groups in this study.
Licensing
agreement
Upon entering into our agreement with Vanderbilt University in
1999 for the exclusive, worldwide license to the clinical data
on use of intravenous ibuprofen for treatment of sepsis, we
issued 50,000 shares of our common stock to Vanderbilt.
Upon regulatory approval for Caldolor, we issued
64
Business
Vanderbilt 10,000 additional shares of our common stock
pursuant to our agreement. We are also required to pay
Vanderbilt a two percent royalty on sales of any product
developed based on the data. We and Vanderbilt each have the
right to terminate this agreement upon substantial breach by the
other party, subject to providing 45 days prior written
notice and an opportunity to cure. If not terminated, the
agreement shall continue until we cease distribution of Caldolor
in all countries for which we have obtained regulatory approval.
Commercialization
strategy
We have worldwide commercial rights to Caldolor. We intend to
market Caldolor in the United States through our existing
hospital sales force, which we are expanding in preparation for
the product launch. We intend to partner with third parties to
reach markets outside the United States. We have agreements for
commercial manufacturing of Caldolor with Hospira Australia Pty.
Ltd., formerly known as Mayne Pharma Pty. Ltd., and Bayer
Healthcare, LLC in the United States.
In preparation for the launch of Caldolor in the United States
we have undertaken extensive market research activities and have
developed a comprehensive launch plan. In conjunction with
scientific and medical advisory boards as well as leading pain
and fever specialists, we have developed and tested what we
believe are appropriate and effective marketing messages for our
carefully selected targets, including physicians in several
specialties, nurses and pharmacists in high-use institutions. We
are completing price-sensitivity research to select an
appropriate pricing strategy and production of launch supplies
is underway, with the first commercial batches complete.
We are currently expanding our existing hospital sales force
from 30 to 77 experienced hospital sales representatives and
managers to promote Caldolor, and have developed a comprehensive
training program to support them. These representatives will be
responsible for territories designed through computer modeling
to optimize both hospital targeting and coverage. Marketing
support materials will include new clinical papers, journal ads,
in-service programs, an information package designed for
Pharmacy and Therapeutic committees and a range of sales support
literature. We have expanded our professional affairs team to
handle increased medical inquiries. Launch preparation will
culminate with a national launch meeting to finalize training
and maximize motivation prior to the planned launch in the
fourth quarter of 2009.
Acetadote
Acetadote is N-acetylcysteine, or NAC, for the intravenous
treatment of acetaminophen overdose. Until we obtained FDA
approval for Acetadote in 2004, the only FDA-approved form of
NAC available in the U.S. was an oral preparation. Medical
literature suggested that many hospitals prepared an off-label,
IV form of NAC from the oral solution for easier administration
and accuracy in dosing. Given this market dynamic, we concluded
that a medical need existed for an FDA-approved, injectable
formulation of NAC for the U.S. market.
We actively managed the development and regulatory approval of
Acetadote by implementing the following steps:
|
|
Ø |
We held initial discussions with the FDA to design a development
plan.
|
|
|
Ø |
Acetadote was granted orphan drug status in October 2001, which
provides for seven years of marketing exclusivity from the date
of marketing approval.
|
|
|
Ø
|
We submitted our NDA in July 2002.
|
|
Ø
|
We submitted a complete response to FDA initial review questions
in July 2003.
|
65
Business
|
|
Ø
|
We received FDA marketing approval for Acetadote in January 2004
for the treatment of acetaminophen overdose.
|
|
Ø
|
Acetadote was launched in June 2004.
|
|
|
Ø |
Early in 2006, the FDA approved revised labeling for the
product, which included an expanded indication for dosing in
pediatric patients.
|
|
|
Ø |
In 2008, the FDA approved further revised labeling for the
product, which included additional safety data from a
post-marketing study.
|
In connection with the FDAs approval of Acetadote, we
committed to certain post-marketing activities for the product.
Our first phase IV commitment (pediatric) was completed and
accepted by the FDA in December 2004. Our second phase IV
commitment (clinical) was completed and accepted by the FDA in
August 2006. We completed our third and final phase IV
commitment (manufacturing) for Acetadote in 2007 and have
submitted the appropriate documentation to the FDA for review.
We are also supporting a number of studies to explore other
potential indications for the product.
We believe Acetadote has clinical and financial benefits
relative to oral NAC, including ease of administration,
minimizing nausea and vomiting associated with oral NAC,
accurate dosage control, shorter treatment protocol and
reduction in overall cost of acetaminophen overdose management.
Acetadote makes NAC administration easier to tolerate for
patients and easier to administer for medical providers. We
believe Acetadote also offers a significant cost benefit to both
patient and hospital by reducing the treatment regimen, usually
from three days to one day.
Acetadote is manufactured for us by Bioniche Teoranta at its
FDA-approved manufacturing facility in Ireland, and by Bayer
Healthcare, LLC at its
FDA-approved
facility in Kansas.
Kristalose
Kristalose is a prescription laxative administered orally for
the treatment of constipation. In patients with a history of
chronic constipation, lactulose therapy increases the number of
bowel movements per day and the number of days on which they
occur. Lactulose is a product with a long history of use as a
laxative, and as a treatment for hepatic encephalopathy, which
is a deterioration of the liver resulting in a
build-up of
ammonia. Kristalose is an innovative, dry powder crystalline
formulation of lactulose which is designed to enhance patient
compliance and acceptance.
We co-promoted Kristalose from 2002 until April 2006 under an
agreement with Bertek Pharmaceuticals, Inc., the branded
division of Mylan Laboratories, Inc. Following Mylans
discontinuance of Bertek operations in 2006, Inalco assumed
exclusive rights to commercialize Kristalose and in turn
transferred exclusive U.S. commercialization rights to
Kristalose to us. In April 2006, we and Mylan Bertek
Pharmaceuticals, Inc. entered into a mutual release of all
claims against each other. We
re-launched
Kristalose under the Cumberland brand in September 2006 with a
dedicated, contract sales force which is now comprised of
36 sales representatives and district managers as of
July 1, 2009. We direct our sales efforts to physicians who
are the most prolific writers of prescription laxatives. These
physicians include gastroenterologists, pediatricians,
internists and colon and rectal surgeons.
We believe Kristalose offers competitive advantages over other
laxative products. Packaged in single dose packets, Kristalose
is very portable, is reconstituted in as little as four ounces
of water, is clear, virtually tasteless, does not change the
viscosity of the water and contains almost no calories, all of
which we believe cause Kristalose to compare favorably to liquid
lactulose products. Compared to polyethylene glycol 3350
products, we believe Kristalose has a fast onset of action and a
better
66
Business
pregnancy category rating. Compared with
Amitiza®,
Kristalose has fewer potential side effects or contraindications
and is less expensive.
Kristalose is manufactured for us at an FDA-approved facility in
Italy under contract with Inalco.
Early-stage
product candidates
Our pre-clinical product candidates are being developed by CET,
which collaborates with leading research institutions to
identify and pursue promising pre-clinical programs. Three of
the more advanced CET development programs are:
|
|
Ø
|
In collaboration with Vanderbilt University, we are currently
developing a new palliative treatment for fluid buildup in the
lungs of cancer patients. The product candidate is a protein
therapeutic being designed to treat pleural
effusion, a condition which occurs when cancer spreads to
the surface of the lung and chest cavity, causing fluid to
accumulate and patients to suffer shortness of breath and chest
pain. An estimated 100,000 patients are affected by this
condition each year. Currently, the substances used in treating
this cause pain and have only a
60-90%
success rate. Vanderbilt University researchers believe they
have found a method of treating this condition which may involve
less pain, a higher success rate and faster healing time,
resulting in significantly shorter hospital stays.
|
|
Ø
|
In collaboration with the University of Mississippi, we are
developing a highly purified, injectable anti-infective used to
treat fungal infections in immuno-compromised patients. This
product candidates active ingredient is currently
FDA-approved in a different formulation, and while it is the
therapeutic of choice for infectious disease specialists in
treating such fungal infections, it can produce serious side
effects related to renal toxicity, often resulting in dosage
limitations or discontinued use. University of Mississippi
researchers have developed what they believe is a purer and
safer form of the anti-infective.
|
|
|
Ø |
In collaboration with the University of Tennessee, we are
currently developing a novel asthma therapeutic designed to
prevent remodeling of airway smooth muscle to reduce asthmatic
reaction in pediatric patients. Airway remodeling occurs when
the cells or muscles that line the airway become inflamed and
can result in decreased lung function. University of Tennessee
researchers believe they have found a treatment that can reduce,
or even prevent, asthma attacks in children.
|
BUSINESS
DEVELOPMENT
Since inception, we have had an active business development
program focused on acquiring rights to marketed products and
product candidates that fit our strategy and target markets. We
source our business development leads both through our senior
executives and our international network of pharmaceutical and
medical industry insiders. These opportunities are reviewed and
considered on a regular basis by a multi-disciplinary team of
our managers against a list of selection criteria. We have
historically focused on product opportunities with relatively
low acquisition, development and commercialization costs,
employing a variety of deal structures.
We intend to continue to build a portfolio of complementary,
niche products largely through product acquisitions. Our primary
targets are under-promoted, FDA-approved drugs with existing
brand recognition and late-stage development products that
address unmet medical needs in the hospital acute care and
gastroenterology markets. We also plan to explore opportunities
to acquire rights to and seek approval for new uses of
pharmaceutical products. We believe that by focusing mainly on
approved or
67
Business
late-stage products, we can minimize the significant risk, cost
and time associated with drug development. We have completed
three material acquisitions including:
|
|
Ø |
exclusive, worldwide rights from Vanderbilt University to data
for intravenous ibuprofen to support our FDA submission and
approval for Caldolor;
|
|
|
Ø
|
exclusive, worldwide rights to clinical data supporting the
safety and efficacy of Acetadote, which served as a key
component of our FDA submission and approval; and
|
|
Ø
|
exclusive U.S. commercial rights to Kristalose.
|
Our business development team is also responsible for
identifying appropriate CET product candidates and negotiating
with our university partners to secure rights to these
candidates. Through CET, we are collaborating with a growing
list of research institutions including:
|
|
Ø
|
Vanderbilt University;
|
|
Ø
|
University of Mississippi, School of Pharmacy; and
|
|
Ø
|
University of Tennessee Research Foundation.
|
Since 2004, these collaborations secured nearly $1 million
in National Institutes of Health grant funding for the
development of promising new products and several additional
proposals have been submitted or are awaiting review. Although
we believe that these collaborations may be important to our
business in the future, these collaborations are not material to
our business at this time.
CLINICAL AND
REGULATORY AFFAIRS
We have established in-house capabilities for the management of
our clinical, professional and regulatory affairs. Our team
develops and manages our clinical trials, prepares regulatory
submissions, manages ongoing product-related regulatory
responsibilities and manages our medical information call
center. They were responsible for devising the regulatory and
clinical strategies and obtaining FDA approvals for Acetadote
and Caldolor.
Clinical
development
Our in-house clinical development personnel are responsible for:
|
|
Ø
|
creating clinical development strategies;
|
|
Ø
|
designing and monitoring our clinical trials;
|
|
Ø
|
creating case report forms and other study-related documents;
|
|
Ø
|
overseeing clinical work contracted to third parties; and
|
|
Ø
|
overseeing CET grant funding proposals.
|
Regulatory and
quality affairs
Our internal regulatory and quality affairs team is responsible
for:
|
|
Ø
|
preparing and submitting NDAs and fulfilling post-approval
marketing commitments;
|
|
Ø
|
maintaining investigational and marketing applications through
the submission of appropriate reports;
|
|
Ø
|
submitting supplemental applications for additional label
indications, product line extensions and manufacturing
improvements;
|
68
Business
|
|
Ø
|
evaluating regulatory risk profiles for product acquisition
candidates, including compliance with manufacturing, labeling,
distribution and marketing regulations;
|
|
Ø
|
monitoring applicable third-party service providers for quality
and compliance with current Good Manufacturing Practices, Good
Laboratory Practices, and Good Clinical Practices, and
performing periodic audits of such vendors; and
|
|
Ø
|
maintaining systems for document control, product and process
change control, customer complaint handling, product stability
studies and annual drug product reviews.
|
Professional and
medical affairs
Our clinical and regulatory team provides in-house, medical
information support for our marketed products. This includes
interacting directly with healthcare professionals to address
any product or medical inquiries through our medical information
call center. In preparation for the launch of Caldolor, we have
expanded our medical affairs staff to support inquiries from
medical professionals regarding the appropriate use of Caldolor
as well as to support the efforts of our expanded hospital sales
force. Our call center was previously operated by the Rocky
Mountain Poison and Drug Center, or RMPDC. In 2006, we expanded
our clinical and regulatory capabilities and brought our call
center in-house in an effort to ensure the highest level of
quality and service. The RMPDC continues to supplement our
efforts by providing
after-hours
support for our call center and assisting us with our adverse
event collection/reporting and global pharmacovigilance
activities. In addition to coordinating the call center, our
clinical/regulatory group generates medical information letters,
provides informational memos to our sales forces and assists
with ongoing training for the sales forces.
SALES AND
MARKETING
Our sales and marketing team has broad industry experience in
selling branded pharmaceuticals. They manage the dedicated
hospital and gastroenterology sales forces, which are comprised
of 66 sales representatives and managers as of July 1,
2009, direct our national marketing campaigns and maintain key
national account relationships. We promote our products to
hospitals and office-based physicians across the U.S. and plan
to commercialize our products internationally through marketing
alliances.
In January 2007, we converted our hospital sales force, which
had previously been contracted to us by Cardinal Health Inc., or
Cardinal, to Cumberland employees through our newly-formed,
wholly-owned subsidiary, Cumberland Pharma Sales Corp. The
hospital sales team is comprised of 30 sales
representatives and managers, covering approximately 1,768
hospitals across the U.S. We are currently expanding our
hospital sales force to 77 representatives in preparation
for the launch of Caldolor. The gastroenterology-focused team,
formed in September 2006 with our re-launch of Kristalose, is a
field sales force comprised of 36 representatives and district
managers and covering approximately 8,000 high prescribers of
laxatives. This gastroenterology sales force is contracted to us
by Ventiv Commercial Services, LLC, or Inventiv. Under our
agreement, we pay Inventiv a monthly fee of $0.4 million, a
portion of which is used to compensate the sales force. In
addition to this monthly fee, as of March 31, 2009, we have
paid Inventiv an aggregate of approximately $1.8 million
for bonuses and expenses during the existence of this agreement.
This agreement terminates in March 2010. We have the option,
with Inventivs consent, to extend the contract for one
additional year. We also have the option to bring this sales
force in-house.
Our sales and marketing executives conduct ongoing market
analyses to evaluate marketing campaigns and promotional
programs. The evaluations include development of product
profiles, testing of the profiles against the needs of the
market, determining what additional product information or
development work is needed to effectively market the products
and preparing financial forecasts. We
69
Business
utilize professional branding and packaging as well as
promotional items to support our products, including direct
mail, sales brochures, journal advertising, educational and
reminder leave-behinds, patient educational pieces and product
sampling. We also regularly attend targeted trade shows to
promote broad awareness of our products.
Our National Accounts group is responsible for key large buyers
and related marketing programs. This group supports sales and
marketing efforts by maintaining relationships with our
wholesaler customers as well as with third-party payors such as
Group Purchasing Organizations, Pharmacy Benefit Managers,
Hospital Buying Groups, state and federal government purchasers
and influencers and health insurance companies.
International
Sales and Marketing
Consistent with our strategy to outsource non-core functions, we
have licensed to third parties the right to distribute certain
products outside the U.S. We have granted Alveda
Pharmaceuticals Inc., or Alveda, an exclusive license to
distribute Caldolor in Canada subject to receipt of regulatory
approval. Alveda is obligated to make payments to us of up to
$1,000,000 Canadian upon Caldolors achieving specified
regulatory milestones in Canada and to pay us a royalty based on
Canadian sales of Caldolor. This license terminates five years
after regulatory approval is obtained in Canada for the later of
the fever or pain indications. We have granted Hospira Singapore
Pte. Ltd. an exclusive license to market and distribute Caldolor
in Southeast Asia subject to the receipt of regulatory approval.
Hospira Singapore Pte. Ltd. is obligated to make payments to us
of up to $500,000 upon Caldolors achieving specified
regulatory milestones in Southeast Asia as well as royalty
payments. The initial term of the agreement expires on the fifth
anniversary of Caldolor obtaining regulatory approval in
Southeast Asia. We have granted Phebra Pty. Limited, or Phebra,
an exclusive license to market and distribute Acetadote in
Australia, New Zealand, and Southeast Asia, subject to the
receipt of regulatory approval. Phebra is obligated to make
payments to us of up to $325,000 upon Phebras achieving
specified milestones as well as royalty payments. This license
terminates seven years after sales of Acetadote are recorded in
Australia.
MANUFACTURING AND
DISTRIBUTION
We outsource certain non-core, capital-intensive functions,
including manufacturing and distribution. Our executives have
years of experience in these areas and manage these third-party
relationships with a focus on quality assurance.
Manufacturing
Our key manufacturing relationships include:
|
|
Ø |
In July 2000, we established an international manufacturing
alliance with a predecessor to Hospira Australia Pty. Ltd., or
Hospira. Hospira sources active pharmaceutical ingredients, or
APIs, and manufactures Caldolor for us under an agreement that
expires on the fifth anniversary of FDA approval of Caldolor,
subject to early termination upon 45 days prior notice in
the event of uncured material breach by us or Hospira. The
agreement will automatically renew for successive three-year
terms unless Hospira or we provide at least 12 months prior
written notice of non-renewal. Under the agreement, we pay
Hospira a transfer price per unit of Caldolor supplied. In
addition, we reimburse Hospira for
agreed-upon
development, regulatory and inspection and audit costs. As of
March 31, 2009, we have made payments to Hospira for
validation batches of commercial supplies of Caldolor pursuant
to this agreement. We have paid approximately $1.1 million
in the aggregate for validation batches, supplies, development,
regulatory, inspection, audit and all other costs for Caldolor
to Hospira and its predecessors, Mayne Pharma Pty. Ltd. and F.H.
Faulding & Co. Limited,
|
70
Business
|
|
|
as of March 31, 2009. We have also granted Hospira a right
of first negotiation with respect to the manufacture of all
future pharmaceutical products we intend to sell and the
distribution of these products in Australia, New Zealand, Canada
and mutually agreed Southeast Asian and Latin American countries.
|
|
|
Ø |
Bioniche Teoranta, or Bioniche, sources APIs and manufactures
Acetadote for us for sale in the U.S. at its FDA-approved
manufacturing facility in Ireland. Our relationship with
Bioniche began in January 2002. Bioniche manufactures and
packages Acetadote for us, and we purchase Acetadote from
Bioniche pursuant to an agreement expiring in January 2011. This
agreement is subject to early termination upon prior written
notice in the event of an uncured material default by us or
Bioniche. We have an option to renew the agreement for a
five-year term upon expiration. Under the agreement, we pay
Bioniche a transfer price per unit of Acetadote supplied, which
transfer price is subject to annual adjustment, and a percentage
royalty in the mid-single digits throughout the term of the
agreement based on our net sales of the product. In addition, we
are required to purchase minimum quantities of Acetadote.
|
|
|
Ø |
Inalco S.p.A. and Inalco Biochemicals, Inc., or collectively
Inalco, from which we licensed exclusive
U.S. commercialization rights to Kristalose in April 2006,
source APIs and supply us with the product under an agreement
that expires in 2021. The agreement renews automatically for
successive three-year terms unless we or Inalco provide written
notice of intent not to renew at least 12 months prior to
expiration of a term. Either we or Inalco may terminate this
agreement upon at least 45 days prior written notice in the
event of uncured material breach. Under the agreement, we are
required to pay Inalco a transfer price per unit of Kristalose
supplied and a percentage royalty in the low to
mid-single-digits throughout the term of the agreement based on
our net sales of Kristalose. In addition, we are required to
purchase minimum quantities of Kristalose.
|
|
|
Ø |
We entered into an agreement with Bayer Healthcare, LLC, or
Bayer, in February 2008 for the manufacture of Caldolor and
Acetadote. The agreement expires in February 2013, subject
to early termination upon 30 days prior written notice in
the event of uncured material breach by us or Bayer. The
agreement will automatically renew for successive one-year terms
unless Bayer or we provide at least six months prior written
notice of non-renewal. Under the agreement, we pay Bayer a
transfer price per each unit of Caldolor or Acetadote supplied.
In addition, we pay Bayer for agreed upon development costs.
|
Distribution
Like many other pharmaceutical companies, we employ an outside
third party logistics contractor to facilitate our distribution
efforts. Since August 2002, Specialty Pharmaceutical Services,
or SPS, (formerly CORD Logistics, Inc.) has exclusively handled
all aspects of our product logistics efforts, including
warehousing, shipping, customer billing and collections. SPS is
a division of Cardinal. SPSs main facility is located just
outside of Nashville, Tennessee, with more than
325,000 square feet of space and a well-established
infrastructure. In 2008, SPS opened a second, distribution-only
facility in Reno, Nevada, with an additional 88,000 square feet
of space. We began utilizing this facility for distribution to
certain locations in the second half of 2008. We maintain
ownership of our finished products until their sale to our
customers.
INTELLECTUAL
PROPERTY
We seek to protect our products from competition through a
combination of patents, trademarks, trade secrets, FDA
exclusivity and contractual restrictions on disclosure.
Proprietary rights, including patents, are an important element
of our business. We seek to protect our proprietary information
by requiring our employees, consultants, contractors and other
advisors to execute agreements providing for
71
Business
protection of our confidential information on commencement of
their employment or engagement, through which we seek to protect
our intellectual property. We also require confidentiality
agreements from entities that receive our confidential data or
materials.
Caldolor
We are the owner of U.S. Patent No. 6,727,286, which
is directed to ibuprofen solution formulations, methods of
making the same, and methods of using the same, and which
expires in 2021. This U.S. patent is associated with our
completed international application
No. PCT/US01/42894.
We have filed for international patent protection in association
with this PCT application in various countries, some of which
have been allowed and some of which remain pending.
We have an exclusive, worldwide license to clinical data for
intravenous ibuprofen from Vanderbilt University, in
consideration for royalty and other payment obligations
conditioned upon approval by the FDA of Caldolor.
In addition, we received three years marketing exclusivity upon
receipt of FDA approval for Caldolor. We may also seek further
exclusivity from the FDA upon completion of successful pediatric
clinical trials for the product.
Effective May 2009, we introduced the trade name Caldolor
to replace the trade name Amelior for our intravenous ibuprofen
product.
Acetadote
Acetadote was approved by the FDA in January 2004 as an orphan
drug for the intravenous treatment of acetaminophen overdose. As
an orphan drug, Acetadote is entitled to seven years of
marketing exclusivity for the treatment of this approved
indication. We have applied for patent protection for a new
formulation of Acetadote through U.S. patent application
No. 11/209,804,
as well as through international application
No. PCT/US06/20691,
both of which are directed to acetylcysteine compositions,
methods of making the same and methods of using the same. In
addition, we have an exclusive, worldwide license to NAC
clinical data from Newcastle Master Misercordiae Hospital in
Australia. We have no expected outstanding payment obligations
pursuant to this contract.
Kristalose
We are the exclusive licensee of U.S. Patent No. 5,480,491 owned
by Inalco relating to Kristalose, directed to a process for
preparation of crystalline lactulose. Related license rights
include an exclusive license to use related Inalco know-how and
the Kristalose trademark to manufacture, market and distribute
Kristalose in the U.S. Under our agreement with Inalco,
Inalco is solely responsible for prosecuting and maintaining
both the patents and know-how that we license from them. Our
license expires in 2021 and is subject to earlier termination
for material breach. Our payment obligations under this
agreement are described under Manufacturing and
Distribution Manufacturing.
COMPETITION
The pharmaceutical industry is characterized by intense
competition and rapid innovation. Our continued success in
developing and commercializing pharmaceutical products will
depend, in part, upon our ability to compete against existing
and future products in our target markets. Competitive factors
directly affecting our markets include but are not limited to:
|
|
Ø
|
product attributes such as efficacy, safety,
ease-of-use
and cost-effectiveness;
|
|
Ø
|
brand awareness and recognition driven by sales and marketing
and distribution capabilities;
|
72
Business
|
|
Ø
|
intellectual property and other exclusivity rights;
|
|
Ø
|
availability of resources to build and maintain developmental
and commercial capabilities;
|
|
Ø
|
successful business development activities;
|
|
Ø
|
extent of third-party reimbursements; and
|
|
Ø
|
establishment of advantageous collaborations to conduct
development, manufacturing or commercialization efforts.
|
A number of our competitors possess research and development and
sales and marketing capabilities as well as financial resources
greater than ours. These competitors, in addition to emerging
companies and academic research institutions, may be developing,
or in the future could develop, new technologies that could
compete with our current and future products or render our
products obsolete.
Caldolor
We are developing Caldolor for the treatment of pain and fever,
primarily in a hospital setting. A variety of products already
address the acute pain market.
|
|
Ø
|
Morphine, the most commonly used product for the treatment of
acute, post-operative pain, is manufactured and distributed by
several generic pharmaceutical companies.
|
|
Ø
|
DepoDur®
is an extended release injectable formulation of morphine that
is marketed by EKR Therapeutics, Inc.
|
|
|
Ø |
Other generic injectable opioids, including fentanyl, meperidine
and hydromorphone, address this market.
|
|
|
Ø |
Ketorolac (brand name
Toradol®),
an injectable NSAID, is also manufactured and distributed by
several generic pharmaceutical companies.
|
We are aware of other product candidates in development to treat
acute pain including injectable NSAIDs, novel opioids, new
formulations of existing therapies and extended release
anesthetics. We believe the companies developing injectable,
non-narcotic analgesics for the treatment of post-surgical pain
are the primary potential competitors to Caldolor. Cadence
Pharmaceuticals Inc. has filed for FDA regulatory approval of an
injectable formulation of acetaminophen for the treatment of
pain and fever, for which it has received priority review, and
Javelin Pharmaceuticals Inc. is developing an injectable form of
an NSAID, diclofenac.
In addition to the injectable analgesic products above, many
companies are developing analgesics for specific indications
such as migraine and neuropathic pain, oral extended-release
forms of existing narcotic and non-narcotic products, and
products with new methods of delivery such as transdermal.
We are not aware of any approved injectable products indicated
for the treatment of fever in the U.S. other than Caldolor.
There are, however, numerous drugs available to physicians to
reduce fevers in hospital settings via oral administration to
the patient, including acetaminophen, ibuprofen and aspirin.
These drugs are manufactured by numerous pharmaceutical
companies.
Acetadote
Acetadote is our injectable formulation of NAC for the treatment
of acetaminophen overdose. NAC is accepted worldwide as the
standard of care for acetaminophen overdose. Despite the
availability of injectable NAC outside the United States,
Acetadote, to our knowledge, is the only injectable NAC product
approved in the U.S. to treat acetaminophen overdose. Our
competitors in the acetaminophen overdose market are those
companies selling orally administered NAC including, but not
limited to,
73
Business
Geneva Pharmaceuticals, Inc., Bedford Laboratories division of
Ben Venue Laboratories, Inc., Roxane Laboratories, Inc. and
Hospira Inc.
Kristalose
Kristalose is a dry powder crystalline prescription formulation
of lactulose indicated for the treatment of constipation. The
U.S. constipation therapy market includes various
prescription and OTC products. The prescription products which
we believe are our primary competitors are
Amitiza®
and liquid lactuloses:
|
|
Ø
|
Amitiza is indicated for the treatment of chronic idiopathic
constipation in adults and is marketed by Sucampo
Pharmaceuticals Inc. and Takeda Pharmaceutical Company Limited;
and
|
|
Ø
|
Liquid lactulose products are marketed by a number of
pharmaceutical companies.
|
In addition, Kristalose competed with Novartis Pharma AGs
prescription product
Zelnorm®
until the company announced its withdrawal from the U.S. market
in April 2008 after adverse safety findings led to U.S.
marketing suspension in 2007.
There are several hundred OTC products used to treat
constipation marketed by numerous pharmaceutical and consumer
health companies.
MiraLax®
(polyethylene glycol 3350), previously a prescription product,
was indicated for the treatment of constipation and manufactured
and marketed by Braintree Laboratories, Inc. Under an agreement
with Braintree, Schering-Plough introduced MiraLax as an OTC
product in February 2007.
EMPLOYEES
As of July 1, 2009, we had 59 full-time employees,
which includes 30 hospital sales force representatives and
managers. We also have a dedicated gastroenterology field sales
force under contract that is comprised of 36 dedicated sales
representatives and district managers. We believe that employing
experienced, independent contractors and consultants is a
cost-efficient and effective way to accomplish our goals. A
number of additional individuals have provided or are currently
providing services to us pursuant to agreements between the
individuals or their employers and us. None of our employees are
represented by a collective bargaining unit. We believe that we
have positive relationships with our employees.
FACILITIES
We currently lease approximately 9,300 square feet of
office space in Nashville, Tennessee for our headquarters. This
lease expires in December 2010 for approximately 6,300 square
feet and in December 2015 for approximately 3,000 square feet.
We also entered into a sublease agreement for approximately
9,000 square feet of additional office space adjoining our
headquarters, effective June 1, 2007. The sublease expires
in October 2010. We believe that these facilities are adequate
to meet our current needs for office space. We currently do not
plan to purchase or lease facilities for manufacturing,
packaging or warehousing, as such services are provided to us by
third-party contract groups.
Under an agreement expiring in July 2011, CET leases
approximately 6,900 square feet of office and wet
laboratory space in Nashville, Tennessee. CET uses this space to
operate the CET Life Sciences Center for product development
work to be carried out in collaboration with universities,
research institutions and entrepreneurs. CET has an option to
lease up to 20,000 square feet at the Life Sciences Center
should it need additional space. The CET Life Sciences Center
provides laboratory and office space, equipment and
infrastructure to early-stage life sciences companies and
university spin-outs.
74
Business
GOVERNMENT
REGULATION
Pharmaceutical companies are subject to extensive regulation by
national, state, and local agencies in countries in which they
do business. The manufacture, distribution, marketing and sale
of pharmaceutical products is subject to government regulation
in the U.S. and various foreign countries. Additionally, in the
U.S., we must follow rules and regulations established by the
FDA requiring the presentation of data indicating that our
products are safe and efficacious and are manufactured in
accordance with cGMP regulations. If we do not comply with
applicable requirements, we may be fined, the government may
refuse to approve our marketing applications or allow us to
manufacture or market our products and we may be criminally
prosecuted.
We and our manufacturers and clinical research organizations may
also be subject to regulations under other federal, state and
local laws, including the Occupational Safety and Health Act,
the Resource Conservation and Recovery Act, the Clean Air Act
and import, export and customs regulations as well as the laws
and regulations of other countries.
FDA Approval
Process
The steps required to be taken before a new prescription drug
may be marketed in the U.S. include:
|
|
Ø
|
completion of pre-clinical laboratory and animal testing;
|
|
Ø
|
the submission to the FDA of an investigational new drug
application, or IND, which must be evaluated and found
acceptable by the FDA before human clinical trials may commence;
|
|
Ø
|
performance of adequate and well-controlled human clinical
trials to establish the safety and efficacy of the proposed drug
for its intended use; and
|
|
|
Ø |
submission and approval of an NDA.
|
The sponsor of the drug typically conducts human clinical trials
in three sequential phases, but the phases may overlap. In
Phase I clinical trials, the product is tested in a small
number of patients or healthy volunteers, primarily for safety
at one or more dosages. In Phase II clinical trials, in
addition to safety, the sponsor evaluates the efficacy of the
product on targeted indications, and identifies possible adverse
effects and safety risks in a patient population. Phase III
clinical trials typically involve testing for safety and
clinical efficacy in an expanded population at
geographically-dispersed test sites.
The FDA requires that clinical trials be conducted in accordance
with the FDAs good clinical practices (GCP) requirements.
The FDA may order the partial, temporary or permanent
discontinuation of a clinical trial at any time or impose other
sanctions if it believes that the clinical trial is not being
conducted in accordance with FDA requirements or presents an
unacceptable risk to the clinical trial patients. The
institutional review board (IRB), or ethics committee (outside
of the U.S.), of each clinical site generally must approve the
clinical trial design and patient informed consent and may also
require the clinical trial at that site to be halted, either
temporarily or permanently, for failure to comply with the
IRBs requirements, or may impose other conditions.
The results of the pre-clinical and clinical trials, together
with, among other things, detailed information on the
manufacture and composition of the product and proposed
labeling, are submitted to the FDA in the form of an NDA for
marketing approval. The FDA reviews all NDAs submitted before it
accepts them for filing and may request additional information
rather than accepting an NDA for filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the
NDA. Under the policies agreed to by the FDA under the
Prescription Drug User Fee Act, or PDUFA, the FDA has ten months
in which to complete its initial review of a standard NDA and
respond to the applicant. The review process and the PDUFA goal
date may be extended by three months if the FDA requests or the
NDA
75
Business
sponsor otherwise provides additional information or
clarification regarding information already provided in the
submission within the last three months of the PDUFA goal date.
If the FDAs evaluations of the NDA and the clinical and
manufacturing procedures and facilities are favorable, the FDA
may issue an approval letter. The FDA may also issue an
approvable letter setting forth further conditions that must be
met in order to secure final approval of the NDA. If and when
those conditions have been met to the FDAs satisfaction,
the FDA will issue an approval letter. An approval letter
authorizes commercial marketing of the drug for certain
indications. According to the FDA, the median total approval
time for NDAs approved during calendar year 2004 was
approximately 13 months for standard applications. If the
FDAs evaluations of the NDA submission and the clinical
and manufacturing procedures and facilities are not favorable,
it may refuse to approve the NDA and issue a not-approvable
letter.
The time and cost of completing these steps and obtaining FDA
approval can vary dramatically depending on the drug. However,
to complete these steps for a novel drug can take many years and
cost millions of dollars.
Section 505(b)(2)
New Drug Applications
As an alternate path for FDA approval of new indications or new
formulations of previously-approved products, a company may file
a Section 505(b)(2) NDA, instead of a
stand-alone or full NDA.
Section 505(b)(2) of the FDC Act was enacted as part of the
Drug Price Competition and Patent Term Restoration Act of 1984,
otherwise known as the Hatch-Waxman Amendments.
Section 505(b)(2) permits the submission of an NDA where at
least some of the information required for approval comes from
studies not conducted by or for the applicant and for which the
applicant has not obtained a right of reference. Some examples
of products that may be allowed to follow a 505(b)(2) path to
approval are drugs which have a new dosage form, strength, route
of administration, formulation or indication.
We successfully secured FDA approvals for Acetadote in January
2004 and for Caldolor in June 2009 pursuant to the 505(b)(2)
pathway.
Upon approval of a full or 505(b)(2) NDA, a drug may
be marketed only for the FDA-approved indications in the
approved dosage forms. Further clinical trials are necessary to
gain approval for the use of the product for any additional
indications or dosage forms. The FDA may also require
post-market reporting and may require surveillance programs to
monitor the side effects of the drug, which may result in
withdrawal of approval after marketing begins.
Special Protocol
Assessment Process
The special protocol assessment, or SPA, process generally
involves FDA evaluation of a proposed Phase III clinical
trial protocol and a commitment from the FDA that the design and
analysis of the trial are adequate to support approval of an
NDA, if the trial is performed according to the SPA and meets
its endpoints. The FDAs guidance on the SPA process
indicates that SPAs are designed to evaluate individual clinical
trial protocols primarily in response to specific questions
posed by the sponsors. In practice, the sponsor of a product
candidate may request an SPA for proposed Phase III trial
objectives, designs, clinical endpoints and analyses. A request
for an SPA is submitted in the form of a separate amendment to
an IND, and the FDAs evaluation generally will be
completed within a
45-day
review period under applicable PDUFA goals, provided that the
trials have been the subject of discussion at an
end-of-Phase II
and pre-Phase III meeting with the FDA, or in other limited
cases.
On June 14, 2004, we submitted a request for SPA of our
Caldolor Phase III clinical study. During a meeting with
the FDA on September 29, 2004, the FDA confirmed that the
efficacy data from our study of post-operative pain with a
positive outcome was considered sufficient to support a
505(b)(2)
76
Business
application for the pain indication. Final determinations by the
FDA with respect to a product candidate, including as to the
scope of its labeling, are made after a complete
review of the applicable NDA and are based on the entire data in
the application. Moreover, notwithstanding any SPA, FDA approval
of an NDA is subject to future public health concerns
unrecognized at the time of protocol assessment.
Orphan Drug
Designation
The Orphan Drug Act of 1983, or Orphan Drug Act, encourages
manufacturers to seek approval of products intended to treat
rare diseases and conditions with a prevalence of
fewer than 200,000 patients in the U.S. or for which there
is no reasonable expectation of recovering the development costs
for the product. For products that receive orphan drug
designation by the FDA, the Orphan Drug Act provides tax credits
for clinical research, FDA assistance with protocol design,
eligibility for FDA grants to fund clinical studies, waiver of
the FDA application fee, and a period of seven years of
marketing exclusivity for the product following FDA marketing
approval. Acetadote received Orphan Drug designation in October
2001 and was approved by the FDA for the intravenous treatment
of moderate to severe acetaminophen overdose in January 2004. As
an orphan drug, Acetadote is entitled to marketing exclusivity
until January 2011 for the treatment of this approved
indication. This exclusivity would not prevent a product with a
different formulation from competing with Acetadote, however.
The Hatch-Waxman
Act
The Hatch-Waxman Act provides three years of marketing
exclusivity for the approval of new and supplemental NDAs,
including Section 505(b)(2) NDAs, for, among other things,
new indications, dosages or strengths of an existing drug, if
new clinical investigations that were conducted or sponsored by
the applicant are essential to the approval of the application.
It is under this provision that we received three years
marketing exclusivity for Caldolor upon receipt of FDA approval
in June 2009.
Other regulatory
requirements
Regulations continue to apply to pharmaceutical products after
FDA approval occurs. Post-marketing safety surveillance is
required in order to continue to market an approved product. The
FDA also may, in its discretion, require post-marketing testing
and surveillance to monitor the effects of approved products or
place conditions on any approvals that could restrict the
commercial applications of these products.
If we seek to make certain changes to an FDA-approved product,
such as promoting or labeling a product for a new indication,
making certain manufacturing changes or product enhancements or
adding labeling claims, we will need FDA review and approval
before the change can be implemented. While physicians may use
products for indications that have not been approved by the FDA,
we may not label or promote the product for an indication that
has not been approved. Securing FDA approval for new indications
or product enhancements and, in some cases, for manufacturing
and labeling claims, is generally a time-consuming and expensive
process that may require us to conduct clinical trials under the
FDAs IND regulations. Even if such studies are conducted,
the FDA may not approve any change in a timely fashion, or at
all. In addition, adverse experiences associated with use of the
products must be reported to the FDA, and FDA rules govern how
we can label, advertise or otherwise commercialize our products.
In addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal laws have
been applied to restrict certain marketing practices in the
pharmaceutical industry
77
Business
in recent years. These laws include anti-kickback statutes and
false claims statutes. The federal health care program
anti-kickback statute prohibits, among other things, knowingly
and willfully offering, paying, soliciting or receiving
remuneration to induce or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any
health care item or service reimbursable under Medicare,
Medicaid or other federally financed health care programs. This
statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers,
purchasers and formulary managers on the other. Violations of
the anti-kickback statute are punishable by imprisonment,
criminal fines, civil monetary penalties and exclusion from
participation in federal health care programs.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to have a false claim
paid. Recently, several pharmaceutical and other health care
companies have been prosecuted under these laws for allegedly
inflating drug prices they report to pricing services, which in
turn were used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to
customers with the expectation that the customers would bill
federal programs for the product.
Outside of the U.S., our ability to market our products will
also depend on receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory
approval process includes all of the risks associated with the
FDA approval process described above. The requirements governing
the conduct of clinical trials and marketing authorization vary
widely from country to country.
LEGAL
PROCEEDINGS
Except as described below, we are not a party to litigation or
other legal proceedings.
During the second quarter of 2006, our Chief Executive, a Vice
President of ours, and we were named as co-defendants in
Parniani v. Cardinal Health, Inc. et al., Case
No. 0:06-cv-02514-PJS-JJG
in the U.S. District Court in the District of Minnesota for
unspecified damages based on workers compensation and
related claims. In July 2007, the federal district court
dismissed the case against us and our officers. The
U.S. Court of Appeals for the Eighth Circuit (Eighth
Circuit) affirmed this ruling in December 2008. The plaintiff
filed a petition for rehearing en banc with the Eighth Circuit
in February 2009. After this petition was denied in March 2009,
the plaintiff filed a motion for stay of mandate with the Eighth
Circuit in April 2009. The Eighth Circuit denied
plaintiffs motion for stay of mandate as well as the
plaintiffs subsequent motion appealing that denial in
April 2009. The plaintiff requested an extension of time to file
a petition for writ of certiorari with the U.S. Supreme
Court in May 2009. The U.S. Supreme Court granted the
plaintiffs extension request and the plaintiff has until
July 14, 2009 to file a petition for writ of certiorari
with the U.S. Supreme Court. The plaintiff is a former
employee of a third-party service provider to us. The service
provider, which was also named as a co-defendant, agreed to
assume control of our defense at its cost pursuant to a contract
between the service provider and us. Based upon the information
available to us to date, we believe that all asserted claims
against us and the individual defendants are without merit.
However, if any of the plaintiffs claims are deemed to be
meritorious upon rehearing, we expect to be indemnified by the
service provider so that resolution of this matter is not
expected to have a material adverse effect on our future
financial results or financial condition.
78
Management
OFFICERS AND
DIRECTORS
The following table sets forth the names and ages of our
directors, executive officers and key managers as of
July 1, 2009:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
Directors and executive officers:
|
|
|
|
|
|
|
A.J. Kazimi
|
|
|
51
|
|
|
Chairman and Chief Executive Officer
|
Martin E.
Cearnal(1)
|
|
|
64
|
|
|
Director, Senior Vice President and Chief Commercial Officer
|
Dr. Robert G.
Edwards(2)
|
|
|
81
|
|
|
Director
|
Dr. Lawrence W.
Greer(1),(2)
|
|
|
64
|
|
|
Director
|
Thomas R.
Lawrence(1),(2)
|
|
|
69
|
|
|
Director
|
Jean W. Marstiller
|
|
|
59
|
|
|
Senior Vice President and Corporate Secretary
|
Dr. Gordon R. Bernard
|
|
|
57
|
|
|
Senior Vice President and Medical Director
|
Leo Pavliv, R.Ph.
|
|
|
48
|
|
|
Senior Vice President, Operations
|
David L. Lowrance
|
|
|
41
|
|
|
Vice President and Chief Financial Officer
|
Key managers:
|
|
|
|
|
|
|
James L. Herman
|
|
|
54
|
|
|
Senior Director, National Accounts and Corporate Compliance
Officer
|
Amy D. Rock, Ph.D.
|
|
|
38
|
|
|
Senior Director, Regulatory & Scientific Affairs
|
Dr. Arthur P. Wheeler
|
|
|
52
|
|
|
Director, Medical Affairs
|
Barry L. Lee
|
|
|
50
|
|
|
Product Director
|
Cindy Patton
|
|
|
55
|
|
|
Director, Sales & Marketing
|
Doug Jack
|
|
|
39
|
|
|
Senior Manager, SEC Reporting
|
|
|
|
(1)
|
|
Member of Audit Committee
|
|
(2)
|
|
Member of Compensation Committee
|
A.J. Kazimi, Chairman and Chief Executive
Officer. Mr. Kazimi founded our company in
1999 and has served as our Chief Executive Officer and Chairman
of our Board of Directors since inception. His career includes
20 years in the biopharmaceutical industry. Prior to
joining our company, he spent eleven years from 1987 to 1998
helping to build Therapeutic Antibodies Inc., a
biopharmaceutical company, where as President and Chief
Operating Officer he made key contributions to the
companys growth from its
start-up
phase through its initial public offering and product launches.
Mr. Kazimi oversaw operations in three countries and was
personally involved with the companys product development
strategies, licensing and distribution agreements, and the
raising of more than $100 million through equity and debt
financings. From
1984-1987,
Mr. Kazimi worked at Brown-Forman Corporation, rising
through a series of management positions and helping to launch
several new products. Mr. Kazimi currently serves on the
board of directors for the Nashville Health Care Council; Aegis
Sciences Corporation, a federally certified forensic toxicology
laboratory; and the Tennessee Biotechnology Association. He also
serves as Chairman and Chief Executive Officer of Cumberland
Emerging Technologies, Inc., or CET. He holds a B.S. from the
University of Notre Dame and an M.B.A. from the Vanderbilt Owen
Graduate School of Management.
Martin E. Cearnal, Director, Senior Vice President and Chief
Commercial Officer. Mr. Cearnal has served
as a member of our board of directors since 2004, and in 2008
joined our management team to head commercial development for
Cumberland. He is the former President and Chief Executive
Officer of Physicians World, which became the largest provider
of continuing medical education during his
79
Management
tenure from 1985 to 2000. Physicians World was acquired by
Thomson Healthcare in 2000, and Mr. Cearnal served as
President of Thomson Physicians World from 2000 to 2003 and
Executive Vice President-Chief Strategy Officer for Thomson
Medical Education from 2003 through 2005. Since 2006, he has
been Executive Vice President-Chief Strategy Officer for Jobson
Medical Information. Mr. Cearnal has 40 years
experience in the healthcare industry and has been involved with
the launches of such noteworthy pharmaceutical products as
Lipitor®,
Actos®,
Intron-A®,
Straterra®,
Botox®
and
Humira®.
He spent 17 years at Revlon Healthcare in a variety of
domestic and international pharmaceutical marketing roles
culminating in his position as Vice President, Marketing for
International Operations. He serves the industry through several
organizations, including the Healthcare Marketing &
Communications Council and the Alliance for Continuing Medical
Education. Mr. Cearnal also serves as a member of our Audit
Committee. He has a B.S. degree from Southeast Missouri State
University.
Dr. Robert G. Edwards,
Director. Dr. Edwards has served as a member
of our board of directors since 1999. From 1991 to 1999, he was
Chairman and Managing Director of the Australasian subsidiary of
Therapeutic Antibodies Inc., overseeing operations in Australia,
New Zealand and Southeast Asia. Dr. Edwards also served as
Deputy Director of the Institute for Medical &
Veterinary Science in South Australia, President of the Royal
College of Pathologists of Australasia, and member of the
Australian National Health & Medical Research Council.
Dr. Edwards currently serves as a member of our
Compensation Committee. He also serves as a director for CET,
and is chairman of the CET Scientific Advisory Board.
Dr. Edwards holds a Primary Degree from London University,
Master of Human Physiology from London University and an M.D.
from the University of Adelaide.
Dr. Lawrence W. Greer,
Director. Dr. Greer has served as a member
of our board of directors since 1999. Since 2002, he has been
Senior Managing Partner of Greer Capital Advisors of Birmingham,
Alabama. Dr. Greer serves as investment advisor to two
private equity funds and general partner for two additional
private equity funds, including the S.C.O.U.T. Healthcare Fund
from which we have received equity financing. Dr. Greer and
his firm are established leaders in private healthcare
investments in the mid-south. Previously, he served as Vice
President-Investments of Dunn Investment Company, where he was
responsible for management of a marketable securities portfolio
plus personal management of a portfolio of 15 private equity
investments. He is the former Chairman of Southern BioSystems
which was acquired by DURECT Corporation in 2001. Dr. Greer
has also worked as an independent consultant in healthcare
administration and finance. Dr. Greer serves as the
chairman of the Audit Committee of our board of directors, as a
member of our Compensation Committee, and is an Audit Committee
financial expert. He also served as the chairman of the Audit
Committee for the Southtrust (Bank) Funds Board of Trustees for
several years. Dr. Greer holds a B.S. from Tulane
University, D.D.S. from Emory University and an M.B.A. from
Emory University.
Thomas R. Lawrence,
Director. Mr. Lawrence has served as a
member of our board of directors since 1999. Since 2003 he has
been Chairman and Chief Executive Officer of Aetos Technologies
Inc., a corporation formed in 2003 by Auburn University to
market technological breakthroughs by its faculty. From 1998 to
2003, Mr. Lawrence advised business clients on matters of
marketing and corporate governance through his firm Capital
Consultants. He previously served as Co-Founder and Managing
Partner of Delta Capital Partners in Memphis from 1989 to 1998.
The partnership made investments in ten early-stage companies
which, by 1998, were valued at more than $30 million. Prior
to the formation of Delta, Mr. Lawrence founded several
companies in the areas of commercial leasing and venture capital
financing. He also worked for most of the 1980s as an
Institutional Sales Representative and Commercial Leasing
Specialist with the Investment Banking Group of Union Planters
Bank in Memphis, where he was responsible for the structure and
sale of over $1 billion in securities.
80
Management
Mr. Lawrence serves as the chairman of our Compensation
Committee, as a member of our Audit Committee and as a director
for CET. He holds a B.S. from Mississippi State University.
Jean W. Marstiller, Senior Vice President and Corporate
Secretary. Ms. Marstiller joined our company
in 1999. She oversees our administrative operations, human
resources, site services and information systems, and became our
Corporate Secretary in 2007. She has 18 years
biopharmaceutical industry experience and was formerly Director
of Administrative Operations at Therapeutic Antibodies Inc.,
where she worked from 1989 until 1998. In that capacity, she
oversaw administrative services, information systems, and human
resources. Ms. Marstiller was employed by Brown-Forman
Corporation from 1982 until 1987, where she held management
level positions in the areas of finance and operations. She
holds a B.E. from Vanderbilt University and attended the
Vanderbilt Owen Graduate School of Management.
Dr. Gordon R. Bernard, Senior Vice President and Medical
Director. Dr. Bernard has served as our
medical director since 1999. Dr. Bernard is the Assistant
Vice-Chancellor for Research at Vanderbilt University, and also
the Melinda Owen Bass Professor of Medicine and former Chief of
the Division of Allergy, Pulmonary and Critical Care Medicine at
Vanderbilt. In addition, he is the Medical Director of the
Vanderbilt Institutional Review Board and Chairman of
Vanderbilts Pharmacy and Therapeutics Committee, which is
responsible for approving the Vanderbilt Medical Center
Formulary of approved drugs and therapeutics. Dr. Bernard
also chairs the National Institutes of Health, Acute Respiratory
Distress Syndrome Clinical Trials Network. He holds a B.S. from
the University of Southwestern Louisiana and an M.D. from
Louisiana State University.
Leo Pavliv, R. Ph., Senior Vice President,
Operations. Mr. Pavliv has served as our Vice
President, Operations since 2003, and in 2009, was named Senior
Vice President. He is responsible for Cumberlands overall
drug development, including manufacturing and quality
operations, and has 24 years of experience developing
pharmaceutical and biological products. From 1997 to 2003 he
worked at Cato Research, a contract research organization, most
recently as Vice President of Pharmaceutical Development where
he oversaw development of a wide variety of products throughout
the development cycle. Prior to 1997, he held various scientific
and management positions at both large pharmaceutical and
smaller biopharmaceutical firms including Parke-Davis from 1984
to 1986, Agouron Pharmaceuticals from 1992 to 1997, ProCyte from
1989 to 1992, and Interferon Sciences from 1986 to 1989. He is a
registered pharmacist (R.Ph.) and is regulatory affairs
certified (RAC). Mr. Pavliv holds a B.S., Pharmacy, and an
M.B.A. from Rutgers University.
David L. Lowrance, Vice President and Chief Financial
Officer. Mr. Lowrance is responsible for
overseeing all our accounting and financial activities,
including financial reporting and planning. He has been with us
since 2003 and has 19 years of accounting and financial
experience in both international business and manufacturing.
From 1994 to 2003, he spent eight years with two global
conglomerates, including four years as Senior Vice President for
Icore International, a division of Smiths Group, PLC. Prior to
that, Mr. Lowrance worked as a senior accountant for
Ernst & Young, LLP from 1990 to 1994. He is a
Certified Public Accountant, or CPA, and holds a B.B.A. from the
University of Georgia.
James L. Herman, Senior Director, National Accounts and
Corporate Compliance Officer. Mr. Herman
handles all national accounts sales, including wholesalers and
retail chain buying offices, managed care home offices and
federal government accounts. He is also charged with overseeing
our corporate compliance efforts. He has been with us since 2003
and has 18 years pharmaceutical industry experience. From
1998 to 2003, he was with Solvay Pharmaceuticals and served as
Director of Managed Care as well as Director of Trade Affairs
and Customer Service. From 1990 to 1998, Mr. Herman was
with Schwarz Pharma, where he held national sales leadership
positions in National
81
Management
Accounts and Managed Care. He holds a B.S. from Indiana
University and an M.B.A. from Cardinal Stritch University.
Amy Dix Rock, Ph.D., Senior Director, Regulatory and
Scientific Affairs. Dr. Rock joined our
company in 2001 and built our Regulatory Affairs Department and
infrastructure. In addition to managing all interactions between
our company and the FDA, Dr. Rock oversees the preparation
of pre-approval and post-approval regulatory submissions. Her
additional responsibilities include involvement in protocol
development and clinical trials management, overseeing our
medical call center and supporting our corporate compliance
initiatives. She holds a B.A. from Washington University, a
Ph.D. in Immunology from the University of Kentucky, and an
M.B.A. from the Vanderbilt Owen Graduate School of Management.
Dr. Arthur P. Wheeler, Director, Medical
Affairs. Dr. Wheeler joined our company as
Director of Medical Affairs in 2007 and has served on our
Medical Advisory Board since 2005. He is Associate Professor of
Allergy, Pulmonary and Critical Care Medicine as well as
Associate Professor of Medicine at Vanderbilt University.
Dr. Wheeler also serves as Director of the Medical
Intensive Care Unit at Vanderbilt University Medical Center. He
is the vice chairman of the Vanderbilt Pharmacy and Therapeutics
committee, and Director of the Vanderbilt Clinical Coordinating
Center. He holds B.A. and M.D. degrees from the University of
Maryland.
Barry L. Lee, Product Director. Mr. Lee
joined our company as Product Director for Caldolor in 2008. He
is responsible for all marketing activities associated with the
launch and ongoing commercialization of Caldolor, our lead
product candidate. Beginning his career with Berlex
Laboratories, Inc. in 1984, Mr. Lee spent 24 years at
the company, which is now known as Bayer Healthcare
Pharmaceuticals Inc. following its acquisition of Berlex in
2006. There he served in a variety of pharmaceutical sales and
marketing positions, and most notably was responsible for the
launch of
Yasmin®
in 2001one of the most successful industry product
launches at that time. He has a B.S. degree from Texas A&M
University.
Cindy Patton, Director, Sales and
Marketing. Ms. Patton joined our company in
2009 as National Sales Director. She is responsible for the
development and management of Cumberlands hospital and
field sales forces, and the successful execution of sales plans
for our current and future products. Ms. Patton joined us
from Novartis/CIBA-GEIGY Pharmaceutical Corporation where she
acquired 25 years of pharmaceutical sales and marketing
experience from 1983 to 2008. Her responsibilities there ranged
from field and hospital sales to customer and product marketing,
including serving as product director for the successful
Novartis brand
Lotensin®.
Most recently, she served as Regional Sales Director of the Ciba
Novartis Field Force, leading a team of managers and
representatives in six states. Ms. Patton received her B.A.
from Lambuth College.
Doug Jack, Senior Manager, SEC
Reporting. Mr. Jack is responsible for the
preparation of all SEC required financial reports, including
quarterly reports on
Form 10-Q
and annual reports on
Form 10-K.
Joining us in 2007, he has over 15 years of accounting and
financial experience. Mr. Jack spent a combined eight years
in the public accounting arena, most recently as an audit
manager with Ernst & Young LLP from 2006 to 2007, and
previously with PricewaterhouseCoopers from 1993 to 2000. He has
worked with manufacturing, wholesale and retail clients,
including SEC registrants. Mr. Jack also served as Chief
Financial Officer and Controller at Southern Specialty Brands
from 2001 to 2006. He is a Certified Public Accountant and holds
a B.B.A. from the University of Georgia.
ADVISORY
BOARDS
In order to augment the efforts of our management and directors,
we have established two key advisory boards to support our
management and directors.
82
Management
Pharmaceutical
Advisory Board
Our Board of Pharmaceutical Advisors is comprised of eight
individuals who have spent their careers in the pharmaceutical
industry. These advisors help to build our company by actively
contributing to many areas of our business such as strategy,
business development, human resources, marketing, international
activities, accounting and logistics. The members of our Board
of Pharmaceutical Advisors are:
|
|
|
Joseph D. Williams
|
|
Former Chairman and CEO
Warner Lambert Company
|
|
|
|
Joseph Carpino
|
|
Former VP, Business Development
Warner Lambert Company
|
|
|
|
Jonathan Griggs
|
|
Former VP, Human Resources
Warner Lambert Company
|
|
|
|
Robert Anderson
|
|
Former Chief Marketing Officer
Thomson Medical Education
Former Marketing Positions at Pfizer Pharmaceutical Company,
Ciba Corp., Parke-Davis Company
|
|
|
|
Timothy Meakin
|
|
Former CEO
Faulding Hospital Pharmaceuticals Division of F H Faulding
& Co. Limited
Former President
Bristol-Myers Squibb Canada Co.
|
|
|
|
Neil M. Richie, Jr.
|
|
Former Director of Logistics
Parke-Davis Company
|
|
|
|
J. William Hix
|
|
Former Vice President, Sales & Marketing
Cumberland Pharmaceuticals
|
Medical Advisory
Board
We have also established a Board of Medical Advisors to support
our product development efforts. This board includes five
physicians from the U.S. and international medical communities
who are leaders in the fields of emergency, critical care and
infectious disease medicine as well as toxicology and
cardiology. These individuals meet as a group with our
management to help us identify unmet medical needs and
underserved patient populations in our target areas. They also
help us identify and evaluate relevant product opportunities.
The members of our Board of Medical Advisors are:
|
|
|
Dr. Art Wheeler
|
|
Associate Professor of Medicine
Vanderbilt University
|
|
|
|
Dr. Ben deBoisblanc
|
|
Professor of Medicine and Physiology
Louisiana State University Medical School
|
|
|
|
Dr. Richard Dart
|
|
Director
Rocky Mountain Poison and Drug Center
|
|
|
|
Dr. Robert Roberts
|
|
President and CEO
University of Ottawa Heart Institute
|
|
|
|
Dr. David Warrell
|
|
Head, Nuffield Department of Clinical Medicine
Professor Emeritus Tropical Medicine and Infectious Disease
Oxford University
|
83
Management
BOARD
COMPOSITION
Our board of directors currently consists of five directors who
are divided into three classes serving staggered three-year
terms. Dr. Robert G. Edwards is a Class I
director who will serve until our 2011 annual meeting of
shareholders. Dr. Lawrence W. Greer and Thomas R.
Lawrence are Class II directors who will serve until our
2012 annual meeting. A.J. Kazimi and Martin E. Cearnal
are Class III directors who will serve until our 2010
annual meeting. Upon expiration of the term of a class of
directors, directors in that class will be eligible to be
elected for a new three-year term at the annual meeting of
shareholders in the year in which their term expires. Any
additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of directors
could have the effect of increasing the length of time necessary
to change the composition of a majority of our board of
directors. In general, at least two annual meetings of
shareholders will be necessary for shareholders to effect a
change in a majority of the members of our board of directors.
DIRECTOR
INDEPENDENCE
In July 2009, our board of directors undertook a review of the
independence of the directors and considered whether any
director had a material relationship with us that could
compromise his ability to exercise independent judgment in
carrying out his responsibilities. As a result of this review,
our board of directors determined that Dr. Lawrence W.
Greer and Thomas R. Lawrence were independent as
defined under applicable National Association of Securities
Dealers Automated Quotation System, or NASDAQ, rules and SEC
rules and regulations. We expect that a majority of our board
will be independent within a year following this offering as
required by the Sarbanes-Oxley Act of 2002, SEC rules and
regulations and NASDAQ rules.
BOARD
COMMITTEES
The standing committees of our board consist of an audit
committee and a compensation committee. Both committees will
have three members following this offering, two of whom will be
independent. We expect that all directors on our audit and
compensation committees will be independent within a year
following this offering.
Audit
committee
The members of our audit committee are Dr. Lawrence W.
Greer, Martin E. Cearnal and Thomas R. Lawrence. The Chair of
the audit committee is Dr. Greer, who has been
affirmatively determined by our board of directors to be
independent in accordance with applicable rules. In addition,
the board of directors has determined that Dr. Greer is an
audit committee financial expert, as such term is
described in Item 407 of
Regulation S-K.
The primary function of the audit committee is to assist our
board of directors in fulfilling its oversight responsibilities
by reviewing the financial reports and certain financial
information provided by us to any governmental body or the
public, reviewing our systems of internal controls regarding
finance, accounting, legal compliance and ethics that we have
established and overseeing our auditing, accounting and
financial reporting processes generally. Consistent with this
function, we expect the audit committee to encourage continuous
improvement of, and to foster adherence to, our policies,
procedures and practices at all levels, to be responsible for
managing the relationship with our independent registered public
accountants, and to provide a forum for discussion with the
independent registered public accountants and our board.
84
Management
Some of the audit committees responsibilities include:
|
|
Ø
|
appointing, determining the compensation for and overseeing our
relationship with our independent registered public accountants;
|
|
Ø
|
overseeing, reviewing and evaluating our financial statements,
the audits of our financial statements, our accounting and
financial reporting processes, the integrity of our financial
statements, our disclosure controls and procedures and our
internal audit functions;
|
|
Ø
|
reviewing and approving the services provided by our independent
registered public accountants, including the scope and results
of their audits and pre-approving permissible non-audit services
to be performed by them;
|
|
Ø
|
resolving disagreements between management and our independent
registered public accountants;
|
|
Ø
|
overseeing our compliance with legal and regulatory requirements
and compliance with ethical standards adopted by us;
|
|
Ø
|
establishing and maintaining whistleblower procedures; and
|
|
Ø
|
evaluating periodically our Standards of Business Conduct and
Ethics, Code of Ethics for Senior Financial Officers and
Procedures for Complaints and Concerns Regarding Accounting,
Internal Accounting Controls and Auditing Matters.
|
Compensation
committee
The members of our compensation committee are Dr. Lawrence
W. Greer, Dr. Robert G. Edwards, and Thomas R.
Lawrence. The Chair of the compensation committee is Thomas R.
Lawrence. The responsibilities of the compensation committee
include:
|
|
Ø
|
reviewing and recommending to the board of directors the
compensation and benefits of all of our executive officers and
directors;
|
|
Ø
|
evaluating the performance of the principal executive officer;
|
|
Ø
|
administering our equity incentive plans;
|
|
Ø
|
establishing and reviewing general policies relating to
compensation and benefits of our employees;
|
|
Ø
|
reviewing and evaluating the compensation discussion and
analysis prepared by management; and
|
|
Ø
|
preparing an executive compensation report for publication in
our annual proxy statement.
|
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas R. Lawrence, the Chair of our compensation committee, is
the Chairman of Aetos Technologies, Inc., a corporation formed
in 2003 by Auburn University to market technological
breakthroughs by its faculty. Until June 2009 Mr. Kazimi,
our Chairman and Chief Executive Officer, served on the board of
directors of Aetos Technologies. Other than this relationship,
none of our executive officers serves, or in the past year has
served, as a member of the board of directors or compensation
committee of any other entity that has one or more executive
officers who serve on our board of directors or compensation
committee.
CODES OF CONDUCT
AND CORPORATE GOVERNANCE
We have implemented and continue to develop a Corporate
Compliance Program. Within this program, we plan to maintain
internal processes and review procedures that ensure our
business activities are conducted in compliance with applicable
federal and state laws, statutes, regulations or program
85
Management
requirements, including guidance documents drafted specifically
by governing entities for the healthcare and pharmaceutical
industries, consistent with advancing, preserving and protecting
public health.
To help ensure compliance, we plan to conduct regular, periodic
compliance audits by internal and external auditors and
compliance staff, who have expertise in federal and state
healthcare laws and regulations.
Our codes of conduct consist of a Standards of Business Conduct
and Ethics, a Code of Ethics for Senior Financial Officers, an
Insider Information, Trading or Dealing and Stock Tipping Policy
and Procedures for Complaints and Concerns Regarding Accounting,
Internal Accounting Controls, and Auditing Matters. As part of
our corporate compliance program, in 2006 we established a
compliance hotline to enable employees, directors and other
representatives to report compliance violations, including
violations of our codes of conduct.
Standards of
Business Conduct and Ethics
Our board of directors has adopted a Standards of Business
Conduct and Ethics which establish the standards of ethical
conduct applicable to all of our directors, officers, employees,
key advisors, consultants and contract organizations. The code
of ethics addresses, among other things, compliance with laws
and regulations, business practices, conflicts of interest,
employment policies and reporting procedures. Suspected
violations of this code may be reported on a confidential,
anonymous basis through the compliance hotline. The audit
committee oversees this process, tracks the complaints and
resolutions and reports the significant results to the full
board of directors. The code is distributed to all employees and
directors. All employees and directors must sign, date and
return a certification stating that they received, understand
and will comply with the code.
Code of Ethics
for Senior Financial Officers
In 2006, we adopted a Code of Ethics for Senior Financial
Officers. The code is designed to deter wrongdoing and to
promote honest and ethical conduct, full and accurate disclosure
in periodic reports, and compliance with laws and regulations by
our senior management who has financial responsibility. We
expect that any suspected violations of this code will be
reported to the audit committee. Any waiver of this code may
only be authorized by our audit committee and will be disclosed
as required by applicable law.
Insider
Information, Trading or Dealing and Stock Tipping
Policy
We are committed to fair trading for publicly traded securities
and have established standards of conduct for directors,
employees and others who obtain material or price-sensitive,
non-public information through their work with us. The policy is
distributed to all employees. Non-compliance with the policy may
be submitted on a confidential, anonymous basis through the
compliance hotline.
Procedures for
Complaints and Concerns Regarding Accounting, Internal
Accounting Controls, and Auditing Matters
In 2006, we established Procedures for Complaints and Concerns
Regarding Accounting, Internal Accounting Controls and Auditing
Matters to encourage any person who has a reasonable basis for a
complaint or concern regarding our financial statement
disclosures, accounting matters, internal accounting controls or
auditing matters to promptly submit a complaint or concern.
Complaints may be submitted on a confidential, anonymous basis
through the compliance hotline. The audit committee oversees
this process, immediately reviews the complaints and oversees
all necessary investigations. The audit committee tracks the
complaints and resolutions and reports the significant results
to the full board of directors.
86
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
We provide what we believe is a competitive total compensation
package to our executive management team through a combination
of base salary, annual bonuses, grants under our long-term
equity incentive compensation plan and broad-based benefits
programs.
We place significant emphasis on performance-based incentive
compensation programs. This Compensation Discussion and Analysis
explains our compensation philosophy, policies and practices
with respect to our chief executive officer, chief financial
officer, and the other three most highly-compensated executive
officers or the named executive officers.
Overall
compensation objectives
Our compensation committee is responsible for establishing and
administering the policies governing the compensation for our
executive officers. Our executive officers are appointed by our
board of directors.
Our executive compensation programs are designed to achieve the
following objectives:
|
|
Ø
|
attract and retain talented and experienced executives;
|
|
Ø
|
motivate and reward executives whose knowledge, skills and
performance are critical to our success;
|
|
Ø
|
align the interests of our executive officers and shareholders
by motivating executive officers to increase shareholder value
and rewarding executive officers when shareholder value
increases;
|
|
Ø
|
provide a competitive compensation package in which total
compensation is primarily determined by company and individual
results and the creation of shareholder value;
|
|
Ø
|
ensure fairness among the executive management team by
recognizing the contributions each executive makes to our
success; and
|
|
Ø
|
compensate our executives to manage our business to meet our
long-range objectives.
|
When making decisions on setting compensation for new executive
officers, the compensation committee considers the importance of
the position to us, the past salary history of the executive
officer and the contributions to be made by the executive
officer to us.
We use the following principles to guide our decisions regarding
executive compensation:
|
|
Ø
|
provide compensation opportunities targeted at market median
levels;
|
|
Ø
|
require performance goals to be achieved or common stock price
to increase in order for the majority of the target pay levels
to be earned;
|
|
Ø
|
offer a comprehensive benefits package to all full-time
employees; and
|
|
Ø
|
provide fair and equitable compensation.
|
Our executive
compensation programs
Overall, our executive compensation programs are designed to be
consistent with the objectives and principles set forth above.
The basic elements of our executive compensation programs are
base salary, annual bonuses, long-term equity incentive plan
awards, retirement savings opportunities and health and welfare
benefits.
In making compensation determinations, our compensation
committee considers published survey data to guide compensation
decisions and then considers the performance of each named
executive officer through a review of annual corporate and
individual objectives. In 2008 and previous years, the
87