Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
The aggregate market value of the registrant's common stock held by non-affiliates as of June 30, 2017 (the last business day of the registrant's most recently completed second
quarter) was approximately $40,263,000, based upon the $4.02 closing sales price of the registrant's common stock as reported on the NASDAQ Stock Market on such date. Shares of
common stock held by each executive officer and director and by each person who owns 10 percent or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
On March 1, 2018, the registrant had 11,872,758 shares of its common stock outstanding.
Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant's 2018
Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days following the end of the registrant's fiscal year ended December 31, 2017.
PART I
Unless the context indicates otherwise, references in the report to "Pernix
®
," "Company," "we," "us" and "our" and
similar terms mean Pernix Therapeutics Holdings, Inc., a Maryland corporation, and its subsidiaries.
This Annual Report on Form 10-K and the documents incorporated by reference into this report contain certain forward-looking statements within the meaning of the Private Securities Litigation
Reform act of 1995. These statements are based on our current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee the accuracy of such statements, and
you should be aware that results and events could differ materially from those contained in such statements. You should consider carefully the statements set forth in Item 1A of this report entitled
"Risk Factors" and Item 7 of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SPECIAL NOTE REGARDING CLASSIFICATION AS A SMALLER REPORTING COMPANY
Our Form 10-K for our fiscal year ended December 31, 2017 has been prepared following the Securities and Exchange Commission (SEC) guidelines for a smaller reporting company as defined by
229.10 (Item 10) of Regulation S-K. The rules and guidelines for a smaller reporting company allow a company to reduce the amount of historical disclosure required.
ITEM 1. BUSINESS
Overview
We are a specialty pharmaceutical company focused on improving patients' lives by identifying, developing and commercializing differentiated products that address unmet medical needs.
We target underserved segments, such as central nervous system (CNS) indications, including pain, neurology, and psychiatry, as well as other specialty therapeutic areas. We promote
our core branded products to physicians through our sales force of 74 Sales Specialists and distribute our generic products through our wholly owned subsidiaries, Macoven Pharmaceuticals, LLC
(Macoven) and Cypress Pharmaceuticals, Inc.
®
(Cypress).
We have a portfolio of approved products that address medical needs in several therapeutic areas, including:
-
Chronic Pain:
Zohydro
®
ER (hydrocodone bitartrate) with BeadTek
TM
, an extended-release opioid agonist indicated for the management of pain
severe enough to require daily, around-the-clock, long-term opioid treatment for which alternative treatment options are inadequate;
-
Insomnia:
Silenor
®
(doxepin), the only non-narcotic, non-scheduled and non-addictive prescription sleep aid for the treatment of insomnia
characterized by difficulty with sleep maintenance; and
-
Migraine:
Treximet
®
(sumatriptan/naproxen sodium), a fixed dose combination product indicated for the treatment of acute migraine;
Our strategy is to continue to create shareholder value by:
-
Growing or maintaining sales of the existing products in our portfolio in various ways, including identifying new growth opportunities; and
-
Acquiring additional marketed specialty products or products close to regulatory approval to leverage our existing expertise and infrastructure.
On January 4, 2018, we committed to and commenced a realignment plan to reduce operating costs and better align our workforce with the needs of our business in anticipation of the expiration of
certain patents related to our Treximet® fixed dose combination product. We completed the realignment plan on January 5, 2018, resulting in a reduction of our workforce by 41 employees
(representing approximately 22% of our workforce), the majority of which were associated with our sales force and commercial infrastructure. In connection with this commercial reorganization, we expect
to realize annualized cost savings of $7.0 million - $8.0 million beginning in the first quarter of 2018. We anticipate recording a one-time charge of approximately $1.0 million during the first quarter of 2018
as a result of this realignment.
3
Our Products and Product Candidates
Pernix-Promoted Products
Zohydro ER with BeadTek
Zohydro ER with BeadTek is indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are
inadequate. Zohydro ER does not contain acetaminophen, unlike many immediate-release hydrocodone products, reducing the risk for potential liver toxicity due to overexposure of acetaminophen.
Zohydro ER with BeadTek has six dosage strengths; 10 mg, 15 mg, 20 mg, 30 mg, 40 mg and 50 mg. On January 30, 2015, the U.S. Food and Drug Administration (FDA) approved this updated
formulation that features BeadTek, a technology encompassing an indistinguishable mix of inactive beads, active immediate-release hydrocodone beads and active extended-release hydrocodone beads.
Zohydro ER with BeadTek delivers an extended release of hydrocodone that provides 12-hour dose duration. When taken as directed, the inactive beads contained in Zohydro ER with BeadTek remain
inert. The inactive beads dissolve independently of the active hydrocodone beads and are designed not to change the 12-hour release properties of the medication when taken as directed. However, a
viscous gel forms when the inactive beads are crushed and dissolved in liquids or solvents.
It is estimated that about 100 million Americans suffer from chronic pain, defined as pain that lasts longer than three months. Chronic pain can be mild or excruciating, episodic or continuous, merely
inconvenient or totally incapacitating. With chronic pain, signals of pain remain active in the nervous system for months or even years. This can take both a physical and emotional toll on a person. The
most common sources of pain stem from lower back pain, joint pain or pain from injury. Other kinds of chronic pain include pain affecting specific parts of the body, such as the shoulders, pelvis, and
neck. Generalized muscle or nerve pain can also develop into a chronic condition. Chronic pain may originate with an initial trauma/injury or infection, or there may be an ongoing cause of pain. Some
people suffer chronic pain in the absence of any past injury or evidence of body damage. Chronic pain is complex, so there are many treatment options including opioid pain medications such as Zohydro
ER with BeadTek. We believe Zohydro ER with BeadTek is a good option for patients who have pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative
treatment options are inadequate because of its true 12-hour formulation ensuring patients are able to get pain control without the risk of end of dose failure.
We promote Zohydro ER with BeadTek in the United States through our nationwide specialty sales force, which covers 74 territories. In April 2015, we acquired the Zohydro ER franchise from
Zogenix, Inc. (Zogenix). Zohydro ER with BeadTek is manufactured by and licensed from Recro Pharma, Inc. (Recro). Prior to our acquisition of the Zohydro ER franchise, Zogenix was
responsible for all commercialization activities in the U.S. During this time, Zogenix paid milestones and royalties on sales to Alkermes plc. On March 3, 2015, Alkermes announced the sale
of the manufacturing facility and royalty revenue associated with Zohydro ER to Recro. Recro is our supplier of the commercial product for distribution in the U.S. Zohydro ER with BeadTek
is covered by 13 issued U.S. patents, which our subsidiary, Pernix Ireland Pain Designated Activity Company (PIP DAC) (formerly known as Pernix Ireland Pain Ltd. (PIPL)) either owns or has rights
to. Two of these patents expire November 1, 2019, seven expire July 25, 2033 and four expire September 12, 2034. Net revenues of Zohydro were $24.0 million and $24.7 million for the
years ended December 31, 2017 and 2016, respectively.
In May 2017, we announced that, due to a manufacturing issue with our supplier, we expect that the 20mg strength of Zohydro ER with BeadTek will be on back order until at least the first quarter of
2018. During this time, we have continued to market and distribute other strengths of Zohydro ER with BeadTek, including the 10 mg, 15 mg, 30 mg, 40 mg and 50 mg strengths. While utilization of the
10mg, 15mg and 30mg strengths have increased, we believe that the temporary stock out of the 20 mg strength has impacted the overall prescription volume for Zohydro ER with BeadTek, resulting in a
loss of revenue and adverse effect on our financial condition.
Silenor (doxepin)
Silenor is the only non-narcotic, non-scheduled and non-addictive prescription sleep aid for the treatment of insomnia characterized by difficulty with sleep maintenance. Silenor is
marketed as an oral tablet formulation and is available in 3 mg and 6 mg dosage forms. Doxepin, the active ingredient in Silenor, binds to H1 receptors in the brain and blocks histamine, which is believed
to play an important role in the regulation of sleep. Doxepin has been marketed and used for over 35 years at dosages ranging from 75 mg to 300 mg for the treatment of anxiety and
depression, but has historically not been used to treat insomnia due to undesirable next-day residual effects. Silenor, which uses doxepin at much lower dosages, does not exhibit the same
pharmacological effects as high-dose doxepin.
4
In four separate Phase III clinical trials, Silenor demonstrated a favorable safety and tolerability profile, including a low dropout rate and an adverse event profile comparable to
placebo. Silenor demonstrated no clinically meaningful next-day residual effects and no evidence of amnesia, complex sleep behaviors, hallucinations, tolerance or withdrawal
effects. Silenor was approved by the FDA in March 2010 for the treatment of insomnia characterized by difficulty with sleep maintenance and was launched commercially in the United States
in September 2010 by Pernix Sleep, Inc. (f/k/a Somaxon Pharmaceuticals, Inc.) (Pernix Sleep). We acquired the Silenor product line as a result of our merger with Somaxon Pharmaceuticals, Inc.
(Somaxon) on March 6, 2013, and we launched Silenor in the second quarter of 2013.
The current market-leading prescription products for the treatment of insomnia include: GABA-receptor agonists, which are classified by the FDA as Schedule IV controlled substances; melatonin
agonists; hypnotic benzodiazepines; and sedating antidepressants. Currently, the most widely-prescribed products for the treatment of insomnia include GABA-receptor agonists such as:
zolpidem (Ambien
®
); zolpidem tartrate extended-release tablets (Ambien CR
®
), a controlled-release formulation of Ambien; eszopiclone
(Lunesta
®
); and zalepon (Sonata
®
) and Belsomra
®
(suvorexant), an orexin receptor antagonist. In addition, melatonin agonists such
as ramelteon (Rozerem
®
), hypnotic benzodiazepines, such as temazapam (Restoril
®
) and flurazepam (Dalmane
®
), and sedating antidepressants
such as trazodone (Desyrel
®
) are used to treat insomnia. Our market research indicated that the market is underserved due in large part to characteristics associated with
many of these products, such as next-day grogginess, memory impairment, amnesia, hallucinations, physical and psychological dependence, complex sleep behaviors such as sleep driving, hormonal
changes and gastrointestinal effects.
We believe that Silenor offers many benefits, including improved safety, tolerability and efficacy in the treatment of sleep maintenance. Unlike many of the other insomnia treatments
currently available, Silenor is not designated as a controlled substance, and according to its FDA-approved labeling, Silenor does not appear to have any potential for dependency, addiction or abuse.
Because Silenor is not a controlled substance, it can be made available to physicians, facilitating initial physician and patient trials without the additional sampling regulation that applies to controlled
substances.
As a result of the numerous benefits presented by Silenor, the limitations of other current therapies, and because it is the first and only nonscheduled prescription sleep medication approved by the
FDA for the treatment of insomnia characterized by difficulty with sleep maintenance, we believe that Silenor has the potential for increased growth in the market. In addition, for these
reasons, we believe Silenor is an attractive candidate for the over-the-counter (OTC) market. We are engaged in life-cycle management activities relating to Silenor, including the assessment of OTC
opportunities such as potential out-licensing transactions. We also continue to review and assess options for internal development.
We promote Silenor in the United States through a nationwide specialty sales force, which covers 74 territories. We market and sell Silenor through Paladin Labs (a division of Endo Pharmaceuticals plc)
in Canada, and are currently working with CJ Healthcare Corporation, which launched Silenor in South Korea in 2015. Silenor is covered by eight issued U.S. patents, the latest expiring
2030, five of which are exclusively licensed from ProCom One, Inc. (ProCom). Four companies filed abbreviated new drug applications (ANDAs) with the FDA seeking approval to market a
generic version of Silenor, which resulted in all four companies being permitted to launch in 2020. We have an exclusive supply agreement with JRS Pharma L.P. for the exclusive use of
ProSolv®HD90, an ingredient used in our formulation for Silenor, in combination with doxepin. Mylan is our supplier of commercial product for distribution in the U.S. Net revenues of Silenor
were $22.3 million and $16.9 million for the years ended December 31, 2017 and 2016, respectively.
Treximet (sumatriptan/naproxen sodium)
Treximet is the only fixed dose combination product approved by the FDA to treat acute migraines. Sumatriptan, one of the two active ingredients in Treximet, belongs to the triptan class
used for the treatment of migraine headaches. Naproxen sodium, the other active ingredient in Treximet, is a non-steroidal anti-inflammatory drug (NSAID) used to relieve pain from various
conditions such as headaches, muscle aches, tendonitis, dental pain, and menstrual cramps, as well as pain, swelling, and joint stiffness caused by arthritis, bursitis, and gout
attacks. Treximet was approved in April 2008 for acute migraine attacks, with or without aura, in adults. The product is a unique formulation of sumatriptan and naproxen sodium
that employs the patented formulation technology owned by Aralez Pharmaceuticals, Inc. (formerly POZEN Inc.) (Aralez) and the RT Technology™ of GlaxoSmithKline's (GSK). We believe this unique
combination provides a synergistic therapeutic effect. The triptan component shrinks the swollen blood vessels in the head, which has been demonstrated to provide relief of migraine
pain. The NSAID component inhibits the enzyme responsible for the production of prostaglandins, which are the mediators of pain and inflammation. This dual mechanism of
action of Treximet has been shown to provide superior sustained pain relief compared to placebo and to both of the active ingredients alone. In clinical trials, Treximet demonstrated significantly greater
pain relief at two hours compared to sumatriptan 85mg or naproxen sodium 500 mg alone. In addition, Treximet provided more patients with sustained migraine pain relief from two to 24
hours compared to the individual components alone.
5
Migraines are a common and disabling neurologic condition that affect an estimated 17% of females and 6% of males in the United States. Based on current U.S. census data, there are
over 28 million individuals in the U.S. who suffer from migraines. A variety of medications have been specifically designed to treat migraines. Medications used to combat
migraines fall into two broad categories: acute or abortive medications; and preventative or prophylactic medications. Triptans, which are the most commonly prescribed class of drugs for
acute migraine, are available as oral pills, nasal sprays, injections and tablets that dissolve under the tongue. NSAIDs, such as ibuprofen and naproxen, are also used to treat acute
migraine. Treximet is an acute medication that combines the benefits of both of these commonly used classes of drugs.
Migraines have an estimated prevalence of 8% to 23% in adolescents 11 years of age and older. Acute and prophylactic treatments are similar to those used for
adults. Sumatriptan is the most widely studied triptan in adolescents. In clinical trials to date, sumatriptan has failed to demonstrate efficacy versus placebo, primarily as a result
of a high placebo response. Currently medical providers and patients have limited options for the treatment of acute migraine attacks with or without aura approved for use in this
population. We believe Treximet has the potential to meet this void. On May 15, 2015, we announced that the FDA had approved Treximet for use in pediatric patients 12 years of age and
older for the acute treatment of migraine with or without aura and we began to market and sell Treximet for pediatric patients in October 2016.
In August 2014, we, through our wholly owned subsidiary, Pernix Ireland Limited (PIL) acquired the U.S. intellectual property rights to Treximet from GSK, as well as GSK's royalty obligation to
Aralez. Treximet is exclusively licensed to us by GSK for U.S. marketing, sales and distribution. We originally promoted Treximet in the United States through our nationwide specialty sales
force. After the sales force restructure on January 4, 2018, we are no longer promoting Treximet with a sales force. We currently have two qualified suppliers of
Treximet. Treximet is covered by five patents in the U.S. Including six months of pediatric exclusivity, four of the patents expired on February 14, 2018, and one expires on April
2, 2026. Six companies filed ANDAs with the FDA seeking approval to market a generic version of Treximet, three of which are permitted to launch in 2018 and three other generics enjoined
from launching until 2026.
On February 14, 2018, four patents covering Treximet expired, enabling up to three generic competitors to enter the market. As of February 28, 2018, one of these competitors entered the market and
we are expecting the other two competitors to enter later in 2018. Concurrent with the launch of generics by third parties, we launched an authorized generic version of Treximet. We will also continue to
distribute the branded versions of Treximet. We have one additional patent that covers Treximet that will expire in 2026 that we expect to prevent additional generic competitors from entering the market
until that time. We expect that generic competition for Treximet will negatively impact our net revenues for the fiscal year ending December 31, 2018.
Net revenues of Treximet for the year ended December 31, 2016 were negatively impacted by $15.3 million of disputed rebate claims, which were recorded during the year ended December 31, 2016,
for sales which occurred in prior periods ($12.5 million and $2.8 million for the years ended December 31, 2015 and 2014, respectively) related to the unfavorable arbitration ruling in our dispute with GSK.
There was no impact on 2017 net revenues as a result of this ruling.
The following table sets forth the impact of the GSK arbitration award on net revenues of Treximet (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
GAAP net revenues of Treximet
|
|
$
|
68,405
|
|
$
|
66,961
|
|
$
|
101,753
|
|
$
|
54,775
|
GSK arbitration award adjustment
|
|
|
-
|
|
|
15,277
|
|
|
(12,484)
|
|
|
(2,793)
|
Adjusted net revenues of Treximet (1)
|
|
$
|
68,405
|
|
$
|
82,238
|
|
$
|
89,269
|
|
$
|
51,982
|
(1)
|
Adjusted net revenues of Treximet is a non-generally accepted accounting principles (GAAP) financial measure that adjusts GAAP net revenues of Treximet for the impact of the GSK arbitration
award for the year ended December 31, 2016 and reclassifies it to the years ended December 31, 2015 and 2014 and, therefore, has not been calculated in accordance with GAAP. We believe that this
non-GAAP financial measure provides meaningful supplemental information regarding our operating results because it reclassifies the gross-to-net adjustments that were the subject of the GSK arbitration
award to the years (2015 and 2014) in which the sales directly related to the gross-to-net adjustments actually occurred. See further discussion under the heading "Non-GAAP Financial
Measures" in Part II, Item 7 of this Annual Report on Form 10-K.
|
6
Externally Promoted and Non-Promoted Products
We market and sell our non-core products, including generics, through our wholly owned subsidiaries, Cypress and Macoven. We also market our non-promoted products through
distributors and trade partners.
Through our Macoven entity, we had distributed a combination product called isometheptene mucate, dichlorphenazone, and acetaminophen, or IDA, which was originally approved in 1948 by the
FDA, for safety only. The product's efficacy as an adjunct treatment for peptic ulcer disease, as well as other medical conditions, such as migraine headaches, was reviewed under the FDA's Drug Efficacy
Study Implementation process, DESI notice 3265.
We received a letter from the FDA dated October 19, 2017, asserting that IDA was subject to DESI 3265 and that any drug products identified in DESI 3265, including IDA, require an approved new
drug application (NDA) or an abbreviated new drug application (ANDA) in order for them to continue to be distributed. Since we have not obtained an NDA or ANDA for IDA, the FDA directed that we
should immediately cease distribution of IDA. While IDA has a long history of safe use, we complied with the FDA's request and confirmed with the FDA within its requested time frame that we ceased
distribution of the product. For the year ended December 31, 2017, our net revenues from the sale of IDA were $14.9 million. As we will not have further revenues from the product in 2018, the
discontinuance of the product will impact net revenues for the fiscal year ending December 31, 2018.
Research and Development
Our current development projects include potential line extensions. We intend to be opportunistic in exploiting our in-house expertise and intellectual property to initiate additional low-risk
development projects. In addition, we will look for external opportunities through in-licensing, collaborations or partnerships to build our pipeline.
We are currently reviewing alternatives for a Prescription -to-Over-The-Counter (OTC) switch for Silenor. We held a pre-IND meeting with the FDA in June 2015, during which we received
clarity from the FDA on the development activities that would be required to seek approval to market Silenor in the U.S. OTC market. Specifically, the FDA advised us that the results of preclinical studies
to assess the abuse potential of Silenor, a label comprehension study, a driving study, a self-selection study and an actual use trial, among other things, would be needed as part of an NDA submission.
Based upon our interactions with clinical research organizations (CROs) and potential out-licensing partners, we believe that it could take approximately four to five years to complete the development
work needed to file an NDA and seek approval to market Silenor as an over-the counter (OTC) product.
For the years ended December 31, 2017 and 2016, we recorded $787,000 and $6.1 million, respectively, in research and development expenses.
Sales and Marketing
On January 4, 2018, we committed to and commenced a realignment plan to reduce operating costs and better align our workforce with the needs of our business in anticipation of the expiration of
certain patents related to our Treximet® fixed dose combination product. We completed the realignment plan on January 5, 2018, resulting in a reduction of our workforce by 41 employees
(representing approximately 22% of our workforce), the majority of which were associated with our sales force and commercial infrastructure.
Our commercial activities in the United States are dedicated to our marketed products Zohydro ER with BeadTek and Silenor. Our commercial team also provides support for sales of certain of
our other products from time to time. We currently sell our products through our nationwide sales force, which consists of approximately 74 territories. Our teams of experienced sales professionals
discuss our products with Healthcare Providers (HCPs), such as prescribers, in specialties appropriate for each marketed product.
Our commercial activities include marketing, managed care contracting and related services and commercial support services. We also employ third-party vendors, such as advertising
agencies, market research firms and suppliers of marketing and other sales support-related services, to assist with our commercial activities.
We currently have a relatively small number of sales representatives compared with the number of sales representatives of most other pharmaceutical companies with marketed products. Each of our
sales representatives is responsible for a territory of significant size. We believe that the size of our sales force is appropriate to reach our target audience for our marketed products in the specialty
markets in which we currently operate. Continued growth of our current products and the launch of any future products may require expansion of our sales forces and sales support
organization in the United States and internationally, and we may need to commit significant additional funds, management and other resources to the growth of our sales organization.
7
GSK Arbitration, Restructuring and Business Development
GSK Arbitration Update
We were involved in an arbitration proceeding with Glaxo Group Limited, GlaxoSmithKline LLC, GlaxoSmithKline Intellectual Property Holdings Limited, and
GlaxoSmithKline Intellectual Property Management Limited (collectively,
GSK)
. GSK claimed that we owed GSK damages relating to an alleged breach by us of a
covenant contained in the Asset Purchase and Sale Agreement (APSA), dated as of May 13, 2014 by and among GSK and us pertaining to a pre-existing customer agreement.
We asserted counterclaims and defenses under the APSA and also asserted claims against GSK related to breaches of a supply agreement between
the parties. We and GSK entered into an interim settlement agreement (the Interim Settlement Agreement) under which we agreed to make payments to GSK and escrow additional funds. Additionally,
the parties agreed to submit the matter to binding arbitration.
On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35 million, plus interest (estimated to be
approximately $2 to $5 million). The tribunal also denied our claim that GSK breached its obligations under the supply agreement. We had already paid to GSK an aggregate of $16.5 million, including
$6.2 million from the escrow account, which will offset the total award. After discussions with GSK, an agreement was reached on March 17, 2017, to amend the Interim Settlement Agreement with GSK
whereby we agreed to establish a payment schedule for satisfaction of the current balance of the award. Pursuant to the amendment, we agreed that the outstanding balance as of the date of the
amendment was approximately $21.5 million to GSK and we agreed to make quarterly installments in amounts totaling $1.0 million in 2017, $3.5 million in 2018 and approximately $17.0 million in 2019.
We recorded the fair value of this settlement in the amount of approximately $18.5 million in our financial statements at December 31, 2016 and recorded $15.3 million as a reduction to net revenues, $1.0
million to selling, general and administrative expense and $2.2 million to interest expense in the year ended December 31, 2016.
On July 20, 2017, we and GSK entered into Amendment No. 2 to the Interim Settlement Agreement. Amendment No. 2 supersedes Amendment No. 1 and permitted payment by us to
GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the award granted to GSK in the arbitration of certain matters previously disputed by the
parties. Pursuant to Amendment No. 2, we were obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017 and (ii) a payment of $3.2 million due
on or before December 31, 2017. Both of these payments were made as of December 31, 2017.
Also pursuant to Amendment No. 2, we agreed that if on or before
September 30, 2019, we (x) redeem or repurchase our 4.25% Convertible Notes (as defined below) for greater than 31.00 cents for every one dollar of principal amount outstanding or (y) exchange such
notes for new notes or similar instruments that have a face value providing such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged
by such holders, we shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2.0
million.
GSK has agreed that for so long as we comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek to enforce or
exercise any other remedies in respect of the award granted to GSK, and that the outstanding balance of such award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. We
have recorded $2.0 million as contingent consideration for the potential payment due by September 30, 2019 and is recorded in Arbitration Award on our consolidated balance sheet at December 31, 2017.
Also, we recorded $10.5 million as gain from legal settlement for the year ended December 31, 2017 pursuant to Amendment No. 2 in the consolidated statements of operations and comprehensive
loss.
Reverse Stock Split
On October 13, 2016, we filed Articles of Amendment to our charter, with the State Department of Assessments and Taxation of Maryland to affect a one-for-ten reverse stock split of the outstanding
shares of common stock, par value $0.01 per share (the Reverse Stock Split). The purpose of the Reverse Stock Split was to raise the per share trading price of our common stock to regain compliance
with the minimum $1.00 continued listing requirement for the listing of our common stock on The Nasdaq Global Market. As of the date of this Report, we have regained compliance with Nasdaq Listing
Rule 5450(a)(1).
Each stockholder's percentage ownership in us and proportional voting power remained unchanged immediately after the Reverse Stock Split, except for minor changes resulting from the rounding up
of fractional shares. The rights and privileges of stockholders were also unaffected by the Reverse Stock Split. There was no change to the number of authorized shares of our common stock as a result of
the Reverse Stock Split. Accordingly, all share and per share information in this Annual Report on Form10-K has been restated to retroactively show the effect of the Reverse Stock Split.
8
Debt Restructuring
In August 2016, we announced the commencement of a formal process to pursue alternatives to improve financial flexibility, and we retained advisors to explore options to restructure our debt and
assess other potential alternatives in order to maximize value for all stakeholders.
On July 20, 2017, we entered into several refinancing transactions (collectively, the Transactions) with certain holders (the Holders) of our outstanding 4.25% Convertible Senior Notes Due 2021 (the
4.25% Convertible Notes). The Transactions closed on July 21, 2017, and included:
-
A new five-year $40.0 million asset-based revolving credit facility (the ABL Credit Agreement) by and among us and certain of our subsidiaries as borrowers and guarantors
(the ABL Borrowers) and Pernix Ireland Pain DAC (PIP DAC), Pernix Ireland Limited, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC as additional guarantors (the ABL Guarantors),
Cantor Fitzgerald Securities, as agent, and the Holders, as lenders. The ABL Credit Agreement replaced our asset-based revolving credit agreement, dated as of August 21, 2015, by and among the ABL
Borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, as amended (the Old ABL Facility); We have drawn $14.2 million under this facility at December 31, 2017;
-
A new five-year $45.0 million delayed draw term loan facility (the Delayed Draw Term Loan or DDTL) among PIP DAC, Cantor Fitzgerald Securities, as agent, and the Holders, as lenders. We drew
$30.0 million of the proceeds under this facility upon closing of the Transactions;
-
The issuance of (a) $36.2 million aggregate principal amount of PIP DAC's 4.25%/5.25% Exchangeable Senior Notes due 2022 (the Exchangeable Notes) and (b) 1,100,498 shares of Pernix's
common stock (the Exchange Shares), in exchange for the tender to PIP DAC of $51.8 million aggregate principal amount of Convertible Notes held by the Holders (the Exchange). The Exchangeable
Notes are governed by a new indenture under which PIP DAC is the issuer and Pernix and its other subsidiaries are the guarantors (the Exchangeable Notes Guarantors), with Wilmington Trust, National
Association, as trustee (the Exchangeable Notes Trustee). Concurrent with the Transactions, we entered into a registration rights agreement among Pernix, PIP DAC and the Holders that provides for the
registration under the Securities Act of 1933, as amended, for the offer and sale of the Exchange Shares and the Underlying Shares (the Registration Rights Agreement). The Exchangeable Notes will be
exchangeable for our common stock. After giving effect to the Exchange, approximately $78.2 million principal amount of the 4.25% Convertible Notes remain outstanding.
These transactions are discussed in further detail below.
Financing Activities
Convertible Notes:
4.25% Convertible Notes
On April 22, 2015, we issued $130.0 million aggregate principal amount in the 4.25% Convertible Notes. The 4.25% Convertible Notes mature on April 1, 2021, unless earlier converted,
redeemed or repurchased. We received net proceeds from the sale of the 4.25% Convertible Notes of $125.0 million, after deducting placement agent fees and commissions and offering
expenses payable by us. Interest on the 4.25% Convertible Notes is payable on April 1 and October 1 of each year, beginning October 1, 2015. $51.8 million of these notes were tendered in
consideration for the issuance of (a) $36.2 million aggregate principal amount of PIP DAC's 4.25%/5.25% Exchangeable Senior Notes due 2022 (the Exchangeable Notes) and (b) 1,100,498 shares of
Pernix's common stock (the Exchange Shares) discussed above.
Secured Notes:
Treximet Secured Notes
On August 19, 2014, we issued $220.0 million aggregate principal amount of our 12% Senior Secured Notes due 2020 (the Treximet Secured Notes) pursuant to an
Indenture (the Treximet Notes Indenture), dated as of August 19, 2014, among us, certain of our subsidiaries (the Treximet Guarantors) and U.S. Bank National Association (the Treximet Notes Trustee),
as trustee and collateral agent.
9
The Treximet Secured Notes mature on August 1, 2020 and bear interest at a rate of 12% per annum, payable in arrears on February 1 and August 1 of each year, beginning on February 1, 2015. On
each payment date, commencing August 1, 2015, we will pay an installment of principal of the Treximet Secured Notes in an amount equal to 50% of net sales of Treximet for the two consecutive fiscal
quarters immediately preceding such payment date (less the amount of interest paid on the Treximet Secured Notes on such payment date). As of December 31, 2017, the aggregate principal amount of
the Treximet Secured Notes was approximately $172.1 million.
Third Supplemental Indenture
On December 29, 2017, we and U.S. Bank National Association, as trustee, entered into a third supplemental indenture (the "Third Supplemental Indenture") to the Treximet
Notes Indenture with the consent of the holders of a majority in aggregate principal amount of our Treximet Secured Notes. The Third Supplemental Indenture amends the Treximet Notes Indenture to
clarify the definition of "Net Sales", as such term is defined in the Treximet Notes Indenture and resulted in the deferral of $3.2 million of principal payments until maturity.
Credit Facilities:
Cantor Fitzgerald
On July 21, 2017, we entered into a new five-year $40.0 million asset-based revolving credit facility (the ABL Credit Agreement) by and among Pernix and certain subsidiaries of Pernix as
borrowers and guarantors (the ABL Borrowers) and Pernix Ireland Pain Designated Activity Company (PIP DAC), Pernix Ireland Limited, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3,
LLC as additional guarantors (the ABL Guarantors), Cantor Fitzgerald Securities, as agent, and the Holders, as lenders. The ABL Credit Agreement replaced our asset-based revolving credit agreement,
dated as of August 21, 2015, by and among the ABL Borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, as amended (the Old ABL Facility). As of
December 31, 2017, the aggregate principal amount of the ABL Credit Agreement was approximately $14.2 million.
Our obligations under the ABL Credit Agreement are secured by, among other things, our and certain of our subsidiaries' inventory and accounts receivable and were guaranteed by certain of our
subsidiaries. Borrowings under the ABL Credit Agreement will bear interest at our election at (i) the rate of LIBOR plus 7.5% (ii) the Base Rate (as defined in the ABL Credit Agreement) plus 6.5%. In
addition, we are required to pay a commitment fee on the undrawn commitments under the ABL Credit Agreement from time to time at an applicable rate of 0.25% per annum according to the average
daily balance of borrowings under the ABL Credit Agreement during any month.
Wells Fargo
On August 21, 2015, we entered into a Credit Agreement with Wells Fargo National Association (Wells Fargo), as Administrative Agent and the lenders party thereto for a $50.0 million,
three-year senior secured revolving credit facility (the Wells Fargo Credit Facility), which may have been increased by an additional $20.0 million in the lenders' discretion.
Our obligations under the Wells Fargo Credit Facility were secured by, among other things, our and certain of our subsidiaries' inventory and accounts receivable and were guaranteed by certain of
our subsidiaries. The outstanding balances on this facility as of December 31, 2017 and 2016, were $0 and $14.0 million, respectively.
Borrowings under the Wells Fargo Credit Facility accrued interest at our election at (i) the rate of LIBOR plus 1.5% to LIBOR plus 2.0% or (ii) the Base Rate (as defined in the Wells Fargo Credit
Facility) plus 0.5% to the Base Rate plus 1.0%. The applicable interest rate margin percentage will be determined by the average daily availability of borrowings under the Wells Fargo Credit Facility. In
addition, we were required to pay a commitment fee on the undrawn commitments under the Wells Fargo Credit Facility from time to time at an applicable rate of 0.25% per annum according to the
average daily balance of borrowings under the Wells Fargo Credit Facility during any month. On February 8, 2017, we agreed to provide Wells Fargo with 30 days' prior notice of any request for a
borrowing under this facility until April 8, 2017.
As discussed earlier, the ABL Credit Facility entered into on July 21, 2017 replaced the Wells Fargo Credit Facility and the Company used the proceeds from the ABL Credit Facility to repay the
outstanding obligation of the Wells Fargo Credit Facility.
10
Term Facility
Cantor Fitzgerald
On July 21, 2017, we entered into a $45.0 million term loan credit agreement (the Delayed Draw Term Loan or DDTL) with Cantor Fitzgerald Securities, as agent (the Term Agent) and the
lenders party thereto to obtain the DDTL. $30 million under the DDTL was drawn on the date of closing of the Transactions, and the remaining $15.0 million will be available for subsequent draws for
certain specified purposes, including to finance certain acquisitions, subject to conditions set forth in the DDTL Credit Agreement. The DDTL includes an incremental feature that allows PIP DAC, with the
consent of the requisite lenders under the Term Facility, to obtain up to an additional $20.0 million in term loan commitments from new or existing lenders under the Term Facility that agree to provide such
commitments. Interest on the loans will accrue either in cash or a combination of cash and in- kind interest, at PIP DAC's election. Cash interest will accrue at a rate of 7.50% per annum, while the
combination of cash and in-kind interest will accrue at a rate of 8.50% per annum, with up to 4.00% per annum added to the principal amount of loans and the balance paid in cash. The DDTL will contain
representations and warranties, affirmative and negative covenants, and events of default applicable to PIP DAC and its subsidiaries (if any) that are customary for credit facilities of this type. The DDTL
will mature on July 21, 2022. As of December 31, 2017, the aggregate principal amount outstanding of the DDTL was $30.0 million.
Exchangeable Notes
Wilmington Trust
On July 21, 2017, PIP DAC, the
Exchangeable Notes
Guarantors, and Wilmington Trust, National Association, as Trustee, entered into a $36.2 million New
Exchangeable Notes Indenture. The Exchangeable Notes issued under the New Notes Indenture will be guaranteed by Pernix and each other subsidiary thereof. The Exchangeable Notes are senior,
unsecured obligations of PIP DAC. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIP DAC's election. Interest paid in cash (the "All Cash
Method") will accrue at a rate of 4.25% per annum, while interest paid in a combination of cash and in-kind will accrue at a rate of 5.25% per annum, with 2.25% per annum of interest (plus additional
interest, if any) capitalized to the principal amount of the Exchangeable Notes, and the balance paid in cash. The maturity date of the Exchangeable Notes Indenture is July 15, 2022.
The Exchangeable Notes initially are exchangeable into shares of our common stock at an exchange price per share of $5.50 (the "Exchange Price"). The Exchange Price will be subject to
adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants,
subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain Company tender or exchange offers. As of December 31, 2017, the
aggregate principal amount outstanding of the Exchange Note was $35.7 million.
Holders will exchange all or a portion of their Exchangeable Notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity
dates. See further discussion under the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Annual Report on Form 10-K.
See further discussion in Note 12,
Debt and Lines of Credit
, to our audited consolidated financial statements in Part II, Item 8 and also under the heading "Liquidity and Capital
Resources" in Part II, Item 7 of this Annual Report on Form 10-K.
Acquisition of Zohydro ER with BeadTek
On April 24, 2015, through our wholly-owned subsidiary, PIP DAC, formerly known as Pernix Ireland Pain Limited and Ferrimill Limited, we completed the acquisition of the
pharmaceutical product line, Zohydro ER, including an abuse-deterrent pipeline and rights to all related intellectual property, a supplier contract and an associated liability payable and a specified quantity
of inventory associated therewith, from Zogenix. There were no other tangible or intangible assets acquired and liabilities assumed related to the Zohydro ER product line from Zogenix. The total
purchase price consisted of an upfront cash payment of $80.0 million including a deposit of $10.0 million in an escrow fund, 168,209 shares of our Common Stock, $927,000 for a specified quantity of
inventory, and regulatory and commercial milestone payments of up to $283.5 million, including a $12.5 million milestone payment upon approval of ZX007 abuse-deterrent extended-release hydrocodone
tablet and up to $271.0 million in potential sales milestones if the Zohydro ER product line achieves certain agreed-upon net sales targets. We funded the cash portion of the purchase price from our
issuance of $130.0 million aggregate principal amount of the 4.25% Convertible Notes.
11
Acquisition of Treximet
On August 20, 2014, we, through our wholly owned subsidiary Pernix Ireland Limited (PIL), formerly known as Worrigan Limited, completed the acquisition of the U.S. intellectual property rights to the
pharmaceutical product, Treximet, from GSK.
The total purchase price originally consisted of an upfront cash payment of $250.0 million to GSK upon closing of the transaction, and up to $17.0 million payable to GSK upon receipt of an updated
written request for pediatric exclusivity from the FDA. As a result of supply constraints, the contingent payment amount was subsequently reduced from $17.0 million to $1.95
million. We funded this acquisition with $220.0 million in debt and approximately $32.0 million from available cash.
In connection with the transaction, GSK assigned to PIL the Product Development and Commercialization Agreement (the PDC Agreement) between GSK and Aralez.
In connection with the assignment of the PDC Agreement, PIL paid $3.0 million to CPPIB (which owns the rights to the royalty payments under the PDC Agreement), and we
have also granted Aralez a warrant to purchase 50,000 shares of our common stock at an exercise price of $42.80 per share (the closing price of our common stock on May 13, 2014 as reported on
Nasdaq) (the Warrant). The Warrant was exercisable from the closing date of the acquisition (August 20, 2014) until February 28, 2018. In March 2015, an assignee of Aralez exercised the warrant on a
cashless basis, resulting in the issuance of 31,584 shares of common stock to such assignee. We will continue to pay a royalty to Aralez under the PDC Agreement, equal to 18% of net sales or lower
under certain circumstances, with quarterly minimum royalty amounts of $4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.
Pursuant to the agreement between GSK and PIL, GSK was obligated to manufacture Treximet for sale to us for a period of three years, unless terminated earlier. We were required to
purchase 100% of our requirements of Treximet product from GSK until December 31, 2015. Additionally, the price of Treximet was firm for the first year of the term. Thereafter, the price of
Treximet is subject to increase based on the Pharmaceutical Preparation - Manufacturing Index for the twelve months immediately preceding additional years of the term. GSK
manufactured Treximet for our adolescent sales and is no longer manufacturing Treximet for our adult sales. We have qualified and contracted with an additional manufacturing source to support current supply.
Business Strategy
Our strategy is to maximize the commercial strengths and the value of the infrastructure that we have put in place to create a fully-integrated specialty pharmaceutical company. We have
launched Zohydro ER with BeadTek and re-launched Silenor in the U.S. market. We intend to expand upon and leverage our commercial successes and have launched an authorized generic version of
Treximet. We have also launched Pernix Prescriptions Direct
®
, a prescription processing service that provides benefit verification, prescription adjudication and mail order
delivery of the prescription directly to the patient. We believe that our Pernix Prescriptions Direct program offers patients and healthcare professionals improved convenience that we believe will result in
better compliance and reduced prescription abandonment among those participating in the program. We are focused on developing, acquiring and in-licensing additional products, and on partnering with
and acquiring companies with which we can execute a targeted commercial approach. We are focused primarily on CNS indications, including pain, neurology, and psychiatry, though we will
consider other indications opportunistically.
Manufacturing
We currently outsource all of our manufacturing to third parties. We maintain internal quality standards, regulatory compliance and a committed level of resources to administer the
operations of these third-party relationships. We currently depend on third-party relationships for the supply of the active ingredients in our pharmaceutical products and product candidates, the
manufacture of the finished product and the related packaging. This may increase the risk that we will not have sufficient quantities of our products or product candidates, or that such quantities, if
available, cannot be acquired at an acceptable cost, which could result in development and commercialization of our product candidates being delayed, prevented or impaired. Where possible and
commercially reasonable, we qualify more than one source for manufacturing and packaging of our products to mitigate the risk of supply disruptions. In such circumstances, if one of our manufacturers
or packagers was unable to supply our needs, we would have an alternative source available for those products.
We and all of our other manufacturers and suppliers are subject to the FDA's current Good Manufacturing Practices (cGMP), requirements. Certain of our manufacturers are also subject to the United
States Drug Enforcement Administration (DEA), regulations and other rules and regulations stipulated by other regulatory bodies.
12
Intellectual Property
Our performance relies partly on our capacity to achieve and maintain proprietary protection for our products and product candidates, technology and know-how to function without infringing on
the ownership rights of others and to defend against others from infringing on our ownership rights.
Patents
We own or have rights to 44 issued U.S. patents and 21 pending U.S. Patent Applications relating to our products and technology. Further detail with respect to our patents pertaining to
Treximet, Zohydro ER with BeadTek and Silenor are described below.
Our Treximet patent portfolio broadly covers the pharmaceutical formulation, including the proprietary combination of a 5-HT agonist (i.e. sumatriptan) and a long-acting NSAID (i.e. naproxen), method
of treatment, and bilayer tablet structure. The portfolio comprises five issued U.S. patents (U.S. patent nos. 6,060,499, 6,586,458, 7,322,183, 8,022,095, and 5,872,145), all of which are listed in the
FDA's
Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations
(Orange Book) and all of which benefit from six months pediatric exclusivity. Four of the U.S.
patents expire February 14, 2018, including six months pediatric exclusivity, and one expires April 2, 2026, including pediatric exclusivity. The adult and pediatric strengths have separate Orange
Book listings. There are no pending applications in the U.S. All five patents are in-licensed from Aralez.
Zohydro ER with BeadTek is covered by 13 Orange Book listed patents, 6 of the 13 are in-licensed and the other 7 are solely owned by PIP DAC. Six additional U.S. patent applications
relating to Zohydro ER with BeadTek are pending. U.S. patent nos. 6,228,398 and 6,902,742, both of which expire on November 1, 2019 and both of which are in-licensed from Recro Gainesville,
LLC, broadly cover the multiparticulate modified release composition. U.S. patent nos. 9,132,096, 9,452,163, 9,486,451 and 9,713,611, also in-licensed from Recro, are directed to the abuse
deterrent technology (BeadTek) and expire September 12, 2034. U.S. patent nos. 9,265,760, 9,326,982, 9,333,201, 9,339,499, 9,421,200, 9,433,619 and 9,610,286 (all expire July 25, 2033) are
solely owned by PIP DAC and are directed to methods of dosing patients with mild or moderate hepatic impairment where no adjustment in start dose is required relative to patients without hepatic impairment.
In a license agreement dated August 2003 and amended and restated in September 2010, Pernix Sleep, Inc. acquired the exclusive, worldwide
license from ProCom One, Inc. to certain patents to develop and commercialize low dosages of doxepin for the treatment of insomnia. Silenor benefits from eight issued U.S. patents, all of which are listed
in the Orange Book, with the latest expiring in September 2030. U.S. patent no. 6,211,229 is broadly directed to the treatment of insomnia with doxepin and expires February 17, 2020. U.S.
patent nos. 7,915,307 and 9,572,814 are directed to methods of providing sleep therapy by administering doxepin several hours after a meal and expire August 24, 2027. U.S. patent nos.
9,107,898 and 8,513,299, expiring May 1, 2028 and September 7, 2030, respectively, and 9,486,437 and 9,861,607, expiring May 18, 2027, are directed to methods of treating sleep maintenance
insomnia by administering doxepin to reduce fragmented sleep or early awakenings. Lastly, U.S. patent no. 9,532,971, expiring June 1, 2029, is directed to a pharmaceutical composition with
doxepin and silicified microcrystalline cellulose. It is anticipated that all of these issued U.S. patents will cover the proposed over-the-counter (OTC) version. Further, we own or have rights to
11 pending U.S. patent applications that relate to Silenor.
In connection with the ASPA, GSK assigned to our wholly-owned subsidiary, PIL, all of its right, title and interest in and to that certain PDC Agreement. Pursuant to such assignment, we
acquired the right and license make, use, offer to sell, sell products in the United States and Puerto Rico using certain Aralez patents and other technology.
The term of the PDC Agreement extends until the later of the date the last licensed patent expires and fifteen years from the first commercial sale of a product developed using
the licensed patents. The agreement is terminable at any time by us with 90 days' notice for any reason. Either party may terminate the agreement with 60 days' notice if the
other party commits a material breach of its obligations (or 15 days in the case of a failure to pay amounts due) and fails to remedy the breach within such notice period. Under the terms of the
agreement, we pay a royalty of eighteen percent (18.0%) of net sales (as defined in the agreement), which amount may be reduced under certain circumstances. Our predecessor-in-interest made
upfront and milestone payments upon certain development milestones and regulatory approvals, all of which were satisfied prior to our acquisition of Treximet assets.
Trademarks and Trade Secrets
We own trademark interests in most of our current products and believe that having distinguishing marks is an important factor in marketing these products. We currently
own or have rights to approximately 25 trademarks registered with the United States Patent and Trademark Office, including PERNIX, SILENOR, TREXIMET, ZOHYDRO, ZOHYDRO ER, BEADTEK and
many more. The trademark registrations we own or hold rights to include registrations covering our product names, services, logos and slogans used for marketing of our products. In
addition to our registered marks, we remain committed to branding our goodwill and we continuously file new trademarks used to brand and market our products and services. In some circumstances, we
may depend on trade secrets to aid in protecting our technology.
13
Seasonality
We generally experience some effects of seasonality due to our patients resetting their deductible amounts in the
beginning of the calendar year and reaching their deductible amounts during the year. Accordingly, sales of our products and associated revenue have generally decreased in the first quarter of each
year and begin to increase during the remainder of the
year. This seasonality may cause fluctuations in our financial results. In addition, other seasonality trends may develop and
the existing seasonality that we experience may change.
Customers, Distribution, and Reimbursement
Customers and Distribution
Our customers consist of drug wholesalers, specialty pharmacies, retail drug stores, mass merchandisers and grocery store pharmacies in the U.S. We primarily sell products directly to drug
wholesalers, which in turn distribute the products to retail drug stores, mass merchandisers and grocery store pharmacies. Our top three customers, which represented 88% and 93% of gross product
sales in each of 2017 and 2016, are all drug wholesalers. Each customer and its respective percentage of our gross product sales are listed by year below:
Gross Product Sales
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
McKesson Corporation
|
|
|
34%
|
|
|
36%
|
AmerisourceBergen Drug Corporation
|
|
|
30%
|
|
|
31%
|
Cardinal Health, Inc.
|
|
|
24%
|
|
|
26%
|
Total
|
|
|
88%
|
|
|
93%
|
Consistent with industry practice, we maintain a returns policy that allows our customers to return products within a specified period prior and subsequent to the expiration date. Occasionally, we may
also provide discounts to some customers to ensure adequate distribution of our products.
We actively market our products to authorized distributors through regular sales calls. We have many years of experience working with various industry distribution channels. We believe that this
significantly enhances our performance in the following ways:
-
ensuring product stocking in major channels in the geographic areas where we do business;
-
continually following up with accounts and monitoring product performance;
-
developing successful product launch strategies; and
-
partnering with customers on other value-added programs.
Our active marketing effort is designed to ensure appropriate distribution of our products so that patients' prescriptions can be filled with our products.
Reimbursement
In the U.S. market, sales of pharmaceutical products depend in part on the availability of reimbursement to the patient from third-party payors, such as government health administration authorities,
managed care organizations, or MCOs, and private insurance plans. Most of our products are generally covered by managed care and private insurance plans. The status or tier within each plan varies,
but coverage for our products is similar to other products within the same class of drugs. We also participate in the Medicaid Drug Rebate Program with the Centers for Medicare & Medicaid Services
and submit all of our covered products for inclusion in this program. Coverage of our products under individual state Medicaid plans varies from state to state. Third-party payors are increasingly
challenging the prices charged for pharmaceutical products and reviewing different cost savings efforts, which could affect the reimbursement available for our products and ultimately the net proceeds
realized from the sales of our products.
14
Competition
The pharmaceutical industry is highly competitive and characterized by a number of established, large pharmaceutical companies, as well as specialty pharmaceutical companies that market pain,
neurology, psychiatry, primary care and other products. Many of these companies, particularly large pharmaceutical and life sciences companies, have substantially greater financial, operational and
human resources than we do. They can spend more on, and have more expertise in, research and development, regulatory, manufacturing, distribution and sales activities. As a result, our competitors
may obtain FDA or other regulatory approvals for their product candidates more rapidly than we may and may market their products more effectively than we do. Smaller or earlier stage companies may
also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
Our ability to continue to grow requires that we compete successfully with other specialty pharmaceutical companies for product and product candidate acquisition and in-licensing opportunities.
Some of these competitors include Teva, Depomed, Purdue Pharma, Pfizer, Collegium, Egalet and Valeant. These established companies may have a competitive advantage over us due to their size
and financial resources.
We also face competition from manufacturers of generic drugs. Generic competition often results in decreases in the prices at which branded products can be sold, particularly when
there is more than one generic available in the marketplace. In addition, legislation enacted in some states in the United States allows for, and in a few instances in the absence of specific instructions
from the prescribing physician mandates, the dispensing of generic products rather than branded products where a generic version is available.
Our products and product candidates may also compete in the future with new products currently under development by others. Any products that we develop are likely to be in a highly competitive
market, and many of our competitors may succeed in developing products that may render our products obsolete or noncompetitive.
With respect to all of our products and product candidates, we believe that our ability to successfully compete will depend on, among other things:
-
the existence of competing or alternative products in the marketplace, including generic competition, and the relative price of those products;
-
the efficacy, safety and reliability of our products and product candidates compared to competing or alternative products;
-
product acceptance by physicians, other health care providers and patients;
-
protection of our proprietary rights;
-
obtaining reimbursement for our products in approved indications;
-
our ability to complete clinical development and obtain regulatory approvals for our product candidates, and the timing and scope of regulatory approvals;
-
our ability to supply commercial quantities of a product to the market; and
-
our ability to recruit, retain and develop skilled employees.
Government Regulation
In the U.S. and other countries, federal, state, and local government authorities comprehensively regulate the research, development, testing, manufacture, packaging, storage, recordkeeping,
labeling, advertising, promotion, distribution, marketing, importing and exporting of pharmaceutical products that we market, sell and develop.
15
FDA Regulation of Drug Products
In the United States, the FDA regulates the research, testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record-keeping, reporting, distribution,
import, export, marketing, advertising and promotion of our drug products and product candidates under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. Obtaining
regulatory approvals and complying with applicable federal, state and local statutes and regulations require significant time and financial resources. Failure to comply with applicable FDA requirements
during the development, approval or post-approval processes may subject an applicant to a range of judicial or administrative penalties, including the FDA's refusal to approve pending applications,
withdrawal of an approval, clinical holds, warning letters, product recalls, product seizures, suspension of production or distribution, fines, restitution, disgorgement or civil or criminal sanctions.
Before a sponsor may market a drug in the U.S., the FDA requires a process that generally involves the following steps:
-
performance of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA's Good Laboratory Practices, or GLP. regulations and the U.S. Department of
Agriculture's Animal Welfare Act;
-
submission of an investigational new drug application, or IND, to the FDA, which must become effective before human clinical trials may commence;
-
obtaining approval at each clinical trial site by an independent institutional review board, or IRB, before each trial may begin;
-
completion of adequate and well-controlled human clinical trials in accordance with Good Clinical Practices, or GCP, to establish the safety and efficacy of the proposed drug for its intended use;
-
submission of a new drug application, or NDA, to the FDA;
-
adequate completion of an FDA advisory committee review, if applicable; and,
-
FDA review and approval of the NDA.
Preclinical Studies
. Prior to full clinical studies, product candidates are evaluated in preclinical studies that may include extensive laboratory evaluations of product chemistry, toxicity,
formulation and stability, as well as animal studies. The preclinical test results must be submitted by an IND sponsor, along with a clinical trial protocol, manufacturing information, analytical data and any
available clinical data and literature to the FDA as part of the IND. Unless the FDA raises concerns or questions related to proposed clinical trials (such as concerns that human research subjects will be
exposed to unreasonable risks) and places the clinical trials on a clinical hold, an IND automatically becomes effective 30 days after receipt by the FDA and clinical trials may commence. If the FDA
issues a clinical hold, the IND sponsor and the FDA must settle any pending concerns before the clinical trial can begin. In addition, the FDA can impose clinical holds at any time before or during trials
due to safety concerns or non-compliance. Thus, submission of an IND does not guarantee that the FDA will allow the commencement or the completion of clinical trials.
Clinical Trials
. Clinical trials involve the administration of an investigational new drug to human subjects under the supervision of qualified investigators. Clinical trials are subject to extensive
regulation, including GCP requirements, which include, among other things, obtaining written informed consent from all study subjects, monitoring, and seeking review and approval by an IRB to conduct a
clinical trial at each clinical study site.
Clinical trials are performed in accordance with protocols detailing, among other things, the objectives of the study, dosing procedures and the parameters to be used to monitor subject safety and the
effectiveness criteria to be evaluated. Once an IND is in effect, each new clinical protocol and any amendments to the protocol must be submitted for FDA review and to the IRBs for
approval.
Clinical trials are generally conducted in three consecutive phases, which may coincide or be combined:
-
Phase I: The investigational product is initially introduced into healthy human subjects or, in certain circumstances, patients with the target disease or condition, and is tested for safety, dosage
tolerance, absorption, metabolism, distribution and excretion.
-
Phase II: The investigational product is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific
targeted diseases and to determine dosage tolerance and optimal dosage and schedule.
-
Phase III: The investigational product is administered to an expanded patient population to further evaluate dosage, clinical efficacy and safety, to establish the overall risk-benefit ratio of the drug, and
to provide an adequate basis for regulatory approval and product labeling.
16
An IND sponsor must submit reports to the FDA annually, or more frequently if the FDA requests, detailing among other things the results of the clinical trials and serious and unexpected adverse
events. Phase I, II, and III trials may not be successfully completed within a specified period of time, or at all. Moreover, the FDA, an IRB, a Data Safety Monitoring Board or Data Monitoring Committee,
or the sponsor may, at its discretion, suspend or terminate a clinical trial at any time on various grounds, including a finding that study subjects are being exposed to an unacceptable health risk.
NDA Approval
. If the required clinical testing is completed successfully, a sponsor may submit the results of the preclinical studies and clinical trials, along with detailed descriptions of the
manufacturing process, analytical tests conducted on the drug, proposed labeling and other relevant information, as part of an NDA to the FDA, requesting approval to market the product for one or more
indications. The submission of an NDA is subject to a substantial application fee in most cases. Under the Pediatric Research Equity Act, certain applications for approval must include an assessment,
generally based on clinical study data, of the safety and effectiveness of the drug in relevant pediatric populations. At the request of an applicant or by its own initiative, the FDA may grant deferrals or full
or partial waivers from the pediatric data requirements. The pediatric data requirements do not apply to products with orphan designation, unless otherwise required by regulation.
The FDA must determine whether to accept a submitted NDA for filing within sixty days of receipt, based on the agency's threshold determination that the application is adequately complete to permit
substantive review. Alternatively, the FDA may request additional information. In such an event, the NDA must be resubmitted with the additional information. Once the application is accepted for filing,
the FDA commences a detailed substantive review. The FDA may refer the NDA to an advisory committee for review, evaluation and a recommendation as to whether the application should be approved
and under what conditions. The FDA considers such recommendations when making decisions but is not bound by the recommendations of the advisory committee.
As part of the approval process, the FDA also examines manufacturing facilities for the proposed product. The FDA will not approve an application if it determines that the manufacturing processes
and facilities do not comply with cGMP requirements and are unsatisfactory to assure consistent production within required specifications. In addition, the FDA will typically inspect one or more clinical
sites to assure compliance with GCP before approving an NDA.
The approval process is lengthy and can be difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data
and information. Even if such data and information are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always
conclusive and the FDA may interpret data differently than our interpretation of the same data. The FDA will issue a complete response letter if the agency decides not to approve the NDA in its present
form. The complete response letter usually describes all of the specific deficiencies that the FDA identified in the NDA. The deficiencies identified may be minor, for example, requiring labeling changes,
or major, for example, requiring additional clinical trials. The complete response letter may include recommended actions that the applicant could take to place the application in a condition for approval. If
a complete response letter is issued, the applicant may resubmit the NDA upon addressing all of the deficiencies identified in the letter, withdraw the application, or request an opportunity for a
hearing.
If a product receives regulatory approval, the approval may be significantly limited to specific indications or may otherwise be limited, which could restrict the commercial value of the product. Further,
the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. As a condition of approval, the FDA may require a risk evaluation and mitigation strategy,
or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to
assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special
monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Once adopted, REMS are
subject to periodic assessment and modification. In addition, the FDA may require Phase IV studies designed to further assess a drug's safety and effectiveness after NDA approval and may
require testing and surveillance programs to monitor the safety of products that have been commercialized. Based on the results of post-market studies or surveillance programs, the FDA may prevent or
limit further marketing of a product. Some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further FDA
review and approval after initial approval has been granted.
Post-approval Requirements
. Drugs that receive FDA approval remain subject to continuing regulation by the FDA, including requirements to report adverse events, provide the FDA with
updated safety and efficacy information, comply with advertising and promotion regulations, submit periodic reports and maintain records.
The FDA strictly regulates labeling, advertising and promotion of marketed drug products. Drugs may be promoted only for their approved indications. Improper promotion or advertising practices for
prescription drugs may be subject to enforcement by the FDA and other federal and state agencies. The Federal Trade Commission regulates advertising for OTC drug products. Advertising for these
products must be truthful, not misleading and supported by competent and reliable scientific evidence.
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Additionally, drug manufacturers and other entities involved in the distribution and manufacturing of approved drugs must register with the FDA and state agencies and are subject to periodic
inspections by the FDA and state agencies for compliance with cGMP requirements. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing,
sterilization, packaging, labeling, storage and shipment of the drug. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards and must test
each product batch or lot prior to its release. Certain changes to the manufacturing process generally require prior FDA approval before implementation. Future FDA and state inspections may identify
compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution or may require substantial resources to correct. Accordingly, we and our contract manufacturers
must continue to spend time, money, and effort in the area of quality control and production to maintain cGMP compliance.
The FDA may withdraw an approved application if we do not maintain compliance with regulatory requirements and standards or if problems arise after the product reaches the market. For example,
the FDA may issue an approval letter for a drug that includes postmarket requirements, or PMRs, or commitments, or PMCs, including Phase IV clinical studies. The FDA may withdraw approval of a drug
if it determines that the sponsor is not adequately completing its PMRs or PMCs. In addition, later discovery of previously unknown problems with a product may result in restrictions on the product or
even complete withdrawal of the product from the market. Further, failure to comply with regulatory requirements may result in administrative or judicial actions, such as product recalls or restrictions on
the marketing or manufacturing of the product; warning letters, fines or holds on post-approval clinical trials; suspension or revocation of product approvals; refusal to approve pending applications or
supplements to approved applications; refusal to permit the import or export of products or product seizure or detention; or civil or criminal penalties or injunctions.
From time to time, legislation is drafted, introduced and enacted by Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products
regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or reinterpreted by the agency or the courts in ways that may considerably affect our business and our
products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.
Products Subject to Ongoing DESI Proceedings
The FDCA, enacted in 1938, was the first statute requiring premarket approval of drugs by the FDA. These approvals, however, focused exclusively on safety data. In 1962, Congress amended the
FDCA to require that sponsors demonstrate that new drugs are effective, as well as safe, in order to receive FDA approval. These amendments also required the FDA to conduct a retrospective
evaluation of the effectiveness of the drug products that the FDA approved between 1938 and 1962 on the basis of safety alone. The agency contracted with the National Academy of Science/National
Research Council, or NAS/NRC, to evaluate the effectiveness of drugs covered by NDAs at that time on an active drug ingredient basis and by regulation it applied the findings to all identical, related or
similar, or IRS, drug products. The FDA's administrative implementation of the NAS/NRC reports was the Drug Efficacy Study Implementation, or DESI Review. The DESI review involved a multistep
notice, comment, opportunity for hearing, and appellate process that has had vast administrative and legal complexities.
Although the DESI Review began in the late 1960s, it was never completed. In the ensuing 50 years, the FDA developed other regulatory priorities, thus some unapproved products are subject to
DESI proceedings in which a final determination regarding efficacy has not yet been made. In 2011, FDA published a Compliance Policy Guide, or CPG, that clarified how the FDA intends to exercise
enforcement discretion with respect to drugs that are marketed without FDA approval.
We believe that a small number of our marketed pharmaceutical products are IRS to products with a pre-1962 NDA or ANDA that are subject to an ongoing DESI proceeding, and that may fall within
the scope of the FDA's CPG. The regulatory status of each product is fact specific and we are exploring all the associated legal and regulatory issues. As all of these products are manufactured by
subcontractors, we monitor their compliance with cGMPs in order to minimize product risk.
Over-The-Counter Drugs
The FDA implemented a process of reviewing OTC drugs through rulemaking by therapeutic classes (e.g., antacids, antiperspirants, cold remedies). The FDA convenes an advisory panel for each
therapeutic class, and each advisory panel develops final monographs for the class to be published in the Federal Register. OTC monographs set forth permissible claims, labeling, and active ingredients
for OTC drugs in a particular class. They also specify acceptable ingredients, doses, formulations and labeling.
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Drugs must meet all of the general conditions for OTC drugs and all of the conditions
contained in an applicable final monograph to be considered generally recognized as safe and effective, or GRAS/GRAE, and thus to be legally marketed without prior FDA approval. The general
conditions include, among other things, compliance with cGMP, establishment registration and labeling requirements. Any product that fails to conform to each of the general conditions and a monograph
is subject to regulatory action.
We also market a number of dietary supplement and medical food products. While FDCA regulatory guidance relative to the
labeling requirements for dietary supplements and medical foods products is general and the labeling for each of our products is intricate, we believe that we have labeled our products in accordance with
applicable statutory requirements. While these products are not covered outpatient drugs, some options for the payment for non-covered drugs do exist, including the Children's Health Insurance Program,
or CHIP, as well as various state-specific programs.
The Hatch-Waxman Act
Abbreviated New Drug Applications
. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act
, created the
abbreviated new drug application, or ANDA, pathway, which allows companies to seek approval for generic versions of brand-name drugs previously approved under an NDA. As part of
the NDA
approval process, applicants are required to list with the FDA each patent with claims that cover the applicant's product or an approved use of the product. Upon NDA approval, each of the patents listed
in the application for the drug is published in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Potential generic manufacturers may
reference certain drugs listed in the Orange Book
as reference listed drugs, or RLDs, as the basis of their ANDAs. Generally, an ANDA must contain data and information
showing that the proposed generic product is the same as its RLD by demonstrating that the two products (i) have
the same active ingredient in the same strength and dosage form, to be
delivered via the same route of administration,
(ii) are intended for the same uses, and (iii) are bioequivalent. Under certain state laws, certain
ANDA
approved drugs may be (and in some cases, must be) replaced by pharmacists under prescriptions written for the RLD.
An ANDA applicant must make one of the following certifications to the FDA for each patent listed for the RLD in the Orange Book:
-
the required patent information has not been filed;
-
the listed patent has expired;
-
the listed patent will expire on a particular date, but has not expired and approval is sought after patent expiration; or
-
the listed patent is unenforceable, invalid or will not be infringed by the manufacture, sale or use of the new product (Paragraph IV certification).
If the applicant does not challenge any of the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.
ANDA approval will not be delayed if there are no listed patents or if all patents have expired.
If an ANDA applicant makes a Paragraph IV certification, it must notify the NDA holder and patent owners and provide of the factual and legal basis for the applicant's belief that the patents are invalid,
unenforceable or not infringed. The ANDA applicant must provide this notification within 20 days after the FDA accepts the ANDA for filing. The NDA holder and patent owners may then initiate a patent
infringement lawsuit in response to the notice of the Paragraph IV certification. In general, the filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV notice prohibits the FDA
from approving the ANDA for 30 months from the receipt of notice by the patent holder; however, the FDA may approve the proposed product before the expiration of this 30-month stay if a court deems
the patent unenforceable, invalid or not infringed or if the court shortens the stay period because the parties have failed to cooperate in expediting the litigation. If an RLD has new chemical entity
exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval.
The Hatch-Waxman Act also provides for a 180-day period of generic product exclusivity for the first generic applicant to submit an ANDA with a paragraph IV certification for a generic version of an
NDA-approved drug. "Authorized generics" are generic pharmaceutical products that are introduced by innovator companies, either directly or through partnering arrangements with other
generic companies. Authorized generics are equivalent to the innovator companies' brand name drugs but are sold at relatively lower prices than the brand name drugs. An authorized generic product
may be marketed during the 180-day exclusivity period granted to the first manufacturer to submit an ANDA with a Paragraph IV certification for a generic version of the brand product.
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Section 505(b)(2) New Drug Applications
. Another path to FDA approval, particularly for modifications to drug products previously approved by the FDA, is a Section 505(b)(2) NDA. The
Hatch-Waxman Act created the Section 505(b)(2) pathway, which permits the submission of an NDA where some of the information required for approval comes from clinical trials not conducted by or for
the applicant and for which the applicant has not obtained a right of reference. The FDA interprets Section 505(b)(2) of the FDCA to permit the applicant to rely upon the FDA's previous findings of safety
and effectiveness for a previously approved product that the applicant references as the RLD. The FDA requires submission of information to support any changes relative to the RLD, such as published
data or new studies conducted by the applicant, including bioavailability or bioequivalence studies, or clinical trials demonstrating safety and effectiveness. The FDA may then approve the new product
candidate for some or all of the labeled indications for which the RLD product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.
A Section 505(b)(2) application is subject to exclusivities for the reference product and is required to certify to the FDA regarding any patents listed for the RLD in the Orange Book as an ANDA
applicant would. Therefore, approval of a Section 505(b)(2) NDA may be delayed until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity listed in the
Orange Book for the RLD has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months from when the patent holder receives notice or
a decision or settlement in the infringement case finding the patents to be unenforceable, invalid or not infringed.
Marketing Exclusivity
. Certain newly-approved drugs and indications may benefit from a statutory period of non-patent marketing exclusivity under the Hatch-Waxman Act. The Hatch-Waxman
Act grants five-year marketing exclusivity to the first applicant to obtain approval of an NDA for a new chemical entity, or NCE, which is an active pharmaceutical ingredient that the FDA has not previously
approved. The Hatch-Waxman Act prohibits the approval of a Section 505(b)(2) NDA or an ANDA for another version of such drug during the exclusivity period, but submission of a Section 505(b)(2) NDA
or an ANDA containing a Paragraph IV certification is allowed after four years, which may activate a 30-month stay of approval of the Section 505(b)(2) NDA or ANDA if the patent holder sues. The Hatch-
Waxman Act also provides three years of marketing exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) NDAs and sNDAs, if the sponsor conducts or sponsors new
clinical investigations, other than bioavailability studies, and those investigations are deemed by the FDA to be essential to the approval of the application. Such clinical trials may, for example, support
new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the indication, dosage, or strength associated with the new clinical investigations. Five-year and three-
year exclusivity will not block the submission or approval of another "full" NDA submitted under section 505(b)(1) of the FDCA.
Pediatric Exclusivity
. Pediatric exclusivity is another type of non-patent marketing exclusivity in the U.S. If granted, it provides an additional six months of exclusivity to the term of any existing
regulatory exclusivity or listed patent term. This six-month exclusivity may be granted based on the voluntary completion of a pediatric study that fairly responds to an FDA-issued Written Request for such
a study. We plan to work with the FDA to establish the need for pediatric studies for our product candidates and may consider attempting to obtain pediatric exclusivity for some of our product
candidates.
Regulation of Controlled Substances
We, our third party manufacturers and certain of our products, including Zohydro ER with BeadTek, are subject to the Controlled Substances Act, which imposes registration, recordkeeping, reporting,
labeling, packaging, storage, distribution and other requirements administered by the DEA. The DEA regulates handlers of controlled substances, as well as the equipment and raw materials used in their
manufacture and packaging, in order to prevent loss and diversion into illicit channels of commerce. Accordingly, we and our third-party manufacturers must adhere to a number of requirements with
respect to our controlled substance products including, but not limited to, registration, recordkeeping and reporting requirements; labeling and packaging requirements; security controls, procurement and
manufacturing quotas; and certain restrictions on refills.
The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no currently accepted medical use in treatment in the
U.S. Thus, a pharmaceutical product may be controlled in Schedule II, III, IV or V. Schedule II substances are considered to present a high potential for abuse and Schedule III through V
substances are considered to pose relatively decreasing potential for abuse. Zohydro ER with BeadTek is classified as a Schedule II substance.
Any facility that manufactures, distributes, dispenses, imports or exports any controlled substance is required to register annually with the DEA, unless exempt from registration. The registration is
specific to the particular location where controlled
substances are handled, the activity engaged in, and the controlled substances utilized. For instance, the activities of
importing
and manufacturing require separate registrations, and each registration will indicate which schedules of controlled substances are authorized for use in the activity governed by the
registration.
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Prior to issuing a registration, the DEA may inspect a facility to evaluate whether an applicant meets registration requirements, including applicable security measures. Security
requirements vary by controlled substance schedule, with the most stringent requirements applying to Schedule I and Schedule II substances. To evaluate security measures the DEA takes into
consideration, among other things, the type of building construction, the type of vault, safe, and secure enclosures or storage systems, the adequacy of key control systems and electronic detection and
alarm systems. The DEA also requires employers to conduct comprehensive employee screening programs. Records must be maintained for the handling of all controlled substances and periodic
reports must be made to the DEA, including distribution, acquisition and inventory reports for Schedule I and II controlled substances, Schedule III substances that are narcotics and other designated
substances. Reports must also be made for thefts or
significant losses of controlled substances. A manufacturer/distributor must also maintain a system to detect and report
suspicious orders to DEA, which are defined as orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency. A registrant must follow certain requirements
when disposing of controlled substances, including using certain on-site destruction methods or transferring the substances to a person registered or authorized to accept controlled substances for the
purposes of destruction.
Additionally, particular authorization and notification requirements apply to imports and exports.
The DEA establishes annually an aggregate quota for how much certain controlled substances (including Schedule II controlled substances) may be produced in total in the United States, based on
the DEA's estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount that the DEA allows to be produced in the United States each year is allocated
among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. Manufacturers must receive an annual quota from the DEA in order to
produce any Schedule II substance. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year, although the DEA has
substantial discretion in whether or not to make such adjustments.
Registered establishments that handle controlled substances must go through periodic inspections by the DEA. Failure to comply with applicable requirements, particularly as manifested in loss or
diversion, can result in enforcement action that could have a significant negative effect on our business, results of operations and financial performance. Depending on the violation, the DEA may suspend
or revoke registrations, pursue civil penalties, or pursue criminal penalties.
Individual states also regulate controlled substances, and we and our contract manufacturers will be subject to state regulation concerning the manufacture and distribution of these products.
Hazardous Materials
We depend on third parties to support us in manufacturing and developing certain products and do not directly handle, store or transport hazardous materials or waste products. We depend on these
parties to abide by all applicable federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not
anticipate the cost of complying with the laws and regulations to be material.
Pharmaceutical Pricing and Reimbursement
Our sales of currently marketed products and our ability to commercialize our products effectively depends substantially on the availability of sufficient coverage and reimbursement from third-party
payors, including U.S. governmental payors such as the Medicare and Medicaid programs, Managed Care Organizations (MCOs) and private insurers.
Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, legislative
and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. We expect to
experience pricing pressure in the U.S. in connection with
the sale of our products, due to the impact of managed healthcare, the increasing influence of health maintenance organizations, additional legislative proposals to curb healthcare
costs, and negative publicity regarding pricing and price increases generally. These and other factors could limit the prices that we charge for our products, limit our commercial
opportunity and/or negatively impact revenues from sales of our products.
We anticipate that the U.S. Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs, particularly given the
current atmosphere of mounting criticism of prescription costs in the U.S. These cost containment measures include controls on government-funded reimbursement for drugs; new or increased
requirements to pay prescription drug rebates to government health care programs; pharmaceutical cost transparency bills that aim to require drug companies to justify their prices; controls on healthcare
providers; challenges to the pricing of drugs or limits or prohibitions on reimbursement for specific products through other means; requirements to try less expensive products
or generics before a more expensive branded product is prescribed; changes in drug importation laws;
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expansion of use of managed care systems in which healthcare providers contract to provide
comprehensive healthcare for a fixed cost per person and public funding for cost effectiveness research, which may be used by government and private third party payors to make coverage and payment
decisions. Any such changes could have a negative impact on revenues from sales of our products.
Third party payors decide which drugs they will pay for and establish reimbursement and co-pay levels. Third-party payors are increasingly challenging the prices
charged for medical products and services
and examining their cost effectiveness, in addition to their
safety and efficacy
. We may need to conduct expensive pharmacoeconomic studies in order to
demonstrate
the cost
effectiveness of our products
. Even with
studies, our products may be considered less effective, less safe or less cost-effective than
other products, and third-party payors may not
provide coverage and reimbursement for our products, in whole or in part. The
process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will
pay for the product once coverage is approved. Third party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a
particular indication. For example, third party payors have started to require discounts and/or exclusivity arrangements with some drug manufacturers in exchange for including a specific product on their
formularies. Any such requirements could have a negative impact on revenues from sales of our products.
Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price, average manufacturer price and actual
acquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid
reimbursement rates. Both Medicare and Medicaid are administered by the Centers for Medicare and Medicaid Services (CMS). CMS surveys and publishes retail community pharmacy acquisition cost
information in the form of National Average Drug Acquisition Cost files for the purpose of providing state Medicaid agencies with a basis of comparison for their own reimbursement and pricing
methodologies and rates. It is difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products.
We participate in and have certain price reporting obligations to the Medicaid Drug Rebate program and other governmental pricing programs. Under the Medicaid
Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid
program as a condition of having federal funds being made available to the states for our drugs under Medicaid and, if applicable, Part B of the Medicare program (we currently do not market any Part B
drugs). Those rebates are based on pricing data reported by us on a monthly and quarterly basis to CMS. These data include the average manufacturer price and, in the case of innovator products, the
best price for each drug which, in general, represents the lowest price available from the manufacturer to any entity in the United States in any pricing structure, calculated to include all sales and
associated rebates, discounts and other price concessions.
Health Care Reform (as defined below) made significant changes to the Medicaid Drug Rebate program, such as expanding rebate liability from fee-for-service Medicaid
utilization to include the utilization of Medicaid MCOs as and changing the definition of average manufacturer price. Health Care Reform also increased the minimum Medicaid rebate; changed the
calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount at 100% of the average manufacturer price. Finally, Health Care
Reform required pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.
On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid Drug Rebate program under Health Care Reform, which became effective on April 1, 2016. The
issuance of the final regulations, as well as any other regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program, has and will continue to
increase our costs and the complexity of compliance, has been and will continue to be time-consuming to implement, and could have a material adverse effect on our results of operations, particularly if
CMS challenges the approach we take in our implementation of the final rule.
Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the 340B program in order for federal funds to be available for the manufacturer's
drugs under Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B "ceiling price"
for the manufacturer's covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health
Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price
and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Any changes to the definition of average manufacturer price and the Medicaid rebate amount
under Health Care Reform, discussed below, could affect our 340B ceiling price calculations and negatively impact our results of operations.
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Health Care Reform also made changes to the 340B program by expanding the list of covered entities eligible for 340B participation to include certain free-standing cancer hospitals, critical access
hospitals, rural referral centers and sole community hospitals. Health Care Reform obligates the Secretary of the U.S. Department of Health and Human Services, (HHS), to create regulations and
processes to improve the integrity of the 340B program. On January 5, 2017, the U.S. Health Resources and Services Administration (HRSA), an agency of the HHS issued a final regulation regarding
the calculation of 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities. The effective date of the regulation has
been delayed until July 1, 2018. Implementation of this final rule and the issuance of any other final regulations and guidance could affect our obligations under the 340B program in ways that we cannot
presently anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree
to provide 340B discounted pricing on drugs used in the inpatient setting.
In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies, we participate in
the U.S. Department of Veterans Affairs
, (VA), Federal Supply Schedule, (FSS), pricing program. Under this program, we are obligated to
make our covered drugs (innovators and biologics) available for procurement on an FSS contract and charge a price to four federal agencies - the VA, U.S. Department of Defense, (DoD), Public Health
Service (PHS) and U.S. Coast Guard - that is no higher than the statutory Federal Ceiling Price, (FCP). The FCP is based on the non-federal average manufacturer price, or Non-FAMP, which we
calculate and report to the VA on a quarterly and annual basis.
We also participate in the Tricare Retail Pharmacy program, under which we pay quarterly rebates on
utilization of innovator products that are dispensed through the Tricare Retail Pharmacy network to Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and
FCP
.
Foreign countries that have price controls in place on pharmaceutical products may generate lower-priced product competition. Proposed federal legislation may increase consumers' ability to import
lower-priced versions of competing products from Canada and elsewhere. If such proposals become law, our products may be susceptible to an increase in price competition from lower priced imported
drugs. Additionally, several local and state governments have launched importation schemes for their citizens, and, absent any federal action to restrict such activities, we anticipate other states and local
governments will launch importation programs. The importation of foreign products that compete with ours could adversely impact our business.
Effects of Legislation on the Pharmaceutical Industry
On March 23, 2010, the Patient Protection and Affordable Care Act, or Affordable Care Act was signed into law. On March 30, 2010, the Health Care and Education Reconciliation Act of 2010, or
Reconciliation Act, which included a package of corrective changes to the Affordable Care Act as well as additional elements to reform healthcare in the United States, was also signed into law. We refer
to the Affordable Care Act and the Reconciliation Act as Health Care Reform.
The passage of Health Care Reform was intended to transform the delivery and payment for healthcare services in the U.S. The combination of these measures expanded health coverage and also
provided for significant health coverage reforms that were intended to improve the ability of patients to obtain and maintain health coverage. Such measures included, for example, the elimination of
lifetime caps, no rescission of policies, no denial of coverage due to preexisting conditions, a prohibition on varying premiums by more than 3:1 for age and 1.5:1 for tobacco use, a prohibition on imposing
excessive waiting periods for coverage, and enhanced support for the Children's Health Insurance Program. Health Care Reform provided for implementation of this expansion in a variety of ways,
including the creation of exchanges for finding health insurance policies, Medicaid eligibility expansion, tax penalties on individuals without health coverage and on certain employers who do not provide it,
and tax credits to make health insurance more affordable. The expansion of healthcare coverage and these additional market reforms should result in greater access to our products.
A number of provisions contained in Health Care Reform could adversely affect reimbursement for and access to our products. Some states have elected not to expand their Medicaid programs by
raising the income limit to 133% of the federal poverty level. For each state choosing not to expand its Medicaid program, there may be fewer insured patients overall, which could impact our sales,
business and financial condition. Health Care Reform also expanded rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid MCOs and also limited distributions from
flexible spending accounts for medicines to prescribed drugs and insulin only.
Beginning in 2011, Health Care Reform also required drug manufacturers to provide a 50% discount on brand-name prescriptions filled in the Medicare Part D coverage gap, also known as the
"donut hole." The legislation expands on the manufacturers' 50% discount on brand-name prescriptions and gradually closes the coverage gap, with 75% discounts on brand-name and
generic drugs by 2020. The elimination of the coverage gap may result in greater access to our products for Part D beneficiaries.
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Moreover, Health Care Reform makes a number of other revisions to the
Medicare Part D program, including, for example, a reduction in Part D premium subsidies for higher-income beneficiaries, improvement in determining the Medicare Part D low-income benchmark,
improved information for subsidy-eligible individuals under prescription drug plans, and funding outreach and assistance for low-income programs.
Health Care Reform also required pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government and
also
created an Independent Payment Advisory Board, (IPAB), tasked with reducing the per capita growth rate in Medicare spending in the event that that growth rate exceeds a certain target. The
IPAB is prohibited by statute from making payment reductions to certain sectors, such as hospitals until 2020. This limitation increases the risk that the IPAB would propose to limit access to certain
pharmaceutical products and/or to mandate price controls for pharmaceuticals.
Certain legislative changes to and regulatory changes under Health Care Reform have occurred in the 115th U.S. Congress and under the Trump Administration. For example, the Tax Cuts and Jobs
Act enacted on December 22, 2017, eliminated the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Internal Revenue Code of
1986, commonly referred to as the individual mandate, beginning in 2019.
In addition, the Bipartisan Budget Act of 2018 increased the Affordable Care Act required manufacturer point-of-sale discount from 50% to 70% off the negotiated price for Medicare Part D
beneficiaries during their coverage gap period beginning in 2019.
Additional legislative changes to and regulatory changes under Health Care Reform remain possible.
There have also been proposals to impose federal rebates on Medicare Part D drugs, requiring federally-mandated rebates on all drugs dispensed to Medicare Part D enrollees
or on only those drugs dispensed to certain groups of lower income beneficiaries. If any of these proposals are adopted, they could result in us owing additional rebates, which could have a negative
impact on revenues from sales of our products.
The Budget Control Act, passed in 2011, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction was unable to reach required goals, triggering,
among other things, automatic reductions to the budgets of federal health agencies and an automatic two-percent reduction to Medicare payments to healthcare providers. These spending
reductions went into effect on April 1, 2013. Subsequent legislation extended the two-percent reduction to Medicare payments to healthcare providers through fiscal year 2025.
We are unable to predict the future course of federal or state healthcare legislation and regulations, including rules and regulations that may be issued to implement or seek to roll back provisions of
Health Care Reform or the outcome of any legal challenges to such legislation or regulations. We expect that Health Care Reform, as currently enacted or as it may be amended in the future,
and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to maintain or increase sales of our existing
products. Health Care Reform and further changes in the law or regulatory framework that reduce our revenues or increase our costs could also have a material adverse effect on our business, financial
condition and results of operations and cash flows.
Other Laws and Regulations
Pharmaceutical companies participating in federal healthcare programs like Medicare or Medicaid are subject to various U.S.
federal and state laws
pertaining to healthcare "fraud
and abuse", including anti-kickback and false claims laws. Violations of U.S. federal and state fraud and abuse laws may be
punishable by criminal, civil and administrative sanctions, including fines, damages, imprisonment, civil monetary penalties and exclusion from federal healthcare programs like Medicare and Medicaid.
These laws are extremely complicated, apply broadly and may constrain our business and the financial arrangements through which we market, sell and distribute our products. Examples of these laws
and regulations include
, but are not limited to, the following
:
Anti-kickback Statute
. The federal anti-kickback statute is a criminal statute that, among other things, makes it a felony for individuals or entities to knowingly and willfully offer, pay, solicit or
receive, any remuneration (directly or indirectly, overtly or covertly, in cash or in kind) to induce or in return for (i) the referral of an individual to a person for the furnishing or arranging for the furnishing of
any item or service for which payment may be made in whole or in part under a federal health care program, or (ii) the purchase, lease, or order of, or arranging for or recommending the purchase, lease
or order of any good, facility, service or item for which payment may be made in whole or in part under a federal health care program. The term "remuneration" has been interpreted broadly to
include anything of value. Both the party offering or paying remuneration and the
party receiving or soliciting the remuneration are subject to liability under
the statute.
Some courts, as well as certain governmental guidance, have interpreted the scope of the anti-kickback statute to cover any situation where one purpose of the remuneration is to induce referrals
of federal health care program business
, even if there are other legitimate reasons for the remuneration. The anti-kickback statute has been applied by government
enforcement officials to a number of common business arrangements in the pharmaceutical industry. There are narrow statutory exemptions and regulatory safe harbors protecting certain common
activities from prosecution for violations of the anti-kickback statute, but to qualify for a safe harbor an arrangement must precisely meet each of the requirements. Failure to meet all of the requirements
of a particular statutory exemption or regulatory safe harbor does not make the conduct per se illegal under the anti-kickback statute, but the legality of
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the arrangement will be evaluated on a case-by-case basis based on the totality of the facts and circumstances. Moreover, there are no safe harbors for many common practices.
The Health Care Reform clarified that neither actual knowledge of the anti-kickback statute nor specific intent is required to show a violation of the anti-kickback statute. Additionally, Health Care
Reform amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the anti-kickback statute constitutes a false or
fraudulent claim for purposes of the False Claims Act.
Federal False Claims Act
. The Federal False Claims Act imposes civil liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or
fraudulent claim for payment of government funds; knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; or knowingly makes, uses, or
causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the government, or knowingly conceals or knowingly and improperly avoids or
decreases an obligation to pay or transmit money or property to the government. Penalties include three times the government's damages and mandatory penalties of $10,781 to $21,563 per false claim
or statement. In addition, the Federal False Claims Act permits a private individual acting as a qui tam plaintiff or "whistleblower," to file a lawsuit on behalf of the government against the
person or entity that allegedly violated the law and share in any monetary recovery.
Health Care Reform as well as other legislation, such as Fraud Enforcement and Recovery Act of 2009, makes it easier for the government and qui tam realtor to bring a Federal False Claims Act
case.
Foreign Corrupt Practices Act.
The Foreign Corrupt Practices Act prohibits companies and their intermediaries from making, or offering or promising to make improper payments
to non-U.S. officials for the purpose of obtaining or retaining business or otherwise seeking favorable treatment. Similar anti-bribery laws exist in other countries where we intend to commercialize our
products. For example, the U.K. Bribery Act imposes significant potential fines and other penalties for, among other things, giving, offering, or promising bribes in the public and private sectors, and
bribing a foreign public official or private person.
U.S. Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the EU General Data Protection Regulation (GDPR)
. The HIPAA statute imposes criminal liability in
connection with the delivery of or payment for health care benefits, items or services, for, among other things, knowingly and willfully: (i) executing a scheme or artifice to defraud any health care benefit
program or to obtain, by means of false or fraudulent pretenses, representations or promises, any of the money of the health care benefit program, or (ii) falsifying, concealing or covering up by any trick,
scheme or device, a material fact, or making any materially false, fictitious or fraudulent statements or representations, or making or using any materially false writing or document knowing it contains any
materially false, fictitious or fraudulent statement or entry. Further, the HIPAA statute and implementing regulations established certain standards and requirements for the privacy and security of
individuals' health information, which standards and requirements were expanded by the Health Information Technology for Economic and Clinical Health Act.
In addition to HIPAA, numerous federal and state regulations, including state security breach notification laws, state health information privacy laws and federal and state
consumer protection laws, govern the collection, use, disclosure, and protection of personal information. Failure to comply with such laws and regulations could result in government enforcement actions
and create liability for us (including the imposition of significant penalties), private litigation and/or adverse publicity that negatively affect our business.
Also, the European Parliament has adopted the General Data Protection Regulation (GDPR), which will become effective on May 25, 2018. This regulation replaces the EU's 1995 data protection
directive and shall be the single EU standard across all member states. The GDPR takes a broad view of the types of information that are deemed covered as personal identification information and
contains provisions that require businesses to protect such personal data and the privacy of EU citizens for transactions that occur within EU member states. The GDPR also regulates the exportation of
personal data outside of the EU. Non-compliance with the GDPR could result in significant penalties. Many companies, including our company, are assessing the requirements of the GDPR against
current business practices and preparing for compliance with this regulation once it becomes effective.
Other Health Care Laws
. The Social Security Act contains numerous penalties for fraud and abuse in the health care industry, such as imposition of a civil monetary penalty, a monetary
assessment, exclusion from participation in federal health care programs or a combination of these penalties. The Open Payments program imposes annual reporting requirements on manufacturers of
drugs, devices, or biologics for which payment is available under Medicare, Medicaid or the State Children's Health Insurance Program, of certain payments and other transfers of value to physicians and
teaching hospitals made during the
25
preceding calendar year,
and any ownership and investment interests held by physicians
. Failure to submit required information
may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for "knowing failures") for all payments, transfers of value or
ownership or investment interests not appropriately reported. Manufacturers must submit reports by the 90
th
day of each calendar year.
Analogous state laws and regulations, such as state anti-kickback and false claims laws may apply to sales or marketing arrangements and claims involving healthcare
items or services reimbursed by non-governmental third-party payors, including private insurers. Several states also require pharmaceutical companies to report expenses relating to the marketing and
promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some states also prohibit certain marketing-related activities,
including the provision of gifts, meals, or other items to certain health care providers. Some states restrict the ability of manufacturers to offer co-pay support to patients for certain prescription drugs.
Other states and cities require identification or licensing of state representatives. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes that
are consistent with the May
2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers, and
/or the voluntary
Pharmaceutical Research and Manufacturers of America Code on Interactions with Healthcare Professionals
, or
the PhRMA Code.
The PhRMA Code seeks to promote transparency in relationships between health care professionals and the pharmaceutical industry and to ensure that pharmaceutical marketing activities comport
with the highest ethical standards. The PhRMA Code contains limitations on certain interactions between health care professionals and the pharmaceutical industry relating to gifts, meals and
entertainment, among other things.
The pharmaceutical industry is experiencing a high level of scrutiny and regulation by government authorities and has been the subject of numerous investigations related primarily to financial
arrangements with health care providers, payors and customers, regulatory compliance, and product promotional practices. Government investigations into compliance with these laws typically require
the expenditure of significant resources, divert the attention of company management from operating the business and generate negative publicity. Violations of these laws or other governmental
regulations may subject us to significant civil, criminal and administrative penalties, imprisonment, damages, fines, exclusion from government funded health care programs such as Medicare and
Medicaid, and the curtailment or restricting of business operations. Legislative changes to federal fraud and abuse laws are possible in the 115th United States Congress and under the Trump
Administration, whether as part of changes to Health Care Reform or otherwise.
Employees
As of December 31, 2017, we had 171 full-time employees, including a field sales force that covered 122 territories nationwide, and 49 employees engaged in management,
finance, marketing, research, development, regulatory affairs, quality assurance, supply chain and administration. On January 4, 2018, we committed to and commenced a realignment plan to reduce
operating costs and better align our workforce with the needs of our business in anticipation of the expiration of certain patents related to our Treximet® fixed dose combination product. We completed
the realignment plan on January 5, 2018, resulting in a reduction of our workforce by 41 employees (representing approximately 22% of our workforce), the majority of which were associated with our
sales force and commercial infrastructure. As a result of this restructuring we now cover 74 territories. Currently, none of our employees are subject to a collective bargaining agreement. We consider our
employee relations to be good.
About Pernix Therapeutics Holdings, Inc.
We were incorporated in Maryland as Golf Trust of America, Inc., or GTA, in November 1996. We are the surviving corporation of the March 2010 merger between GTA and Pernix
Therapeutics, Inc. In connection with the merger, we changed our name to Pernix Therapeutics Holdings, Inc.
Our principal executive offices are located at 10 North Park Place, Suite 201, Morristown, New Jersey 07960 and our telephone number is (800) 793-2145. Our website address is www.pernixtx.com.
The information contained in or that can be accessed through our website is not part of this Annual Report on Form 10-K.
We have identified in this Annual Report on Form 10-K our registered trademarks and service marks. In addition, this Annual Report on Form 10-K includes references to trademarks and
service marks of other entities and those trademarks and service marks are the property of their respective owners.
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Available Information
We make available free of charge on or through our internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our internet address is
www.pernixtx.com. Information is also available through the Securities and Exchange Commission's website at www.sec.gov or is available at the Securities and Exchange Commission's
Public Reference Room located at 100 F Street, NE, Washington DC, 20549. Information on the operation of the Public Reference Room is available by calling the Securities and Exchange Commission
at 800-SEC-0330.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could be materially adversely affected and the value of our securities could be
negatively impacted. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently
known that may materially adversely affect our business.
Risks Related to our Business
Our business operations and financial position could be adversely affected as a result of our substantial indebtedness and other payment obligations.
As of December 31, 2017, we had approximately $330.2 million aggregate principal amount of debt outstanding, consisting of approximately $35.7 million aggregate principal amount of our
4.25%/5.25% Exchangeable Senior Notes due 2022 (the Exchangeable Notes), issued pursuant to a new indenture, under which Pernix Ireland Pain Designated Activity Company, or PIP DAC, formerly
known as Pernix Ireland Pain Limited (PIPL), is the issuer and we and our other subsidiaries are the guarantors with Wilmington Trust, National Association, as trustee, of approximately $78.2 million
aggregate principal amount of our 4.25% Convertible Notes due 2021(the Convertible Notes), approximately $172.1 million aggregate principal amount of our 12% Senior Secured Notes due 2020 (the Treximet Secured Notes),
approximately $14.2 million outstanding under our five-year $40 million asset-based revolving credit facility (the New ABL Facility), and approximately $30 million aggregate principal amount outstanding
under PIP DAC's new term loan credit agreement with Cantor Fitzgerald Securities, as agent and the lenders party thereto (the Term Credit Agreement), and together with the New ABL Facility, the Credit
Facilities. In addition, we have the ability to borrow up to an additional $15.0 million under the Term Credit Agreement for certain specified purposes, including future acquisitions, subject to conditions set
forth in the Term Credit Agreement, and up to an additional approximately $26 million under the New ABL Facility, subject to borrowing base capacity and the conditions set forth in the New ABL Facility.
In addition, the Term Credit Agreement includes an incremental feature that allows us, with the consent of the requisite lenders under the Term Credit Agreement, to obtain up to an additional $20 million
in term loan commitments from new or existing lenders under the Term Credit Agreement that agree to provide such commitments. We owed approximately $6.7 million to GSK pursuant to the Interim
Settlement Agreement between us and GSK, as amended by Amendment No. 2 to the Interim Settlement Agreement, which was paid in full at the end of 2017. Our significant indebtedness and other
payment obligations could have important consequences. For example, it could:
-
make it difficult for us to satisfy our obligations under our outstanding notes and our other indebtedness and contractual and commercial commitments;
-
require us to seek Chapter 11 bankruptcy protection;
-
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
-
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
-
restrict us from making strategic acquisitions, entering new markets or exploiting business opportunities;
-
place us at a competitive disadvantage compared to our competitors that have proportionally less debt;
-
limit our ability to borrow additional funds and/or leverage our cost of borrowing; and
-
decrease our ability to compete effectively or operate successfully under adverse economic and industry conditions.
In the event our capital resources are otherwise insufficient to meet future capital requirements and operating expenses, we may seek to finance our cash needs through public or private equity or
debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or royalty rights, or other arrangements. Securing additional financing will
require a substantial amount of time and attention from our management and may divert a
27
disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our
management's ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are
unable to raise additional capital when required or on acceptable terms, we may be required to:
-
sell our business or all or substantially all of our assets to one or more third parties;
-
seek Chapter 11 bankruptcy protection;
-
significantly delay, scale back or discontinue the development or commercialization of our products and product candidates;
-
seek collaborators for one or more of our current or future products or product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might
otherwise be available; or
-
relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.
Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be permissible under the indentures governing our outstanding notes or the covenants in the
agreements governing our credit facilities, or otherwise available on acceptable terms, if at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve
additional restrictive covenants. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential
products or proprietary technologies, or grant licenses on terms that are not favorable to us.
Recent reductions in workforce associated with our realignment plan could disrupt the operation of our business, distract our management from focusing on revenue-generating efforts, result in
the erosion of employee morale, and impair our ability to respond rapidly to growth opportunities in the future.
We recently completed a realignment plan in January 2018 that resulted in personnel reduction of approximately 22% of our workforce, primarily through a reduction of sales and commercial
infrastructure positions. The employee reductions could result in an erosion of morale and affect the focus and productivity of our remaining employees, including those directly responsible for revenue
generation and the management and administration of our finances, which in turn may adversely affect our revenue in the future or cause other administrative deficiencies. Additionally, employees directly
affected by the reductions may seek future employment with our business partners, customers or competitors. We may face wrongful termination, discrimination, or other claims from employees affected
by the reduction related to their employment and termination. We could incur substantial costs in defending ourselves or our employees against such claims, regardless of the merits of such actions.
Furthermore, such matters could divert the attention of our employees, including management, away from our operations, harm productivity, harm our reputation and increase our expenses. We cannot
assure you that our realignment plan will be successful, and we may need to take additional realignment efforts, including additional personnel reduction, in the future.
We may not be able to grow through acquisitions of businesses and assets, the formation of collaborations or other strategic alliances or the in-licensing of products or product candidates.
We have sought growth largely through acquisitions, including the acquisitions of the Zohydro ER product line in 2015, the rights to Treximet intellectual property in 2014, Pernix Sleep in 2013 and
Cypress in 2012. As part of our strategy, we plan to pursue acquisitions of assets, businesses or strategic alliances and collaborations (including the in-licensing of products or product-candidates), to
expand our existing technologies and operations. However, the indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes, and the agreements governing our
credit facilities contain restrictive covenants, which include, among other things, restrictions on the incurrence of indebtedness, as well as certain consolidations, acquisitions, mergers, purchases or sales
of assets and capital expenditures, subject to certain exceptions and permissions limited in scope and dollar value, among other things. For additional information see the notes to our audited consolidated
financial statements for the years ended December 31, 2017 and 2016 contained in Part II, Item 8 of this Annual Report on Form 10-K. Moreover, we cannot assure you that acquisitions will be available
on terms attractive to us or that such acquisitions will be permissible under the indentures governing our outstanding notes and the covenants in the agreements governing our credit facilities or that we
will be able to arrange financing on terms acceptable to us or to obtain timely federal and state governmental approvals on terms acceptable to us, or at all.
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We may be unable to successfully integrate newly acquired businesses or assets and realize the anticipated benefits of these acquisitions or other collaborations or strategic alliances.
Management has in the past devoted, and will in the future devote, significant attention and resources to integrating newly acquired businesses and assets and/or establishing functioning
collaborations that leverage our capabilities in pursuit of developing and commercializing our products and product candidates. Potential difficulties we have or may in the future encounter in the
integration process include the following:
-
the inability to successfully combine our businesses with any newly acquired business, to integrate any newly acquired assets into our existing product portfolio, and to meet our capital requirements
following such acquisition, in a manner that permits us to achieve the cost savings or revenue enhancements anticipated to result from these acquisitions, which would result in the anticipated benefits of
the acquisitions not being realized in the time frame currently anticipated or at all;
-
lost sales and customers as a result of certain of our customers deciding not to do business with us following the acquisition of a business or asset;
-
the additional complexities of integrating newly acquired businesses and assets with different core products and markets;
-
potential unknown liabilities and unforeseen increased expenses associated with an acquisition of a business or asset; and
-
performance shortfalls as a result of the diversion of management's attention caused by integrating the operations of a newly acquired business or a newly acquired asset into the existing product
portfolio.
-
our collaborative partners may not commit adequate resources to the development, marketing and distribution of any collaboration products, limiting our potential revenues from these products;
-
our collaborative partners may experience financial difficulties and may therefore be unable to meet their commitments to us;
-
our collaborative partners may pursue a competing product candidate developed either independently or in collaboration with others, including our competitors; and
-
our collaborative partners may terminate our relationship.
With respect to potential collaborations or strategic alliances, our ability to reach a definitive agreement for any collaboration will depend, among other things, upon our assessment of the
collaborator's resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator's evaluation of a number of factors. If we are unable to reach agreements with
suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to reduce or delay our development or commercialization programs or initiatives.
For all these reasons, you should be aware that it is possible that integrating a newly acquired business or asset and/or the establishment of collaborations or other strategic alliances could result in
the distraction of our management, the disruption of our ongoing business or inconsistencies in our products, standards, controls, procedures and policies, any of which could adversely affect our ability to
maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the acquisitions, or could otherwise adversely affect our business and financial results.
Despite our significant level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.
We may be able to incur substantial additional indebtedness in the future. Although certain of our agreements, including the agreements governing our credit facilities and the indentures governing the
Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes, limit our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to waiver and
a number of qualifications and exceptions and, under certain circumstances, debt incurred following receipt of a waiver or in compliance with these restrictions could be substantial. Among other things, we
have the ability to borrow up to an additional $15.0 million under the Term Credit Agreement for certain specified purposes, including future acquisitions, subject to conditions set forth in the Term Credit
Agreement, and approximately $26 million of additional funds under the New ABL Facility, subject to borrowing base capacity and the conditions set forth in the New ABL Facility. In addition, the Term
Credit Agreement includes an incremental feature that allows us, with the consent of the requisite lenders under the Term Credit Agreement, to obtain up to an additional $20 million in term loan
commitments from new or existing lenders under the Term Credit Agreement that agree to provide such commitments. To the extent that we incur additional indebtedness, the risks associated with our
substantial leverage described herein, including our possible inability to service our debt, would increase.
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Our debt service obligations may adversely affect our cash flow.
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flow to pay the interest on our debt, and future working
capital, borrowings or equity financing may not be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail
our operations.
Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future financial performance will be
affected by a range of economic, competitive and business factors that we cannot control, such as those risks described in this section and in our other filings with the SEC. A significant reduction in
operating cash flows resulting from changes in economic conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and
could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our
indebtedness we will be forced to adopt an alternative strategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking
additional equity capital, or seeking Chapter 11 Bankruptcy Court protection.
These alternative strategies may not be affected on satisfactory terms, if at all, and they may not yield sufficient funds to make required payments on our indebtedness.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which may allow our creditors at
that time to declare outstanding indebtedness to be due and payable, which would in turn trigger cross-acceleration or cross-default rights between the relevant agreements.
In addition, the borrowings under our credit facilities bear interest at variable rates and other debt we incur could likewise be variable-rate debt. If interest rates increase, our debt service obligations on
the variable rate indebtedness would increase even though the amount borrowed thereunder remains the same, and our net income and cash flows, including cash available for servicing our
indebtedness, would correspondingly decrease.
The indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes and the covenants in the agreements governing our credit facilities impose
significant operating and/or financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.
The indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes and the agreements governing our credit facilities contain covenants that restrict our and
our subsidiaries' ability to take various actions, such as:
-
incur additional debt;
-
pay dividends and make distributions on, or redeem or repurchase, our capital stock;
-
make certain investments, purchase certain assets or other restricted payments;
-
sell assets, including in connection with sale-leaseback transactions;
-
create liens;
-
enter into transactions with affiliates;
-
make lease payments that exceed a specified amount; and
-
merge, consolidate or transfer all or substantially all of their assets.
In addition, the terms of the Treximet Secured Notes require us to maintain a minimum liquidity of $8.0 million at all times and the terms of the New ABL Facility require us to maintain unrestricted
minimum liquidity of $7.5 million at all times. In order to maintain minimum liquidity, we must maintain cash or the availability to borrow cash under the New ABL Facility in a combined amount of no less
than the minimum liquidity set forth in the Treximet Secured Notes indenture and the New ABL Facility.
Upon the occurrence of a fundamental change, as described in the indenture governing the Convertible Notes, holders of the Convertible Notes may require us to repurchase for cash all or part of
their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest. If a holder elects to convert its
Convertible Notes for shares in excess of the conversion cap, as described in the indenture governing the Convertible Notes, we will be obligated to deliver cash in lieu of any share that was not delivered
on account of such limitation. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the
30
Convertible Notes surrendered
therefor in connection with a fundamental change or payments of cash on Convertible Notes converted in excess of the conversion cap. In addition, our ability to repurchase the Convertible Notes or to
pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase the Convertible Notes at a time
when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the indenture would constitute a default under the indenture. A
default under the indenture could also lead to a default under agreements governing our other outstanding indebtedness. If the repayment of the related indebtedness were to be accelerated after any
applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions as required by the
indenture.
Upon the occurrence of a fundamental change, as described in the indenture governing the Exchangeable Notes, holders of the Exchangeable Notes may require us to repurchase for cash all or part
of Exchangeable Notes at a repurchase price equal to 100% of the capitalized principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest. However, we may not
have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Exchangeable Notes surrendered therefor in connection with a fundamental change. In
addition, our ability to repurchase the Exchangeable Notes or to pay cash upon conversions of the Exchangeable Notes may be limited by law, by regulatory authority or by agreements governing our
indebtedness. Our failure to repurchase the Exchangeable Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Exchangeable Notes
as required by the indenture would constitute a default under the indenture. A default under the indenture could also lead to a default under agreements governing our other outstanding indebtedness. If
the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the
Exchangeable Notes or make cash payments upon conversions as required by the indenture.
Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy those requirements. Our failure to comply with our debt-related
obligations could result in an event of default under the particular debt instrument, which could permit acceleration of the indebtedness under that instrument and, in some cases, the acceleration of
our other indebtedness, in whole or in part.
These restrictions also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our
operations, enter into acquisitions including transactions, collaborations or other commercial transactions or to engage in other business activities that would be in our interest.
Our ability to borrow under the New ABL Facility is limited by the amount of our borrowing base. Any negative impact on the elements of our borrowing base, such as accounts receivable and
inventory or an imposition of a reserve against our borrowing base, which Cantor Fitzgerald Securities has the authority to do in its sole discretion, could reduce our borrowing capacity under the New ABL
Facility.
If we fail to attract and retain key personnel, we may be unable to successfully develop or commercialize our products.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified managerial personnel. We are highly dependent upon our executive management team. The loss
of the services of any members of our executive management team or other key personnel could delay or prevent the successful completion of some of our development and commercialization
objectives.
Recruiting and retaining qualified sales and marketing personnel is critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among
numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our
development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other
entities that may limit their availability to us.
Our management devotes substantial time to comply with public company regulations.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq Global
Market, imposes various requirements on public companies, including with respect to corporate governance practices. Moreover, these rules and regulations increase legal and financial compliance costs
and make some activities more time-consuming and costly.
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In addition, the Sarbanes-Oxley Act requires, among other things, that our management maintain adequate disclosure controls and procedures and internal control over financial reporting. In
particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and, as applicable, our independent registered public accounting
firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires us to incur substantial
accounting and related expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, our financial reporting could be unreliable and misinformation could be disseminated to
the public.
Any failure to develop or maintain effective internal control over financial reporting or difficulties encountered in implementing or improving our internal control over financial reporting could harm our
operating results and prevent us from meeting our reporting obligations. Ineffective internal controls also could cause our stockholders and potential investors to lose confidence in our reported financial
information, which would likely have a negative effect on the trading price of our common stock. In addition, investors relying upon this misinformation could make an uninformed investment decision and
we could be subject to sanctions or investigations by the SEC, Nasdaq Global Market or other regulatory authorities, or to stockholder class action securities litigation.
Our April 2015 acquisition of Zohydro ER and the August 2014 acquisition of the rights to Treximet intellectual property and our strategy of obtaining, through asset acquisitions and in-licenses,
rights to other products and product candidates for our development pipeline and to proprietary drug delivery and formulation technologies for our life cycle management of current products may not be
successful.
We acquired the rights to Zohydro ER in April 2015 and Treximet intellectual property in August 2014 and from time to time we may seek to engage in additional strategic transactions with third parties
to acquire rights to other pharmaceutical products, pharmaceutical product candidates in the late stages of development and proprietary drug delivery and formulation technologies. Because we do not
have discovery and research capabilities, the growth of our business will depend in significant part on our ability to acquire or in-license additional products, product candidates or proprietary drug delivery
and formulation technologies that we believe have significant commercial potential and are consistent with our commercial objectives. However, we may be unable to license or acquire suitable products,
product candidates or technologies from third parties for a number of reasons.
The licensing and acquisition of pharmaceutical products, product candidates and related technologies is a competitive area. A number of more established companies are also pursuing strategies to
license or acquire products, product candidates and drug delivery and formulation technologies, which may mean fewer suitable acquisition opportunities for us as well as higher acquisition prices. Many
of our competitors have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.
Other factors that may prevent us from licensing or otherwise acquiring suitable products, product candidates or technologies include:
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we may be unable to license or acquire the relevant products, product candidates or technologies on terms that would allow us to make an appropriate return on investment;
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companies that perceive us as a competitor may be unwilling to license or sell their product rights or technologies to us;
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we may be unable to identify suitable products, product candidates or technologies within our areas of expertise;
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we may have inadequate cash resources or may be unable to obtain financing to acquire rights to suitable products, product candidates or technologies from third parties; and
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we may be restricted from licensing or otherwise acquiring suitable products due to restrictions contained in the indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet
Secured Notes and the restrictions contained in the covenants in the agreements governing our credit facilities.
If we are unable to successfully identify and acquire rights to products, product candidates and proprietary drug delivery and formulation technologies and successfully integrate them into our
operations, we may not be able to increase our revenues in future periods, which could result in significant harm to our financial condition, results of operations and development prospects.
If we fail to successfully manage any acquisitions, our ability to develop our product candidates and expand our product pipeline may be harmed.
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Our failure to adequately address the financial, operational or legal risks of any acquisitions or in-license arrangements could harm our business. Financial aspects of these transactions that could
alter our financial position, reported operating results or stock price include:
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use of cash resources;
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higher than anticipated acquisition costs and expenses;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities, impairment losses or restructuring charges;
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large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount that must be
amortized over the appropriate life of the asset; and
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amortization expenses related to other intangible assets.
Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:
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challenges associated with managing an increasingly diversified business;
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disruption of our ongoing business;
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difficulty and expense in assimilating the operations, products, technology, information systems or personnel of the acquired company;
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diversion of management's time and attention from other business concerns;
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entry into a geographic or business market in which we have little or no prior experience;
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inability to maintain uniform standards, controls, procedures and policies;
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the assumption of known and unknown liabilities of the acquired business or asset, including intellectual property claims; and
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subsequent loss of key personnel.
If we are unable to successfully manage our licensing or acquisitions, our ability to develop and commercialize new products and continue to expand our product pipeline may be limited.
If we are unable to effectively train and equip our sales force to sell newly acquired, in-licensed and existing products, our ability to successfully commercialize our products will be harmed.
We have in the past made, and may in the future continue to make, acquisitions or in-licenses of pharmaceutical products. We have also experienced, and expect to continue to experience, turnover
of some of our sales representatives that we hired or will hire, requiring us to train new sales representatives. The members of our sales force may have no prior experience promoting the pharmaceutical
products that we own or may acquire or in-license in the future. As a result, we expend significant time and resources to train our sales force to be credible and persuasive in convincing
physicians to prescribe and pharmacists to dispense these pharmaceutical products. In addition, we must train our sales force to ensure that a consistent and appropriate message about our products is
being delivered to our potential customers. Our sales representatives may also experience challenges promoting multiple products when they call on physicians and their office staff. If we are unable to
effectively train our sales force and equip them with effective materials relating to our pharmaceutical products, including medical and sales literature to help them inform and educate potential customers
about the benefits of such products and their proper administration and label indication, our efforts to successfully market these pharmaceutical products could be put in jeopardy, which could have a
material adverse effect on our financial condition, stock price and operations.
Risks Related to Commercialization
When our patent rights expire, previously protected products may become subject to competition from generic versions, which may lower our net revenue.
We own, have applied for or hold licenses to patents. Our patent protection for our products extends for varying periods in accordance with the legal life of patents. The protection afforded is limited
by the applicable terms of our patents and the availability of legal remedies in the United States. Following expiration of patents covering our products, other entities may be able to obtain approval to
manufacture and market generic alternatives, which we expect would result in lower net revenue. For example, in August 2014, through our wholly owned subsidiary, Pernix Ireland Limited (PIL), we
acquired the U.S. intellectual property rights to Treximet from GSK. Treximet is covered by five patents in the U.S. Including six months of pediatric exclusivity, four of the patents expired on February 14,
2018, and one expires on April 2, 2026. Six companies filed Abbreviated
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New Drug Applications, or ANDAs, with the U.S. Food and Drug Administration, or FDA, seeking approval to market a generic
version of Treximet. Three of the ANDA filers are enjoined from engaging in the commercial manufacture, use, offer to sell, or sale in or importation into the United States of the proposed ANDA products
prior to April 2, 2026. One of the two ANDA filers that were legally able to launch their generic versions of Treximet on February 15, 2018 did enter the market. The one ANDA filer that could have
launched as early as January 3, 2018 has not yet entered the market. While we launched our own generic version of Treximet on February 15, 2018, the entry of generics into the market will likely have a
significant adverse impact on our sales of Treximet and, ultimately, our results of operations.
The commercial success of our currently marketed products and any additional products that we successfully commercialize will depend upon the degree of market acceptance by physicians, patients,
healthcare payors and others in the medical community.
Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If our products do not achieve an adequate
level of acceptance, we may not generate significant product revenue and may not be profitable. The degree of market acceptance of our products depends on a number of factors, including:
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the prevalence and severity of any side effect;
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the efficacy and potential advantages over the alternative treatments;
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the ability to offer our branded products for sale at competitive prices, including in relation to any generic products;
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substitution of our branded products with generic equivalents at the pharmacy level;
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relative convenience and ease of administration;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support; and
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sufficient third-party coverage or reimbursement.
We face competition, which may result in others discovering, developing or commercializing products before or more successfully than us.
The Industry in which we operate is highly competitive. Our competitors include large and small pharmaceutical companies, and other private and public research organizations. We face significant
competition for our currently marketed products, including significant price competition from products for the same therapeutic categories. Some of our currently marketed products do not have patent
protection and face or could face generic competition.
Some or all of our products may face competition from other branded and generic drugs approved for the same therapeutic indications, approved drugs used "off-label" for such indications
and novel drugs in clinical development. As a result, our commercial opportunities could be reduced or eliminated if competitors develop and commercialize products that are more effective, safer, have
fewer or less severe side effects, are more convenient or are less expensive than our products.
Our patent rights may not adequately protect our products or product candidates if competitors develop products that compete with us without legally infringing our patent rights. Further, our patent
rights may be subject to challenge by branded and generic competition.
The FDCA and FDA regulations and policies provide certain exclusivity incentives to manufacturers to develop generic versions of innovator products and 505(b)(2) New Drug Applications. A generic
manufacturer may only be required to show that its proposed generic product has the same active pharmaceutical ingredient, dosage form, strength, route of administration and indication as, and is
bioequivalent to, our brand-name product. The development costs for such generic products would be significantly less than those for our brand-name products and could lead to the emergence of
multiple lower-priced competitor products, which would substantially limit our ability to obtain a return on the investments we have made in our brand-name products. Additionally, other branded
competitors may obtain FDA or other regulatory approval for their product candidates more rapidly than we may obtain approval for our product candidates, and they may obtain periods of exclusivity
under applicable laws that may delay our own products' approval by the FDA.
Products in our portfolio that do not have patent protection are potentially at risk for generic competition. Additionally, products we sell through our collaborative or co-promotion arrangements
may also face competition in the marketplace.
Some of our competitors have significantly greater financial, technical and human resources than we have and superior expertise in marketing and sales, research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products and thus may be better equipped than us to discover, develop, manufacture and
commercialize products. These competitors also compete with us in recruiting and retaining qualified management personnel and acquiring technologies. Many of our competitors have collaborative arrangements in our target
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markets with leading companies and research institutions. In many cases, products that compete with our products have already received regulatory approval or are in
late-stage development, have well-known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved widespread acceptance among physicians and
patients. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
We may face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply, marketing and sales capabilities,
reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective, safer or more affordable products, or products with more effective patent
protection, than our products. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which would adversely affect our competitive position, our revenue
and profit from existing products and anticipated revenue and profit from product candidates. If our products or product candidates are rendered noncompetitive, we may not be able to recover the
expenses of developing and commercializing those products or product candidates.
If our competitors sell generic equivalents of our products, our net revenues from such products are expected to decline.
Product sales of generic pharmaceutical products often follow a particular pattern over time based on regulatory and competitive factors. The first company to introduce a generic equivalent of a
branded product is often able to capture a substantial share of the market. However, as other companies introduce competing generic products, the first entrant's market share, and the price of its generic
product, will typically decline. The extent of the decline generally depends on several factors, including the number of competitors, the price of the branded product and the pricing strategy of the new
competitors.
For example, in the generic drug industry, when a company is the first to introduce a generic drug, the pricing of the generic drug is typically set based on a discount from the published price of the
equivalent branded product. Other generic manufacturers may enter the market and, as a result, the price of the drug may decline significantly. In such event, we may in our discretion provide our
customers a credit with respect to the customers' remaining inventory for the difference between our new price and the price at which we originally sold the product to our customers. There are
circumstances under which we may, as a matter of business strategy, not provide price adjustments to certain customers and, consequently, we may lose future sales to competitors.
Negative publicity regarding any of our products or product candidates could delay or impair our ability to market any such product, delay or prevent approval of any such product candidate and
may require us to spend time and money to address these issues.
If any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers and/or subject to FDA enforcement action, our ability to
successfully market and sell our products could be impaired. Because of our dependence on patient and physician perceptions, any adverse publicity associated with illness or other adverse effects
resulting from the use or misuse of our products or any similar products distributed by other companies could limit the commercial potential of our products and expose us to potential liabilities.
If we are unable to attract, hire and retain qualified sales and management personnel and successfully manage our sales and marketing programs and resources, or if our commercial partners
do not adequately perform, the commercial opportunity for our products may be diminished.
We and any other commercialization partner we engage may not be able to attract, hire, train and retain qualified sales and sales management personnel in the future. If we or they are not successful
in maintaining an effective number of qualified sales personnel, our ability to effectively market and promote our products may be impaired. Even if we are able to effectively maintain such sales
personnel, their efforts may not be successful in commercializing our products.
In addition, a significant portion of the revenues that we might receive from sales of products that are the subject to commercial partnerships could largely depend upon the efforts our partners. The
efforts of partners, in many instances, could likely be outside our control. If we are unable to maintain commercial partnerships or to effectively establish alternative arrangements for our products, our
business could be adversely affected. In addition, despite arrangements with other partners, we still may not be able to cover all of the prescribing physicians for our products at the same level of reach
and frequency as our competitors, and we ultimately may need to further expand our selling efforts in order to effectively compete.
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From time to time, we compliment the efforts of our sales force with on-line and other non-personal promotional initiatives that target both physicians and patients. We also focus upon ensuring broad
patient access to our products by negotiating agreements with leading commercial managed care organizations, or MCOs, and with government payors. Although our goal is to achieve sales through the
efficient execution of our sales and marketing plans and programs, we may not be able to effectively generate prescriptions and achieve broad market acceptance for our products on a timely basis, or at
all.
A failure to maintain optimal inventory levels to meet commercial demand for our products could harm our reputation and subject us to financial losses.
Our product, Zohydro ER with BeadTek, contains a controlled substance that is regulated by the DEA under the Controlled Substances Act. DEA quota requirements applicable to Schedule I and II
controlled substances limit the amount of controlled substance drug products a manufacturer can manufacture and the amount of API it can use to manufacture those products. We may experience
difficulties obtaining raw materials needed to manufacture such product as a result of DEA regulations. If we are unsuccessful in obtaining quotas, unable to manufacture and release inventory on a timely
and consistent basis, fail to maintain an adequate level of product inventory, or if inventory is destroyed or damaged or reaches its expiration date, patients might not have access to our product, our
reputation and our brands could be harmed and physicians may be less likely to prescribe such product in the future, each of which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We and our contract manufacturers may not be able to obtain the regulatory approvals or clearances that are necessary to manufacture pharmaceutical products.
Before approving a new drug, the FDA requires that the facilities in which the product will be manufactured be in compliance with Good Manufacturing Practices, or cGMP, requirements, which
include, among other things, requirements relating to quality control and quality assurance, maintenance of records and documentation and utilization of qualified raw materials. To be successful, our
products must be manufactured in compliance with cGMP during development and, following approval, in commercial quantities and at acceptable costs.
We and our contract manufacturers must comply with these cGMP requirements. While we believe that we and our contract manufacturers currently meet these requirements, we cannot assure that
the manufacturing facilities used to manufacture and package our products will continue to meet cGMP requirements or will be sufficient to manufacture all of our needs and/or the needs of our customers
for commercial materials.
We and our contract manufacturers may also encounter problems with the following:
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production yields;
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possible facility contamination;
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quality control and quality assurance programs;
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shortages of qualified personnel;
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compliance with FDA or other regulatory authorities' regulations, including the demonstration of purity and potency;
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changes in FDA or other regulatory authorities' requirements;
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production costs; and/or
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development of advanced manufacturing techniques and process controls.
In addition, we and our contract manufacturers must register our manufacturing facilities with the FDA, and our facilities are subject to FDA inspections to confirm continuing compliance with cGMP
and other regulations. If we or our contract manufacturers fail to maintain regulatory compliance, the FDA may impose regulatory sanctions including, among other things, temporary or permanent refusal
to permit us or our contract manufacturers to continue manufacturing approved products. As a result, our business, financial condition and results of operations may be materially harmed.
If
we or our third-party manufacturers fail to comply with regulatory requirements for our controlled substance product, Zohydro ER with BeadTek, the DEA may take
regulatory actions detrimental to our business, resulting in temporary or permanent interruption of distribution, withdrawal of such product from the market or other penalties.
We, our third-party manufacturers and our Zohydro with BeadTek product, are subject to the Controlled Substances Act and DEA regulations thereunder. Accordingly, we must adhere to a number of
requirements, including registration, recordkeeping and reporting requirements; labeling and packaging requirements; security controls, procurement and manufacturing quotas; and certain restrictions on
refills. Failure to maintain compliance with applicable requirements can result in enforcement action that could have a material adverse effect on our business, financial condition, results of operations and
cash flows. The DEA may seek civil penalties, refuse to renew necessary registrations or initiate proceedings to revoke those registrations. In certain circumstances, violations could result in criminal
proceedings.
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Changes in laws, regulations and policies applicable to the market for opioid products, litigation and government investigations may adversely affect our business, financial condition and results of
operations.
The manufacture, marketing, sale, promotion and distribution of Zohydro ER are subject to comprehensive government regulations. Changes in laws and regulations applicable to the market
for opioid products, including Zohydro ER with BeadTek, could potentially affect our business. For instance, federal, state and local governments have recently given increased attention to the public
health issue of opioid abuse.
At the federal level, the White House Office of National Drug Control Policy continues to coordinate efforts between the FDA, the DEA, and other agencies to address this issue. The FDA recently
requested that Endo International plc, or Endo, withdraw Opana ® ER, one of its opioid pain medications, from the market due to the public health consequences of abuse (even when taken at
recommended doses) associated with the use of Endo's product. Endo voluntarily complied with the FDA's removal request. In publicly announcing the request, the FDA noted that it would take similar
regulatory action with regard to other opioid products if the risks for abuse outweighed the product's potential benefits. The FDA also recently revised the "black-box" warnings required in the
labeling of opioid paid medications, including Zohydro ER with BeadTek, that highlight the risk of misuse, abuse, addiction, overdose and death. The DEA continues its efforts to hold manufacturers,
distributors, prescribers and pharmacies accountable through various enforcement actions, as well as the implementation of compliance practices for controlled substances. In addition, the Centers for
Disease Control and Prevention (CDC), issued national, non-binding guidelines in 2016 relative to the prescribing of opioids. These guidelines included recommended considerations for primary care
provider use when prescribing opioids, including specific considerations and cautionary information about opioid dosage increases and morphine milligram equivalents. Certain payors are, or are
considering, adopting these CDC guidelines, as well as putting other restrictions on the prescribing of opioid pain medications. Additionally, the Trump administration and certain members of Congress
have called for the DEA to restrict the quantity of opioids that can be manufactured in the United States.
Recent federal activity includes the issuance of a Presidential commission's final recommendations on combating opioid abuse; the federal Department of Health and Human Services declaring the
opioid crisis a national public health emergency; President Trump's establishing a commission to make recommendations regarding new laws and policies to combat opioid addiction and abuse;
Mallinckrodt's $35.0 million settlement with the Justice Department regarding allegations that the company failed to report signs that large quantities of its highly addictive oxycodone pills were diverted to
the black market in Florida; and the FDA's announced intention to extend to immediate-release opioids the Risk Evaluation and Mitigation Strategy, or REMS, currently imposed on extended-release
opioids, such as Zohydro ER. At the state and local level, a number of states and major cities have brought separate lawsuits against various pharmaceutical companies marketing and selling opioid
based pain medications, alleging misleading or otherwise improper promotion of opioid drugs to physicians and consumers. In addition, the attorneys general from several states have announced the
launch of a joint investigation into the marketing and sales practices of drug companies that manufacture opioid pain medications.
These initiatives and other changes and potential changes in laws, regulations and policies, including those that have the effect of reducing the overall market for opioids or reducing the prescribing of
opioids, could adversely affect our business, financial condition and results of operations.
Our ceasing the distribution of our combination drug product IDA will impact our net revenues. In the future, FDA could also request that we no longer market and distribute certain of our other
DESI, OTC, medical foods and dietary supplement products.
Through our Macoven entity, Pernix distributed a combination product called isometheptene mucate, dichlorphenazone, and acetaminophen, or IDA, which was originally approved by the US Food
and Drug Administration, or FDA, in 1948 for safety only. The product's efficacy as an adjunct treatment for peptic ulcer disease, as well as other medical conditions, such as migraine headaches, was
reviewed under the FDA's Drug Efficacy Study Implementation process, DESI notice 3265.
On October 20, 2017, we received a letter dated October 19, 2017 from the FDA asserting that IDA was subject to DESI 3265 and that any drug products identified in DESI 3265, including IDA,
require an approved NDA or ANDA in order for them to continue to be distributed. Since we have not obtained an NDA or ANDA for IDA, the FDA directed that we should immediately cease distribution of
IDA. While IDA has a long history of safe use, we complied with the FDA's request and confirmed with the FDA within the requested time frame that we ceased distribution of the product. For the year
ended December 31, 2017, our net revenues from the sale of IDA were $14.9 million. As we will not have further revenues from the product in 2018, the discontinuance of the product will impact net
revenues for the fiscal year ending December 31, 2018.
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Additionally, it is possible that the FDA could in the future request that we no longer distribute certain of our DESI, OTC, medical foods and dietary supplement products,
which could adversely affect our net revenues.
Product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the sale of our currently marketed products and any other products that we successfully develop or commercialize. For example, at the
state and local level, a number of states and major cities have brought separate lawsuits against various pharmaceutical companies marketing and selling opioid based pain medications, alleging
misleading or otherwise improper promotion of opioid drugs to physicians and consumers. In addition, the attorneys general from several states have announced the launch of a joint investigation into the
marketing and sales practices of drug companies that manufacture opioid pain medications. While we are not a party to these actions, it is possible that we could be included in them in the future.
If we cannot successfully defend ourselves against claims that our products or product candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:
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decreased demand for our products or any products that we may develop;
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injury to reputation;
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withdrawal of clinical trial participants;
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withdrawal of a product from the market;
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costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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diversion of management time and attention;
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loss of revenue; and
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the inability to commercialize any products that we may develop.
The amount of insurance that we currently hold may not be adequate to cover all liabilities that we might incur. Further, there may be instances where our existing insurance coverage will not respond
to or cover a claimed liability or where our insurers may dispute whether their insurance contracts must legally respond to such claimed liabilities. In such instances, we may not have insurance funds
available to cover such liabilities, as well as the legal defense costs that would have to be incurred, which could have a material adverse effect on our business financial condition and results of operations.
Finally, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be
adequate to satisfy any liability that may arise.
Seasonality may cause fluctuations in our financial results.
We generally experience some effects of seasonality due to our patients resetting their deductible amounts in the beginning of the calendar year and reaching their deductible amounts during the year.
Accordingly, sales of our products and associated revenue have generally decreased in the first quarter of each year and begin to increase during the remainder of the year. This seasonality may cause
fluctuations in our financial results. In addition, other seasonality trends may develop and the existing seasonality that we experience may change.
Risks Related to Our Dependence on Third Parties
We may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues if the
manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug
manufacturers.
We do not manufacture our marketed products, and we do not currently plan to develop any capacity to do so. We rely on third parties to manufacture our products. The manufacture of
pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical
products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including
stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations.
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Our manufacturers may not
perform as agreed or may terminate their agreements with us. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or
unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to sell our marketed products or any
other product candidate that we commercialize would be jeopardized. Any delay or interruption in our ability to meet commercial demand for our marketed products will result in the loss of potential
revenues.
For example, we recently announced that, due to a manufacturing issue with our supplier, we expect that the 20 mg. strength of Zohydro ER with BeadTek will be on back order until at least the first
quarter of 2018. During this time, we will continue to market and distribute other strengths of Zohydro ER with BeadTek, including the 10 mg., 15 mg., 30 mg., 40 mg. and 50 mg. strengths. While
utilization of the 10 mg., 15 mg. and 30 mg. strengths are expected to increase in order to fulfill patient needs, the temporary stock-out of the 20 mg. strength has and will continue to impact the overall
prescription volume for Zohydro ER with BeadTek, which may result in a continued loss of revenue and have an adverse effect on our financial condition.
In addition, in connection with our acquisition of the rights to Treximet intellectual property in August 2014, we discovered short-term supply constraints for the product.
While we believe that we have addressed this issue by securing another manufacturer, our failure to obtain sufficient supply of Treximet to meet anticipated demand in the future may result in the loss of
potential revenues
All manufacturers of pharmaceutical products must comply with the FDA's current cGMP requirements enforced by the FDA through its facilities inspection program. The FDA is also likely to conduct
inspections of our manufacturers' facilities as part of their review of any NDAs we submit to the FDA. These cGMP requirements include, among other things, quality control, quality assurance and the
maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. Failure
to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If
the safety, efficacy, or quantities of our drug products are compromised due to our manufacturers' failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory
approval for or successfully commercialize our products.
Moreover, our manufacturers and suppliers may experience difficulties related to their overall businesses and financial stability, which could result in delays or interruptions of our supply of our
marketed products. We do not have alternate manufacturing plans in place at this time. If we need to change to other manufacturers, the FDA must approve these manufacturers' facilities and processes
in advance, which would require new testing and compliance inspections. Moreover, new manufacturers may have to be trained in or independently develop the processes necessary for production.
Any of these factors could adversely affect the commercial activities for our marketed products and required approvals for any other product candidate that we develop, or entail higher costs or result
in our being unable to effectively commercialize our products. Furthermore, if our manufacturers failed to deliver the required commercial quantities of raw materials, including bulk drug substance, or
finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.
The concentration of our product sales to only a few wholesale distributors increases the risk that we will not be able to effectively distribute our products if we need to replace any of these
customers, which would cause our sales to decline.
The majority of our sales are to a small number of pharmaceutical wholesale distributors, which in turn sell our products primarily to retail pharmacies, which ultimately dispense our products to the
end consumers. For the year ended December 31, 2017, McKesson Corporation, Cardinal Health and AmerisourceBergen Drug Corporation accounted for 34%, 24% and 30%, respectively, of our total
gross sales. For the year ended December 31, 2016, McKesson Corporation, Cardinal Health and AmerisourceBergen Drug Corporation accounted for 36%, 26% and 31%, respectively, of
our total gross sales.
If any of these customers cease doing business with us or materially reduce the amount of product they purchase from us and we cannot conclude agreements with replacement wholesale distributors
on commercially reasonable terms, we might not be able to effectively distribute our products through retail pharmacies. The possibility of this occurring is exacerbated by the recent significant
consolidation in the wholesale drug distribution industry, including through mergers and acquisitions among wholesale distributors and the growth of large retail drugstore chains. As a result, a small
number of large wholesale distributors control a significant share of the market.
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Any collaboration arrangements that we enter into may not be successful, which could adversely affect our ability to develop and commercialize our product candidates.
We enter into collaboration arrangements from time to time on a selective basis. Our collaborations may not be successful. In the future, we might market certain branded and generic products in the
U.S. pursuant to collaboration arrangements. The success of such collaboration arrangements may depend heavily on the efforts and activities of our collaborators. Collaborators generally have
significant discretion in determining the efforts and resources that they will apply to these collaborations.
Disagreements between parties to collaboration arrangements regarding clinical development and commercialization matters can lead to delays in the development process or commercialization of
applicable product candidates and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making
authority.
Our business could suffer as a result of a failure to manage and maintain our distribution network with our wholesale customers.
We depend on the distribution abilities of our wholesale customers to ensure that our products are effectively distributed through the supply chain. If there are any interruptions in our customers' ability
to distribute products through their distribution centers, our products may not be effectively distributed, which could cause confusion and frustration among pharmacists and lead to product
substitution.
To the extent that we conduct clinical trials, we plan to rely on third parties to conduct these trials and such third parties may not perform satisfactorily, including failing to meet established
deadlines for the completion of such trials.
We do not plan to independently conduct clinical trials for product candidates that we might acquire in the future and, instead, would rely on third parties, such as contract research organizations,
clinical data management organizations, medical institutions and clinical investigators. Reliance on these third parties for clinical development activities would reduce our control over these activities,
although we would remain responsible for ensuring that clinical trials performed at our direction are conducted in accordance with approved investigational plans and approved clinical trial protocols.
Moreover, the FDA requires compliance with good clinical practices for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate
and that the rights and confidentiality of trial participants are protected. Reliance on third parties does not relieve a sponsor of these responsibilities and requirements. Furthermore, these third parties
could also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our
clinical trials in accordance with regulatory requirements or our stated protocols, we might not be able to obtain, or may be delayed in obtaining, regulatory approvals for future product candidates and may
not be able to, or may be delayed in our efforts to, successfully commercialize such product candidates.
We are subject to various legal proceedings and business disputes that could have a material adverse impact on our business, financial condition and results of operations and could cause the
market value of our common stock to decline.
We are subject to various legal proceedings and business disputes and additional claims may arise in the future. Current legal proceedings and disputes as well as those that may arise in the future
may be complex and extended and may occupy the resources of our management and employees. These proceedings may also be costly to prosecute and defend and may involve substantial awards or
damages payable by us if not found in our favor some or all of which may not be covered by our existing insurance coverage or might result in the granting of certain rights on unfavorable terms in order to
settle such proceedings. Defending against or settling such claims and any unfavorable legal decisions, settlements or orders could have a material adverse effect on our business, financial condition and
results of operations and could cause the market value of our common stock to decline. For more information regarding legal proceedings and contingencies, see Item 3,
Legal Proceedings
and Note 18,
Commitments and Contingencies
, to our consolidated financial statements included in this Annual Report on Form 10-K.
Risks Related to Intellectual Property
If we are unable to obtain and maintain protection for the intellectual property relating to our products, the value of our products will be adversely affected.
Our success will depend in part on our ability to obtain and maintain protection for the intellectual property covering or incorporated into our products. The patent situation in the field of
pharmaceuticals is highly uncertain and involves complex legal and scientific questions. We rely upon patents, trademarks, trade secrets and confidentiality agreements to protect our products.
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We may not be able to obtain additional patent rights relating to our products and pending patent applications to which we have rights may not issue as patents or may not issue in a form
that will be advantageous to us. Further, our patents could be challenged, narrowed, invalidated, or held to be unenforceable, which could limit our ability to stop third party competitors from
marketing competing products. Moreover, some physicians may prescribe a competitive or similar product that is not approved by the FDA to treat patients with insomnia in lieu of prescribing
Silenor and we cannot guarantee that our intellectual property will prevent or deter such "off-label" use.
Our patent rights also may not afford us protection against all competitors. In September 2011, the Leahy-Smith America Invents Act, or Leahy-Smith Act, was signed into law and includes a
number of significant changes to U.S. patent law, including a transition from a first to invent to a first inventor to file system. Because patent applications in the United States and many other
jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither
we nor our licensors can be certain that we or they were the first to invent or file patent applications to the inventions. If a third party has also filed a U.S. patent application covering a similar
invention, we may have to participate in an adversarial proceeding at the United States Patent and Trademark Office. The specific type of proceeding will be determined by the filing date of the
application for patent. If the application for patent was filed prior to March 15, 2013, such a proceeding would be an interference proceeding. For all applications filed after March 15, 2013,
such a proceeding would be a derivation proceeding. Further, our patents may be challenged by one or more post-grant proceedings. The cost of any type of patent proceeding could be substantial
and it is possible that our efforts could be unsuccessful, resulting in a loss of patent protection. In addition, patents generally expire, regardless of the date of issue, 20 years from the earliest non-
provisional effective U.S. filing date, thus loss of patent protection may occur from patent terms expiring.
Our collaborators and licensors may not adequately protect our intellectual property rights. These third parties may have the first right to maintain or defend our
intellectual property rights and, although we may have the right to assume the maintenance and defense of our intellectual property rights if these third parties do not, our ability to maintain and defend our
intellectual property rights may be compromised by the acts or omissions of these third parties.
Trademark protection of our products may not provide us with a meaningful competitive advantage.
We use trademarks on our marketed, branded products and believe that having distinctive marks is an important factor in marketing those products and maintaining good will.
Distinctive marks may also be important for any additional products that we successfully develop and/or commercially market. However, even though we register, maintain, monitor and defend our
trademarks as necessary, we generally do not rely on our marks to provide a meaningful competitive advantage over other products. We believe that efficacy, safety, convenience, price, the level of
competition and the availability of reimbursement from government and other third-party payors are likely to continue to be more important factors in the commercial success of our products.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We have acquired rights to products and product candidates under license and co-promotion agreements with third parties and expect to enter into additional licenses and co-promotion
agreements in the future. Our existing licenses impose, and we expect that future licenses will impose, various development and commercialization, purchase commitment, royalty, sublicensing,
patent protection and maintenance, insurance and other similar obligations on us.
If we fail to comply with our obligations under a license agreement, the licensor may have the right to terminate the license in whole, terminate the exclusive nature of the license or bring a
claim against us for damages. Any such termination or claim could prevent or impede our ability to market any product that is covered by the license agreement. Even if we contest any such
termination or claim and are ultimately successful, our business could suffer. In addition, upon any termination of a license agreement, our market position could be impacted if we were legally
required to provide a licensor with a license to use any related intellectual property that we developed.
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 and trademarks, we rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We
require our relevant persons, such as employees, consultants and other third parties, including vendors (when appropriate), to execute confidentiality and assignment-of-inventions agreements with us.
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These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may
independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. If
we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could
adversely impact our business.
If we infringe or are alleged to infringe intellectual property rights of third parties, it may adversely affect our business.
Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe one or more claims of an
issued patent or pending patent application which we do not hold a license or other rights. Third parties may own or control these patents or patent applications and could bring claims against us or
our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or our collaborators could be forced to stop or delay development, manufacturing or sales of the product or product candidate that is the subject of the suit.
If any relevant claims of third-party patents that we are alleged to infringe are upheld as valid and enforceable in any litigation or administrative proceeding, we or our potential future collaborators
could be prevented from commercializing a product, or maybe required to obtain licenses from the patent owners of each such patent, or to redesign our products, and could be liable for damages.
There can be no assurance that such licenses would be available or, if available, would be available on acceptable terms, or that we would be successful in any attempt to redesign our products.
Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we
could be prevented from commercializing a product, or be forced to cease some aspect of our business operations. An adverse determination in a judicial or administrative proceeding, failure to redesign,
or failure to obtain necessary licenses could prevent us or our future collaborators from manufacturing and selling our products and would have a material adverse effect on our business.
There has been substantial litigation and other proceedings regarding patents and other intellectual property rights in the
pharmaceutical and biotechnology industries. The cost to us of any patent litigation or other proceedings, even if resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb
significant management time.
Risks Related to Our Financial Position
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs,
commercialization efforts or acquisition strategy.
We make significant investments in our currently-marketed products for sales, marketing, and distribution. We have used, and expect to continue to use, revenue from sales of our marketed products
to fund acquisitions (at least partially), for development costs and to establish and expand our sales and marketing infrastructure.
Our future capital requirements will depend on many factors, including:
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our ability to restructure our existing debt;
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our ability to successfully integrate the operations of newly acquired businesses and assets and/or in-licensed products or product candidates into our product portfolio;
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our ability to successfully establish and maintain collaborations or other strategic alliances;
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the level of product sales from our currently marketed products and any additional products that we may market in the future;
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the extent to which we acquire or invest in products, businesses and technologies;
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the scope, progress, results and costs of clinical development activities for our product candidates;
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the costs, timing and outcome of regulatory review of our product candidates;
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the number of, and development requirements for, additional product candidates that we pursue;
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the costs of commercialization activities, including product marketing, sales and distribution;
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the extent to which we choose to establish additional collaboration, co-promotion, distribution or other similar arrangements for our products and product candidates; and
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the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property related claims.
We intend to obtain any additional funding that we require through public or private equity or debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables,
milestone payments or royalty rights, or other arrangements. We cannot assure such funding will be available on reasonable terms, or at all. Additional equity financing will be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially
valuable rights to our potential products or proprietary technologies, or we may have to grant licenses on terms that are not favorable to us.
If efforts to raise additional funds are unsuccessful, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to our products or
renegotiate less favorable terms with respect to such rights than we would otherwise agree to accept or we may have to cease operating as a going concern. In addition, if we do not meet our payment
obligations to third parties as they come due, we may be subject to litigation claims. Even if we were successful in defending against these potential claims, litigation could result in substantial costs and be
a distraction to management and might result in unfavorable results that could further adversely impact our financial condition
If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely
that investors will lose all or a part of their investments.
If the estimates that we make, or the assumptions upon which we rely, in preparing our financial statements prove inaccurate, our future financial results may vary from expectations.
Our financial statements have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of
our assets, liabilities, stockholders' equity, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances. For example, at the same time we recognize revenues for product sales, we also record an
adjustment, or decrease, to revenue for estimated charge backs, rebates, discounts, vouchers and returns, which management determines on a product-by-product basis as its best estimate at the time of
sale based on each product's historical experience adjusted to reflect known changes in the factors that impact such reserves. For new products, these sales adjustments may be estimated based
upon information available on any similar products in the marketplace or specific information provided by business partners or if management is not able to derive a reasonable estimate for the
adjustments, gross revenue can be deferred and recognized as the product is prescribed.
Actual sales allowances may vary from our estimates for a variety of reasons, including unanticipated competition, regulatory actions or changes in one or more of our contractual relationships. We
cannot assure you, therefore, that there may not be material fluctuations between our estimates and the actual results.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017, we had net operating losses ("NOLs") of approximately $396.5 million for federal income tax purposes. Subject to applicable limitations, these NOLs may be used to
offset future taxable income, to the extent we generate any taxable income, and thereby reduce our future federal income taxes otherwise payable.
Under Section 382 of the Internal Revenue Code (the "Code"), if a corporation undergoes an "ownership change" as defined in that section, the corporation's ability to use its
pre-change NOLs and other pre-change tax attributes to offset its post-change income may become subject to significant limitations. In general terms, an ownership change occurs if there is a
greater than 50 percentage point increase in the amount of the corporation's stock owned by certain stockholders during a three year testing period. An ownership change may be triggered by
the purchase and sale, redemption, or new issuance of stock. $366.5 million of our NOLs are already subject to limitation under Section 382 of the Code. We may experience an ownership
change in the future as a result of shifts in our stock ownership, which may result from, among other things, issuances of common stock, including upon the exercise by the holders of our existing
convertible debt securities and any convertible debt securities we may offer in the future of the conversion rights under such instruments, and upon the exercise of stock options and other equity
compensation awards. If a future ownership change were to be triggered, our ability to use some or all of our remaining NOLs could be significantly limited. Further, depending on the level of our
taxable income, all or a portion of our NOLs may expire unutilized, which could prevent us from offsetting future taxable income by the entire amount of our current and future NOLs.
Additionally, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act contains
significant changes to corporate taxation and modifies several existing laws around NOLs, including a limitation on the deduction for NOLs to 80 percent of current year taxable income as well as
an indefinite carryover period for NOLs. Both provisions are applicable for losses arising in tax years beginning after December 31, 2017. For these reasons, even if we generate taxable income
in the future, our ability to utilize our NOLs may be limited, potentially significantly so.
If we fail to meet all applicable continued listing requirements of the Nasdaq Global Market and it determines to delist our common stock, the market liquidity and market price of our common
stock could decline.
If we fail to meet all applicable listing requirements of the Nasdaq Global Market and it determines to delist our common stock, trading, if any, in our shares may continue to be conducted on an
over-the-counter market, such as the OTCQX, OTCQB or the OTC Pink. Delisting of our shares would result in limited release of the market price of those shares and limited analyst coverage and could
restrict investors' interest and confidence in our securities. Also, a delisting could have a material adverse effect on the trading market and prices for our shares and our ability to issue additional securities
or to secure additional financing. In addition, if our shares were not listed and the trading price of our shares was less than $5.00 per share, our shares could be subject to Rule 15g-9 under the Exchange
Act which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser's written
consent prior to any transaction. In such case, our securities could also be deemed to be a "penny stock" under the Securities Enforcement and Penny Stock Reform Act of 1990, which would
require additional disclosure in connection with trades in those shares, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could
severely limit the liquidity of our securities and our ability to raise additional capital.
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If significant business or product announcements by us or our competitors cause fluctuations in our stock price, an investment in our stock may suffer a decline in value.
The market price of our common stock may be subject to substantial volatility as a result of announcements by us or other companies in our industry, including our collaborators. Announcements that
may subject the price of our common stock to substantial volatility include but are not limited to announcements regarding:
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our operating results, including the amount and timing of sales of our products and our ability to successfully integrate the operations of newly acquired businesses or products;
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the availability and timely delivery of a sufficient supply of our products;
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the safety and quality of our products or those of our competitors;
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our licensing and collaboration agreements and the products or product candidates that are the subject of those agreements;
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the results of discoveries, preclinical studies and clinical trials by us or our competitors;
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the acquisition of technologies, product candidates or products by us or our competitors;
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the development of new technologies, product candidates or products by us or our competitors;
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regulatory actions with respect to our product candidates or products or those of our competitors; and
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significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We did not make any distributions for the years ended December 31, 2017 and 2016. We are currently investing in our promoted products lines and do not anticipate paying dividends in the
foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of the agreements governing our credit
facilities and the indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes prohibit us from paying dividends. As a result, capital appreciation, if any, of our
common stock will be your sole source of gain for the foreseeable future.
Sales of a substantial number of shares of our common stock or equity-linked securities could cause our stock price to fall.
Sales of a substantial number of shares of our common stock or equity-linked securities in the public market or the perception that these sales might occur, could depress the market price of our
common stock and could impair our ability to raise capital through the sale of additional equity or equity-linked securities. We are unable to predict the effect that sales may have on the prevailing market
price of our common stock.
Exchange of the Exchangeable Notes and conversion of the Convertible Notes may dilute the ownership interest of existing stockholders.
Subject to certain contractual restrictions, holders of the Exchangeable Notes and the Convertibles Notes are entitled to exchange or convert, respectively, the Exchangeable Notes or the
Convertible Notes for shares of our common stock at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date of the
Exchangeable Notes or the Convertible Notes, respectively. The exchange of some or all of the Exchangeable Notes or the conversion of some or all of the Convertible Notes will dilute the ownership
interests of existing stockholders. If holders of the Exchangeable Notes were to exchange all of the outstanding Exchangeable Notes (not taking into account the potential for capitalization of interest or
additional interest or changes to the exchange price), we would need to deliver approximately 6,498,273 shares of our common stock to settle the exchange, which would result in significant dilution to
existing stockholders. If holders of the Convertible Notes were to exchange all of the outstanding Convertible Notes, we would need to deliver approximately 682,413 shares of our common stock to settle
the conversion, which would result in additional dilution to existing stockholders. Any sales in the public market of any shares of our common stock issuable upon such exchange or conversion could
adversely affect prevailing market prices of our common stock.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results. Potential causes of future fluctuations in our operating results may include:
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period-to-period fluctuations in financial results due to seasonal demands for certain of our products;
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unanticipated potential product liability or patent infringement claims;
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new or increased competition from generics;
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the introduction of technological innovations or new commercial products by competitors;
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changes in the availability of reimbursement to the patient from third-party payers for our products;
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the entry into, or termination of, key agreements, including key strategic alliance agreements;
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the initiation of litigation to enforce or defend any of our intellectual property rights;
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the loss of key employees;
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the results of pre-clinical testing, IND application, and potential clinical trials of some product candidates;
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regulatory changes;
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the results and timing of regulatory reviews relating to the approval of product candidates;
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the results of clinical trials conducted by others on products that would compete with our products and product candidates;
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failure of any of our products or product candidates to achieve commercial success;
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general and industry-specific economic conditions that may affect research and development expenditures;
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future sales of our common stock; and
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changes in the structure of health care payment systems resulting from proposed healthcare legislation or otherwise.
Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer a decline in value.
The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general has recently experienced extreme price and volume
fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely volatile and have experienced fluctuations that often have been unrelated or
disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in
the value of our common stock.
If we become subject to unsolicited public proposals from activist stockholders, we may experience significant uncertainty that would likely be disruptive to our business and increase volatility in
our stock price.
Public companies, particularly those in volatile industries such as the pharmaceutical industry, have been the target of unsolicited public proposals from activist stockholders. The unsolicited and often
hostile nature of these public proposals can result in significant uncertainty for current and potential licensors, suppliers, patients, physicians and other constituents, and can cause these parties to change
or terminate their business relationships with the targeted company. Companies targeted by these unsolicited proposals from activist stockholders may not be able to attract and retain key personnel as a
result of the related uncertainty. In addition, unsolicited proposals can result in stockholder class action lawsuits. The review and consideration of an unsolicited proposal as well as any resulting lawsuits
can be a significant distraction for management and employees, and may require the expenditure of significant time, costs and other resources.
If we were to receive unsolicited public proposals from activist stockholders, we may encounter all of these risks and, as a result, may be delayed in executing our core strategy. We could be required
to spend substantial resources on the evaluation of the proposal as well as the review of other opportunities that never come to fruition. If we were to receive any of these unsolicited public proposals, the
future trading price of our common stock is likely to be even more volatile than in the past, and could be subject to wide price fluctuations based on many factors, including uncertainty associated with the
proposals.
We may become involved in securities or other class action litigation that could divert management's attention and harm our business.
The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology
companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company. Any securities or other class action litigation asserted against us could have a material adverse effect on our business.
Risks Related to Regulatory Matters
If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates and our ability to generate increased revenue will be materially impaired.
Product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval,
advertising, promotion, sale and distribution, are
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subject to comprehensive regulation by the FDA, the DEA and other regulatory agencies in the United States. Should we acquire or develop a product
candidate, the failure to obtain regulatory approval would prevent us from commercializing the product candidate. Securing FDA approval requires the submission of extensive preclinical and clinical data
and supporting information for each therapeutic indication to establish the product candidate's safety and efficacy. Securing FDA approval also requires the submission of information about the product
manufacturing process to, and inspection of manufacturing facilities by, the FDA. Additionally, it is possible that future product candidates may not be effective, may be only moderately effective, or may
have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type,
complexity and novelty of the product candidates involved and the nature of the disease or condition to be treated. Changes in regulatory approval policies during the development period, changes in or
the enactment of additional statutes or regulations, or changes in the regulatory review process for a product application may cause delays in the approval of, or rejection of, an application. The FDA has
substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies.
The FDA may decline to approve one or more of our product candidates for many reasons, including:
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disagreement with the design or implementation of our clinical trials;
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failure to demonstrate that a product candidate is safe and effective for its proposed indication;
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failure of clinical trial results to meet the level of statistical significance required for approval;
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failure to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;
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disagreement with our interpretation of data from preclinical studies or clinical trials;
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insufficiency of data collected from clinical trials of a product candidate to support the submission and filing of an NDA or other submission or to obtain regulatory approval;
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disapproval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and
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changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.
In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval ultimately
obtained may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any pharmaceutical product for which we currently have marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to
comply with regulatory requirements or if we experience unanticipated problems with our products.
Any FDA approved products are subject to continued requirements of and review by the FDA. These requirements include submissions of safety and other post-marketing information and reports,
registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples
to physicians and recordkeeping. Even after a product receives FDA approval, that approval may be subject to limitations on the indicated uses for which the product may be marketed, or to requirements
for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers, or manufacturing
processes or failure to comply with regulatory requirements may result in administrative and judicial actions such as:
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withdrawal of the products from the market;
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restrictions on the marketing or distribution of such products;
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requirements to place additional warnings on the labels for such products;
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requirements to develop a REMS for such products or, if a REMS is already in place, to incorporate additional requirements under the REMS;
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requirements to conduct additional post-market studies;
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restrictions on the manufacturers or manufacturing processes;
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warning letters;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recalls;
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fines;
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suspension or withdrawal of regulatory approvals;
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refusal to permit the import or export of our products;
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product seizure;
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injunctions or the imposition of civil or criminal penalties; or
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private lawsuits alleging harm caused to subjects or patients.
In addition, the FDA strictly regulates labeling, advertising and promotion of marketed products. A pharmaceutical product that receives FDA approval may only be promoted for FDA-approved
indications and in accordance with the FDA-approved labeling. We may be subject to enforcement and other liability if we inappropriately promote our products.
Our sales depend on payment and reimbursement from third-party payors, and a reduction in the payment rate or reimbursement could result in decreased use or
sales of our products.
Our sales of currently marketed products and our ability to commercialize our products effectively depends substantially on the availability of sufficient coverage and reimbursement from third-party
payors, including U.S. governmental payors such as the Medicare and Medicaid programs, MCOs and private insurers. All of our promoted products are generally well covered by managed care and
private insurance plans. Generally, the status or tier within managed care formularies, which are lists of approved products developed by MCOs, varies but coverage is similar to other products within the
same class of drugs. However, the position of any of our branded products that requires a higher patient copayment may make it more difficult to expand the current market share for such product. In
some cases, MCOs may require additional evidence that a patient had previously failed another therapy, additional paperwork or prior authorization from the MCO before approving reimbursement for a
branded product. Some Medicare Part D plans also cover some or all of our products, but the amount and level of coverage varies from plan to plan. We also participate in the Medicaid Drug Rebate
program with the Centers for Medicare & Medicaid Services (CMS) and submit all of our covered products for inclusion in this program. Coverage of our products under individual state Medicaid
plans varies from state to state. Additionally, our covered products are made available under the 340B Drug Pricing Program, which is codified as Section 340B of the Public Health Service Act. The
340B program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B "ceiling price" for the manufacturer's covered outpatient drugs.
Details of the 340B program, our reliance on payment and reimbursement from third-party payors, and a reduction in the payment rate or reimbursement are discussed in the Business section under the
heading "
Pharmaceutical Pricing and Reimbursement
" in Part I, Item 1, of this Annual Report on Form 10-K.
There have been, there are, and we expect there will continue to be federal and state legislative and administrative proposals that could limit the amount that government health care programs will pay
to reimburse the cost of pharmaceutical and biologic products. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA, created a new Medicare benefit for
prescription drugs. The Deficit Reduction Act of 2005 significantly reduced reimbursement for drugs under the Medicaid program. More recently, there have been proposals to impose federal rebates on
Medicare Part D drugs, requiring federally-mandated rebates on all drugs dispensed to Medicare Part D enrollees or on only those drugs dispensed to certain groups of lower income beneficiaries.
Legislative or administrative acts that reduce reimbursement or result in us owing additional rebates for our products could adversely impact our business.
Details of changes under Health Care Reform, as well as current uncertainties arising as a result of Trump administration and Congressional initiatives, are discussed in the Business section under the
heading "
Effects of Legislation on the Pharmaceutical Industry
" in Part I, Item 1, of this Annual Report on Form 10-K.
In addition, private insurers, such as MCOs, may adopt their own reimbursement reductions in response to federal or state legislation. Any reduction in reimbursement for our products could
materially harm our results of operations. In addition, we believe that the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our
products, which may adversely impact our product sales. Furthermore, when a new product is approved, governmental and private coverage for that product and the amount for which that product will be
reimbursed are uncertain. We cannot predict the availability or amount of reimbursement for our product candidates, and current reimbursement policies for marketed products may change at any
time.
The MMA established a voluntary prescription drug benefit, called Part D, which became effective in 2006 for all Medicare beneficiaries. We cannot be certain that our currently marketed products will
continue to be, or any of our product candidates still in development will be, included in the Medicare prescription drug benefit. Even if our products are included, the private health plans that administer
the Medicare drug benefit can limit the number of prescription drugs that are covered on their formularies in each therapeutic category and class. In addition, private managed care plans and other
government agencies continue to seek price discounts. Because many of these same private health plans administer the Medicare drug benefit, they
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have the ability to influence prescription decisions for
a larger segment of the population. In addition, certain states have proposed or adopted various programs under their Medicaid programs to control drug prices, including price constraints, restrictions on
access to certain products and bulk purchasing of drugs.
If we acquire and market additional products to the market, these products may not be considered cost-effective and reimbursement to the patient may not be available or sufficient to allow us to sell
our product candidates on a competitive basis to a sufficient patient population. We may need to conduct expensive pharmacoeconomic trials in order to demonstrate the cost-effectiveness of our
products and product candidates.
If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be subject to additional
reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We participate in and have certain price reporting obligations to the Medicaid Drug Rebate program and other governmental pricing programs.
Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for
by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B (we currently do not market any Part B
drugs). Those rebates are based on pricing data reported by us on a monthly and quarterly basis to the CMS the federal agency that administers the Medicaid Drug Rebate program. These data include
the average manufacturer price and, in the case of innovator products, the best price for each drug which, in general, represents the lowest price available from the manufacturer to any entity in the United
States in any pricing structure, calculated to include all sales and associated rebates, discounts and other price concessions.
Health Care Reform made significant changes to the Medicaid Drug Rebate program, such as expanding rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid
MCOs as well and changing the definition of average manufacturer price. Health Care Reform also increased the minimum Medicaid rebate; changed the calculation of the rebate for certain innovator
products that qualify as line extensions of existing drugs; and capped the total rebate amount at 100% of the average manufacturer price. Finally, Health Care Reform requires pharmaceutical
manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.
On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid Drug Rebate program under Health Care Reform, which became effective on April 1, 2016.
The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program has and will continue to increase our costs and the complexity of
compliance, has been and will be time-consuming to implement, and could have a material adverse effect on our results of operations, particularly if CMS challenges the approach we take in our
implementation of the final rule.
Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service's 340B drug pricing program in order for federal funds to be
available for the manufacturer's drugs under Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge no more than the 340B "ceiling
price" for the manufacturer's covered outpatient drugs to a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as
hospitals that serve a disproportionate share of low-income patients. Health Care Reform expanded the list of covered entities to include certain free-standing cancer hospitals, critical access hospitals,
rural referral centers and sole community hospitals. The 340B ceiling price is calculated using a statutory formula based on the average manufacturer price and rebate amount for the covered outpatient
drug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under Health Care Reform and CMS's final
regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations.
Health Care Reform obligates the Secretary of HHS, to create regulations and processes to improve the integrity of the 340B program. On January 5, 2017, HRSA issued a final regulation regarding
the calculation of 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities. The effective date of the regulation has
been delayed until July 1, 2018. Implementation of this final rule and the issuance of any other final regulations and guidance could affect our obligations under the 340B program in ways we cannot
anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide
340B discounted pricing on drugs used in the inpatient setting.
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Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by us, governmental or regulatory agencies and the courts. In the case of our
Medicaid pricing data, if we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data
for up to three years after those data originally were due. Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate
program and could result in an overage or underage in our rebate liability for past quarters. Price recalculations also may affect the ceiling price at which we are required to offer our products under the
340B drug discount program.
We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we are found to
have knowingly submitted any false price information to the government, we may be liable for civil monetary penalties. Our failure to submit the required price data on a timely basis could also result in a
civil monetary penalty for each day the information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we
participate in the Medicaid program. In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient
drugs.
CMS and the Office of the Inspector General have pursued manufacturers that were alleged to have failed to report these data to the government in a timely manner. Governmental agencies may also
make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our
submissions will not be found by CMS to be incomplete or incorrect.
Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be
purchased by certain federal agencies and grantees, it also must participate in the Department of Veterans Affairs, (VA), Federal Supply Schedule, (FSS), pricing program. To participate, we are
required to enter into an FSS contract with the VA, under which we must make our innovator "covered drugs" available to the "Big Four" federal agencies - the VA, the Department
of Defense, or DoD, the Public Health Service (PHS), and the Coast Guard - at pricing that is capped pursuant to a statutory federal ceiling price, (FCP), formula set forth in Section 603 of the
Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average non-federal average manufacturer price (Non-FAMP), which manufacturers are required to report on a
quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. In 2017, the civil monetary penalties for the knowing provision of false information
in connection with a Non-FAMP filing was $181,071 for each item of false information. This penalty amount has not yet been updated for 2018.
FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure and certification
requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an
agreed "tracking customer." Further, in addition to the "Big Four" agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. FSS
contractors are permitted to charge FSS purchasers other than the Big Four agencies "negotiated pricing" for covered drugs that is not capped by the FCP; instead, such pricing is negotiated
based on a mandatory disclosure of the contractor's commercial "most favored customer" pricing. We offer the same price to the Big 4 and other government agencies on our FSS
contract.
In addition, pursuant to regulations issued by the DoD TRICARE Management Activity, now the Defense Health Agency, to implement Section 703 of the National Defense Authorization Act for
Fiscal Year 2008, each of our covered drugs is listed on a Section 703 Agreement under which we have agreed to pay rebates on covered drug prescriptions dispensed to TRICARE beneficiaries
by TRICARE network retail pharmacies. Companies are required to list their innovator products on Section 703 Agreements in order for those products to be eligible for DoD formulary
inclusion. The formula for determining the rebate is established in the regulations and our Section 703 Agreement and is based on the difference between the annual Non-FAMP and the FCP (as
described above, these price points are required to be calculated by us under the VHCA).
Our relationships with customers and payors are subject to applicable fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputation harm, and diminished profits and future earnings.
Healthcare providers, payors and others play a primary role in the recommendation and prescription of our products. Our arrangements with third-party payors and customers exposes us to broadly
applicable fraud and abuse and other healthcare laws and regulation that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products.
Applicable federal and state healthcare laws and regulations, include but are not limited to, the following:
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-
The federal healthcare anti-kickback statute prohibits, among other things, any person or entity from knowingly and willfully soliciting, offering, receiving or paying remuneration, directly or indirectly, in
cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or arranging for or recommendation of, any good or service, for which payment may be made, in
whole or in part, under federal healthcare programs such as Medicare and Medicaid. The term "remuneration" has been broadly interpreted to include anything of value. The government can
establish a violation of the anti-kickback statute without proving that a person or entity had actual knowledge of the statute or specific intent to violate. Some courts, as well as certain governmental
guidance, have interpreted the scope of the anti-kickback statute to cover any situation where one purpose of the remuneration is to induce referrals of federal health care program business, even if there
are other legitimate reasons for the remuneration. In addition, the government may assert that a claim including items or services resulting from a violation of the anti-kickback statute constitutes a false or
fraudulent claim for purposes of the False Claims Act. The anti-kickback statute has been applied by government enforcement officials to a number of common business arrangements in the
pharmaceutical industry. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. Those exceptions and safe harbors are drawn
narrowly. Failure to meet all of the requirements of the exception or safe harbor does not make the conduct per se illegal, but the legality of the arrangements will be evaluated based on the totality of the
facts and circumstances. However, there are no safe harbors for many common practices, such as educational and research grants or product support and patient assistance programs. We seek to
comply with the available statutory exceptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback
liability.
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The federal False Claims Act imposes civil penalties, and provides for whistleblower or qui tam actions, against individuals or entities for, among other things,
knowingly presenting, or causing to be presented claims for payment of government funds that are false or fraudulent or knowingly making, or using or causing to be made or used a false record or
statement material to a false or fraudulent claim to avoid, decrease, or conceal an obligation to pay money to the federal government. In recent years, several pharmaceutical and other health care
companies have faced enforcement actions under the False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government health care programs and
providing free product to customers with the expectations that the customers will bill federal programs for the product. Federal enforcement agencies have also showed increased interest in
pharmaceutical companies' product and patient assistance programs, including reimbursement and co-pay support services. Other companies have faced enforcement actions for causing false claims to
be submitted because of the company's marketing the product for unapproved uses. False Claims Act liability is potentially significant because the statute provides for treble
damages and mandatory penalties of $11,181 to $22,363 per false claim or statement. Because of the potential for large monetary damages and penalties, pharmaceutical manufacturers often resolve
allegations without admissions of liability for significant and material amounts. Companies may be required to enter into corporate integrity agreements with the government to avoid exclusion from federal
health care programs. Corporate integrity agreements impose substantial costs on companies to ensure compliance. There are also federal criminal statutes that prohibit making or presenting a false or
fictitious or fraudulent claim to the federal government.
-
The Foreign Corrupt Practices Act and similar anti-bribery laws in countries outside of the U.S., such as the U.K. Bribery Act of 2010, prohibit companies and their intermediaries from making, or
offering or promising to make, improper payments for the purpose of obtaining or retaining business or otherwise seeking favorable treatment.
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The Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program. HIPAA also prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or
document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services.
-
The Open Payments program imposes annual reporting requirements on manufacturers of drugs, devices, or biologics for which payment is available under Medicare, Medicaid or the State Children's
Health Insurance Program, of certain payments and other transfers of value to physicians and teaching hospitals made during the preceding calendar year, and any ownership and investment interests
held by physicians. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1.0 million per year for
"knowing failures") for all payments, transfers of value or ownership or investment interests not appropriately reported. Manufacturers must submit reports by the 90
th
day of
each calendar year.
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-
Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed
by non-governmental third party payors, including private insurers. Several states require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical
products in those states and to report gifts and payments to individual health care providers in those states. Some states also prohibit certain marketing-related activities, including providing gifts, meals or
other items to certain health care providers. Some states restrict the ability of manufacturers to offer co-pay support to patients for certain prescription drugs. Other states and cities require identification
or licensing of state representatives. Some states require pharmaceutical manufacturers to implement compliance programs or marketing codes that are consistent with the May 2003 Office of Inspector
General Compliance Program Guidance for Pharmaceutical Manufacturers, and/or the voluntary PhRMA Code.
We, as well as many other pharmaceutical companies, sponsor prescription drug coupons and other product support agreements to help ensure that financial need does not limit a patient's access to
our products. Co-pay coupon programs and other product and patient assistance programs have received negative publicity related to their use to promote branded pharmaceutical products over less
costly generics and as a strategy to increase drug prices by shielding patients from those price increases. In recent years, other pharmaceutical manufacturers were named in class action lawsuits that
challenged co-pay programs under a variety of federal and state laws. The Office of Inspector General for the HHS has issued additional guidance related to co-pay and patient assistance programs, and
other government enforcement agencies have initiated investigations into and pursued enforcement actions related to other manufacturers' product and patient support programs. We cannot be certain
whether our product and patient support programs will be named in any future similar lawsuits or become subject to government scrutiny.
We attempt to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations, utilizing the expertise of outside experts. However, it is possible that
governmental authorities might conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and
regulations. If our past or present operations, including activities conducted by our sales team or agents, would be found to be in violation of any of these laws or any other governmental regulations that
may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, imprisonment, fines, exclusion from federal health care programs such as Medicare and Medicaid,
and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we do business are found to be not in compliance with applicable laws, they may be
subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Many aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts and their provisions are open to a variety of subjective interpretations and remain subject to
change. This increases the risk of potential violations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert
our management's attention from the operation of our business and damage our reputation.
If we fail to comply with data protection laws and regulations, we could be subject to government enforcement actions (which could include civil or criminal penalties), private litigation and/or
adverse publicity, which could negatively affect our operating results and business.
We are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations,
including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), govern the
collection, use, disclosure, and protection of health-related and other personal information. Failure to comply with data protection laws and regulations could result in government enforcement actions and
create liability for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively affect our operating results and business. In addition, we may obtain
health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to privacy and security requirements under HIPAA, as amended by the Health Information
Technology for Economic and Clinical Health Act. Although we are not directly subject to HIPAA-other than potentially with respect to providing certain employee benefits-we could be subject to criminal
penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA- covered entity in a manner that is not authorized or permitted by HIPAA. HIPAA generally
requires that healthcare providers and other covered entities obtain written authorizations from patients prior to disclosing protected health information of the patient (unless an exception to the
authorization requirement applies). If authorization is required and the patient fails to execute an authorization, or the authorization fails to contain all required provisions, then we may not be allowed
access to and use of the patient's information and our research efforts could be impaired or delayed. Furthermore, use of protected health information that is provided to us pursuant to a valid patient
authorization is subject to the limits set forth in the authorization (e.g., for use in research and in submissions to regulatory authorities for product approvals). In addition, HIPAA does not replace federal,
state, international or other laws that may grant individuals even greater privacy protections.
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Also, the European Parliament has adopted the General Data Protection Regulation (GDPR), which will become effective on May 25, 2018. This regulation replaces the EU's 1995 data protection
directive and shall be the single EU standard across all member states. The GDPR takes a broad view of the types of information that are deemed covered as personal identification information and
contains provisions that require businesses to protect such personal data and the privacy of EU citizens for transactions that occur within EU member states. The GDPR also regulates the exportation of
personal data outside of the EU. Non-compliance with the GDPR could result in significant penalties. Many companies, including our company, are assessing the requirements of the GDPR against
current business practices and preparing for compliance with this regulation once it becomes effective.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. PROPERTIES
In June 2014, we began leasing 6,428 square feet of office space in Morristown, New Jersey, which serves as our corporate headquarters. The term of this original lease was due to expire July 2020
and our lease payment was approximately $15,000 per month, which is subject to certain annual escalators. In January 2015, we amended our lease to add 9,562 square feet of office space for a total of
15,990 square feet for approximately $40,000 per month, which is subject to certain annual escalators and extended the original term of the lease to expire July 31, 2022.
We own approximately 118 acres of undeveloped land in Charleston County, South Carolina, which we acquired in our merger with Golf Trust America, Inc. in March 2010. We are currently trying to
sell this property and as of December 31, 2017 has classified $500,000 of land as held for sale, which is included in prepaid expenses and other current assets on the consolidated balance sheet. The
carrying value reflects the estimated selling price based on market data.
ITEM 3. LEGAL PROCEEDINGS
GlaxoSmithKline (GSK) Arbitration
We were involved in an arbitration proceeding with GSK. GSK claimed damages relating to an alleged breach by us of a covenant pertaining to a pre-existing customer agreement contained in the
Asset Purchase and Sale Agreement (ASPA) relative to Treximet. We asserted counterclaims and defenses under the APSA and also asserted claims against GSK related to breaches of a supply
agreement between the parties. We and GSK entered into the Interim Settlement Agreement under which we agreed to make payments to GSK and escrow additional funds. Additionally, the parties
agreed to submit the matter to binding arbitration.
On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35.0 million, plus interest (estimated to be approximately
$2.0 to $5.0 million). The tribunal also denied our claim that GSK breached its obligations under the supply agreement. After discussions with GSK, an agreement was reached on March 17, 2017, to
amend the Interim Settlement Agreement (Amendment No. 1) whereby we agreed to establish a payment schedule for satisfaction of the current balance of the award. We had already paid to GSK an
aggregate of $16.5 million, including $6.2 million from the escrow account, which was to be applied as an offset to the total award. Pursuant to the amendment, we agreed that the outstanding balance
owing to GSK as of the date of the amendment was approximately $21.5 million and we further agreed to make quarterly installments in amounts totaling $1.0 million in 2017, $3.5 million in 2018 and
approximately $17.0 million in 2019. We recorded the fair value of this settlement in the amount of approximately $18.5 million in our financial statements at December 31, 2016 and recorded $15.3
million as a reduction to net revenues, $1.0 million to selling, general and administrative expense and $2.2 million to interest expense in the year ended December 31, 2016.
On July 20, 2017, we and GSK entered into Amendment No. 2 to the Interim Settlement Agreement. Amendment No. 2 superseded Amendment No. 1 and permitted payment by us to GSK of a
reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the award granted to GSK in the arbitration of certain matters previously disputed by the parties.
Pursuant to Amendment No. 2, we were obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017 and (ii) a payment of $3.2 million due on or before
December 31, 2017. Both of these payments were made as of December 31, 2017. Also pursuant to Amendment No. 2, we agreed that if on or before September 30, 2019,
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we (x) redeem or repurchase
our 4.25% Convertible Notes for greater than 31.00 cents for every one dollar of principal amount outstanding or (y) exchanges such notes for new notes or similar instruments that have a face value
providing such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, we shall, no later than five business days
thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2.0 million. GSK has agreed that for so long as we comply with the
payment terms set forth in the Amendment No. 2, enforcement of the award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the award, and that the
outstanding balance of the Award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. As of December 31, 2017, the Company has recorded $2.0 million as contingent
consideration for the potential payment due by September 30, 2019 and is recorded in Arbitration Award on the Company's consolidated balance sheet at December 31, 2017. Also, the Company recorded
$10.5 million as Gain from legal settlement for the year ended December 31, 2017 pursuant to Amendment No. 2 in the consolidated statements of operations and comprehensive loss.
Recro Gainesville LLC v. Actavis Laboratories FL, Inc., District of Delaware Case Nos. 14-1118, 15-413, 15-1196, and 17-cv-01535; Recro Gainesville LLC v. Alvogen Malta Operations Ltd.,
District of Delaware Case No. 14-1364
Recro is the owner of U.S. Patent Nos. 6,228,398 ("the '398 Patent") and 6,902,742 ("the '742 Patent"), both of which expire on November 1, 2019, and U.S. Patent No.
9,132,096 ("the '096 Patent"), which expires on September 12, 2034. All three patents (collectively, "the Orange Book Patents") are listed in the Orange Book as covering
Zohydro ER with BeadTek. Actavis and Alvogen each filed Abbreviated New Drug Applications ("ANDAs") with the FDA seeking approval of proposed generic versions of Zohydro ER
with BeadTek in 10, 15, 20, 30, 40, and 50 mg dosage strengths. Those ANDAs and amendments thereto contained certifications asserting that the Orange Book Patents are invalid and not
infringed. Pursuant to the Hatch-Waxman Act, Recro brought suit against Actavis on September 3, 2014 and May 21, 2015 for declaratory judgment of infringement of the '398 and '742 Patents,
and on December 23, 2015 for declaratory judgment of infringement of the '096 Patent. In response, Actavis filed counterclaims seeking declaratory judgments of noninfringement and invalidity of
all three Orange Book Patents. Pursuant to the Hatch-Waxman Act, Recro brought suit against Alvogen on November 3, 2014 for declaratory judgment of infringement of the '398 and '742
Patents. In response, Alvogen filed counterclaims seeking declaratory judgments of noninfringement and invalidity of those two patents. On September 13, 2016, Recro and Actavis jointly
filed a stipulation of dismissal of all claims and counterclaims relating to the '398 Patent, and that stipulation was entered by the Court on September 14, 2016. On September 29, 2016, Recro and
Alvogen jointly filed a stipulation of dismissal of all claims and counterclaims then-pending, and that stipulation was entered by the Court on September 30, 2016, ending the case between Recro and
Alvogen. Recro and Actavis participated in a bench trial in the United States District Court for the District of Delaware regarding the '742 and '096 Patents, which was completed on October 7,
2016. During the trial, Actavis declined to pursue its invalidity counterclaims as to both the '742 and '096 Patents. The parties' post-trial submissions regarding the remaining issues of
infringement were filed on November 7, 2016. The 30-month stay for Actavis expired on February 12, 2017 and on February 22, 2017, the United States District Court for the
District of Delaware concluded that Actavis Laboratories FL, Inc.'s proposed generic versions of Zohydro ER with BeadTek infringe U.S. Patent Nos. 9,132,096 (which expires on September 12, 2034) and
6,902,742 (which expires on November 1, 2019). Further, the Court entered an order enjoining Actavis from engaging in the commercial manufacture, use, offer to sell, or sale in the United States, or
importation into the United States of Actavis' ANDA product prior to expiration of these two patents. On March 22, 2017 Actavis filed an appeal, which was fully briefed as of September 13, 2017.
Oral argument in the appeal has not yet been scheduled. On October 30, 2017, Recro brought suit against Actavis for infringement of U.S. Patent No. 9,713,611 ("the '611 Patent"), a
continuation of the '096 Patent that issued on July 25, 2017 and was listed in the Orange Book as covering Zohydro ER with BeadTek. Pernix and Actavis entered into a settlement agreement on January
29, 2018 (discussed further in the litigation described immediately below). That settlement agreement resolved the pending disputes between Recro and Actavis.
Pernix Ireland Pain, Ltd. and Pernix Therapeutics, LLC v. Actavis Laboratories FL, Inc., District of Delaware Case No. 16-138; Pernix Ireland Pain, Ltd. and Pernix Therapeutics, LLC v. Alvogen
Malta Operations, Ltd., District of Delaware Case No. 16-139
Pernix Ireland Pain, Ltd. is the owner of U.S. Patent No. 9,265,760 ("the '760 Patent"), which issued on February 23, 2016, U.S. Patent No. 9,326,982 ("the '982 Patent"),
which issued on May 3, 2016, U.S. Patent No. 9,333,201 ("the '201 Patent"), which issued on May 10, 2016, and U.S. Patent No. 9,339,499 ("the '499 Patent"), which issued on
May 17, 2016 (collectively, the "Pernix Zohydro ER Patents"). The Pernix Zohydro ER Patents are listed in the Orange Book as covering Zohydro ER with BeadTek. Pernix
Therapeutics, LLC is the exclusive licensee of the Pernix Zohydro ER Patents and is the sole distributor of Zohydro ER with BeadTek in the United States. As discussed above, Actavis and Alvogen
("Defendants") each filed ANDAs with the FDA seeking approval of proposed generic versions of Zohydro ER with BeadTek in 10, 15, 20, 30,
40, and 50 mg dosage strengths, and litigation regarding those ANDAs is ongoing in the District
53
of Delaware in Recro Gainesville LLC v. Actavis Laboratories FL, Inc.,
Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue and other costs. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe the following critical accounting policies affect the significant judgments and estimates
used in the preparation of our consolidated financial statements:
Items deducted from gross product sales.
Revenues from sales of products are recorded net of governmental rebates and rebates under managed care plans, estimated allowances for
product returns, government chargebacks, prompt pay discounts, patient coupon programs and specialty distributor and wholesaler fees. Calculating certain of these items involves estimates and
judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in applicable regulation and guidelines that would impact the amount of the
actual rebates, our expectations regarding future utilization rates and channel inventory data. We review the adequacy of our provision for sales deductions on a quarterly basis. Amounts accrued for
sales deductions are adjusted when trends or significant events indicate that an adjustment is appropriate and to reflect actual experience. The most significant items deducted from gross product sales
where we exercise judgment are product returns, rebates and chargebacks.
The following table sets forth a summary of our allowances for product returns, government program rebates and price adjustments as of December 31, 2017 and 2016:
Product Returns
. Consistent with industry practice, we offer contractual return rights that allow our customers to return short-dated or expiring products within an 18-month period, commencing
from six months prior to and up to twelve months subsequent to the product expiration date. Our products have expiration periods ranging from 15 to 42 months after the date of manufacture. We
account for product returns as a reduction in net revenue at the time of sale. Product returns are recognized by establishing an accrual in an amount equal to the estimated value of the products expected
to be returned. We adjust our estimate of product returns if we become aware of other factors that we believe could significantly impact our expected returns. These factors include our estimate of
inventory levels of our products within the distribution channel, the shelf life of shipped product, review of consumer consumption data as reported by external information management companies, actual
and historical return rates for expired lots, the forecast of future sales of the product, competitive issues such as new product entrants and other known changes in sales trends. We estimate returns at
percentages up to 10% of sales of branded products and generic products and, from time to time, higher on launch return percentages for sales of new products. Returns estimates are
based upon historical data and other facts and circumstances that may impact future expected returns to derive an average return percentage for our products. The returns reserve is reviewed quarterly
and adjusted as warranted. If estimates regarding product demand are inaccurate, if changes in the competitive environment affect demand for certain products, or if other unforeseen circumstances affect
a product's salability, actual returns could differ and such differences could be material.
Government Program Rebates
. The liability for Medicaid, Medicare and other government program rebates is estimated based on historical and current rebate redemption and utilization rates
contractually submitted by each state's program administrator and assumptions regarding future government program utilization for each product sold. As we become aware of changing circumstances
regarding the Medicaid, Medicare or other government-sponsored program coverage of our products, we will incorporate such changing circumstances into the estimates and assumptions that we use to
calculate government program rebates. Estimating these rebates is complex, in part due to the time delay between the date of sale and the actual settlement of the liability. We believe that the
methodology we use to estimate rebates on product sales made under governmental pricing programs is reasonable and appropriate given current facts and circumstances. However, estimates may vary
from actual expense. If our estimates and assumptions prove inaccurate, we may be subject to higher or lower government program rebates.
Price Adjustments
. Our estimates of price adjustments which include coupons, customer rebates, service fees, chargebacks, shelf stock adjustments, fees and other discounts are based on
our estimated mix of sales to various third-party payors who are entitled either contractually or statutorily to discounts from the listed prices of our products and contracted service fees with our
wholesalers. We account for the costs of these special promotional programs as a reduction of gross revenue when applicable products are sold to the wholesalers or other retailers. Any price
adjustments that are not contractual but that are offered at the time of sale are recorded as a reduction of revenue when the sales order is recorded. These adjustments are not accrued as they are
offered on a non-recurring basis at the time of sale and are recorded as an expense at the time of the sale. These allowances may be offered at varying times throughout the year or may be associated
with specific events such as a new product launch or to reintroduce a product. In the event that the sales mix to third-party payors or the contract fees paid to the wholesalers are different from our
estimates, we may be required to pay higher or lower total price adjustments than originally estimated. Additional information regarding types of price adjustments are discussed below:
Coupons.
To help patients afford our products, we have various co-pay coupon programs for certain products. We estimate our liabilities for these coupon programs based on redemption
information provided by third-party claims processing organizations.
Customer rebates
. We offer customer rebates on many of our products. We generally account for these programs by establishing an accrual based on our estimate of the rebate incentives
attributable to a sale. We accrue our estimates based on historical experience and other relevant factors. We adjust our accruals periodically throughout each quarter based on actual experiences and
changes in other factors, if any, to ensure the balance is fairly stated.
Chargebacks
. These deductions relate to our contractual agreements to sell products to group purchasing organizations and other indirect customers at contractual prices that are lower than
the list prices that we charge to wholesalers. When these group purchasing organizations or other indirect customers purchase our products through a wholesaler at a reduced price, the wholesaler
charges for the difference between the price they paid us and the price at which they sold the product to the indirect customer. The primary factors that we consider in developing and evaluating our
provision for chargebacks include: (i) the average historical chargeback credits, (ii) estimated future sales trends and (iii) an estimate of the inventory held by our wholesalers based on internal analysis of
a wholesaler's historical purchases and contract sales.
Shelf stock adjustments
. These deductions are credits issued to our customers to reflect decreases in the selling prices of our products. These credits are customary in the industry and are
intended to reduce a customer's inventory cost to better reflect current market prices. The primary factors that we consider when deciding whether to record a reserve for a shelf-stock adjustment include:
(i) the estimated number of competing products being launched as well as the expected launch date, which we determine based on market intelligence, (ii) the estimated decline in the market price of our
product, which we determine based on historical experience and customer input and (iii) the estimated levels of inventory held by our customers at the time of the anticipated decrease in market price,
which we determine based upon historical experience and customer input.
Prompt payment discounts
. We typically require our customers to remit payments within the first 30 days for branded products and within 60 to 75 days for generics, depending on the
customer and the products purchased. We offer wholesale distributors a prompt payment discount if they make payments within these deadlines. This discount is generally two percent but may be higher
in some instances due to product launches and/or industry expectations. As our wholesale distributors typically take advantage of the prompt pay discount, we accrue 100% of the prompt pay discounts,
based on the gross amount of each invoice, at the time of our original sale, and apply earned discounts at the time of payment. This allowance is recorded as a reduction of accounts receivable and
revenue. We adjust the accrual periodically to reflect actual experience. Historically, these adjustments have not been material. We do not anticipate that future changes to our estimates of prompt
payment discounts will have a material impact on our net revenue.
Milestone payments.
We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part
on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance and its achievability was not reasonably assured at the inception of the collaboration
arrangement and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned and (iii) it would result in additional payments being due to
us. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other
milestones in the arrangement and the related risk associated with the achievement of the milestone. Any amounts received under the promotion arrangement in advance of performance, if deemed
substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations.
Inventory primarily consists of finished goods, which include pharmaceutical products ready for commercial sale. Inventory is stated at the actual cost per bottle determined under the specific
identification method. Our estimate of the net realizable value of our inventories is subject to judgment and estimation. The actual net realizable value of our inventories could vary significantly from our
estimates and could have a material impact on our financial condition and results of operations in any reporting period. An allowance for slow-moving or obsolete inventory or declines in the value of
inventory is determined based on management's assessments. The raw materials that we have in inventory are provided to certain of our manufacturers to utilize in the manufacture of our products and,
from time to time, are sold to other companies to utilize in their own products.
We grant options to purchase our common stock to our employees and directors under our stock option plans. For options with market conditions, we use the Monte Carlo simulation to value the
awards. For other options which vest based on the passage of time, we estimate the fair value on the date of grant using a Black-Scholes pricing model (Black-Scholes model). The fair value of our
restricted stock units is equal to the market price of our stock at the date of grant. The determination of the fair value of share-based payment awards on the date of grant using the Black-Scholes model is
affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the
expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. If factors change and we employ different assumptions in
future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
Estimates of share-based compensation expenses are significant to our financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by
us.
There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods
and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.
For purposes of estimating the fair value of stock options granted using the Black-Scholes model, we have made an estimate regarding our stock price volatility. We consider the historical volatility
and the implied volatility of market-traded options in our stock for the expected volatility assumption input to the Black-Scholes model. The risk-free interest rate is based on the yield curve of U.S.
Treasury strip securities for a period consistent with the expected term of the option in effect at the time of grant. The dividend yield assumption is based on our history and expectation of dividend
payouts. The expected term is estimated considering historical option information.
We assess the impairment of long-lived assets, intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment
based on a probability weighted projected discounted cash flow method using a discount rate determined to be commensurate with the risk inherent in our current business model.
Intangibles represent the fair value of product rights purchased. Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and
reviewed for impairment if certain events occur.
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment
at least annually, or sooner if circumstances indicate that an impairment might have occurred.
Since our inception, we have not engaged in any off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities.
We do not believe that inflation has had a significant impact on our revenues or results of operations since inception.
We expect that sales in the first quarter of each year will be lower than they may otherwise be due to increased patient out-of-pocket costs until deductibles under applicable plans are met.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Pernix Therapeutics Holdings, Inc. and Subsidiaries
Table of Contents
We have audited the accompanying consolidated balance sheets of Pernix Therapeutics Holdings, Inc. and subsidiaries (collectively, the Company) as of December 31, 2017 and 2016, and the
related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and
schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding of the internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.