FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
|
December 31, 2007
(Unaudited)
|
March 31, 2007
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
Cash (including cash equivalent
investments
of $784,732 in
December and $556,586 in March)
|
$ 789,709
|
$ 563,663
|
Marketable securities
|
967,593
|
788,951
|
Accounts receivable, less allowance for
doubtful accounts
of $20,446 in
December and $20,033 in March
|
404,387
|
382,655
|
Inventories, net
|
438,142
|
434,163
|
Deferred income taxes
|
229,454
|
226,433
|
Other current assets
|
35,329
|
26,852
|
Total current
assets
|
2,864,614
|
2,422,717
|
|
|
|
Marketable securities
|
823,303
|
660,392
|
|
|
|
Property, plant and equipment
|
556,047
|
532,861
|
Less: accumulated depreciation
|
205,359
|
171,775
|
|
350,688
|
361,086
|
Other assets:
Goodwill
|
14,965
|
14,965
|
License agreements, product rights and
other
intangibles, less
accumulated amortization
of $409,008 in
December and $377,219 in March
|
170,601
|
157,049
|
Deferred income taxes
|
56,202
|
27,681
|
Other assets
|
1,593
|
9,482
|
Total other
assets
|
243,361
|
209,177
|
|
|
|
Total
assets
|
$4,281,966
|
$3,653,372
|
|
========
|
========
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except for par values)
|
December 31, 2007
(Unaudited)
|
March 31, 2007
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Current liabilities:
Accounts payable
|
$ 165,760
|
$ 154,614
|
Accrued expenses
|
356,466
|
332,995
|
Income taxes payable
|
43,103
|
139,999
|
Total current
liabilities
|
565,329
|
627,608
|
|
|
|
Long-term liabilities:
Income taxes payable
|
191,266
|
|
Deferred income taxes
|
899
|
951
|
|
192,165
|
951
|
|
|
|
Stockholders' equity:
Series preferred stock, $1.00 par; shares
authorized 1,000;
no shares issued or
outstanding
|
|
|
Common stock, $.10 par; shares
authorized 1,000,000; issued
421,388 shares in
December and 420,695 shares in March
|
42,139
|
42,069
|
Additional paid-in capital
|
1,421,670
|
1,354,264
|
Retained earnings
|
5,438,723
|
4,657,356
|
Accumulated other comprehensive
income
|
29,279
|
21,879
|
Treasury stock, at cost
|
|
|
(110,023
shares in December and 101,143 shares in March)
|
(
3,407,339
)
|
(
3,050,755
)
|
Total
stockholders' equity
|
3,524,472
|
3,024,813
|
|
|
|
Total
liabilities and stockholders' equity
|
$4,281,966
|
$3,653,372
|
|
========
|
========
|
See notes to condensed consolidated financial
statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
|
Three Months
Ended
December
31,
|
Nine Months
Ended
December
31,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Net sales
|
$918,146
|
$830,431
|
$2,603,099
|
$2,367,875
|
Contract revenue
|
52,705
|
38,914
|
156,395
|
130,485
|
Interest income
|
25,862
|
22,577
|
77,532
|
56,330
|
Other income
|
1,529
|
1,109
|
8,450
|
1,654
|
|
998,242
|
893,031
|
2,845,476
|
2,556,344
|
|
|
|
|
|
Costs and expenses:
Cost of sales
|
213,506
|
195,539
|
589,738
|
556,322
|
Selling, general and administrative
|
285,652
|
268,626
|
827,419
|
772,017
|
Research and development
|
108,246
|
112,029
|
415,892
|
344,863
|
|
607,404
|
576,194
|
1,833,049
|
1,673,202
|
|
|
|
|
|
Income before income tax expense
|
390,838
|
316,837
|
1,012,427
|
883,142
|
|
|
|
|
|
Income tax expense
|
89,081
|
66,536
|
217,264
|
191,123
|
|
|
|
|
|
Net income
|
$301,757
|
$250,301
|
$ 795,163
|
$ 692,019
|
|
=======
|
=======
|
========
|
========
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$0.97
|
$0.79
|
$2.52
|
$2.17
|
|
====
|
====
|
====
|
====
|
Diluted
|
$0.96
|
$0.78
|
$2.51
|
$2.14
|
|
====
|
====
|
====
|
====
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
312,140
|
316,200
|
315,729
|
318,512
|
|
======
|
======
|
======
|
======
|
Diluted
|
313,107
|
320,363
|
317,279
|
323,048
|
|
======
|
======
|
======
|
======
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
Three Months Ended
December
31,
|
Nine Months
Ended
December
31,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Net income
|
$301,757
|
$250,301
|
$795,163
|
$692,019
|
Other comprehensive income (loss)
|
(
1,077
)
|
6,083
|
7,400
|
14,054
|
|
|
|
|
|
Comprehensive income
|
$300,680
|
$256,384
|
$802,563
|
$706,073
|
|
=======
|
=======
|
=======
|
=======
|
See notes to condensed consolidated financial
statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
Nine Months
Ended
|
(In thousands)
|
December
31,
|
|
2007
|
2006
|
Cash flows from operating activities:
|
|
|
Net income
|
$ 795,163
|
$ 692,019
|
Adjustments to reconcile net income to
|
|
|
net cash provided by operating
activities:
|
|
|
Depreciation
|
34,988
|
33,815
|
Amortization and
impairments
|
31,789
|
46,554
|
Stock-based
compensation expense
|
30,719
|
28,056
|
Deferred income tax
benefit
|
( 24,209)
|
( 33,348)
|
Foreign currency
transaction gain
|
( 1,420)
|
( 632)
|
Net change in
operating assets and liabilities:
|
|
|
Decrease
(increase) in:
|
|
|
Accounts
receivable, net
|
( 21,732)
|
( 14,868)
|
Inventories,
net
|
( 3,979)
|
202,169
|
Other
current assets
|
( 8,476)
|
( 10,233)
|
Other
assets
|
7,889
|
46
|
Increase
(decrease) in:
|
|
|
Accounts
payable
|
11,146
|
( 5,630)
|
Accrued
expenses
|
23,471
|
66,916
|
Income
taxes payable
|
80,574
|
44,960
|
Net
cash provided by operating activities
|
955,923
|
1,049,824
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property, plant and equipment,
net
|
( 23,906)
|
( 23,118)
|
Purchase of marketable securities
|
( 2,062,330)
|
( 1,793,461)
|
Redemption of marketable securities
|
1,720,777
|
1,554,881
|
Purchase of license agreements, product rights
and
other intangibles
|
(
45,000
)
|
|
Net
cash used in investing activities
|
(
410,459
)
|
(
261,698
)
|
|
|
|
Cash flows from financing activities:
|
|
|
Net proceeds from common stock options
exercised
by employees under stock option
plans
|
25,672
|
155,266
|
Tax benefit realized from the exercise of
stock
options by employees
|
3,442
|
52,655
|
Purchase of treasury stock
|
(
356,327
)
|
(
472,279
)
|
Net
cash used in financing activities
|
(
327,213
)
|
(
264,358
)
|
|
|
|
Effect of exchange rate changes on cash
|
7,795
|
12,955
|
Increase in cash and cash equivalents
|
226,046
|
536,723
|
Cash and cash equivalents, beginning of period
|
563,663
|
414,579
|
Cash and cash equivalents, end of period
|
$ 789,709
|
$ 951,302
|
|
========
|
========
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
Income taxes
|
$157,512
|
$127,067
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
(In
thousands)
:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended December 31, 2007
are not necessarily indicative of the results that may be expected
for the year ending March 31, 2008. For further information refer
to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form
10-K for the year ended March 31, 2007.
2. Accounts
Receivable:
Accounts receivable, net, consists of the
following:
|
December 31, 2007
|
|
|
(In thousands)
|
(Unaudited)
|
|
March 31, 2007
|
|
|
|
|
Trade
|
$337,329
|
|
$330,580
|
Other
|
67,058
|
|
52,075
|
|
$404,387
|
|
$382,655
|
|
=======
|
|
=======
|
3. Inventories:
Inventories, net of reserves for obsolescence,
consist of the following:
|
December 31, 2007
|
|
|
(In thousands)
|
(Unaudited)
|
|
March 31, 2007
|
|
|
|
|
Raw materials
|
$252,886
|
|
$257,042
|
Work in process
|
1,870
|
|
8,449
|
Finished goods
|
183,386
|
|
168,672
|
|
$438,142
|
|
$434,163
|
|
=======
|
|
=======
|
4. Net Income Per Share
(In
thousands)
:
A reconciliation of shares used in calculating basic and diluted
net income per share follows:
|
Three Months Ended
December 31,
|
Nine Months Ended
December
31,
|
|
2007
|
2006
|
2007
|
2006
|
Basic
|
312,140
|
316,200
|
315,729
|
318,512
|
Effect of assumed conversion of
employee stock options
|
967
|
4,163
|
1,550
|
4,536
|
Diluted
|
313,107
|
320,363
|
317,279
|
323,048
|
|
======
|
======
|
======
|
======
|
Options to purchase approximately 14,516 shares of common stock
at exercise prices ranging from $36.50 to $76.66 per share and
options to purchase approximately 11,604 shares of common stock at
exercise prices ranging from $36.50 to $76.66 per share that were
outstanding during a portion of the three and nine-month periods
ended December 31, 2007, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive. These options expire through 2017. Options to
purchase approximately 3,526 shares of common stock at exercise
prices ranging from $50.56 to $76.66 per share and options to
purchase approximately 6,923 shares of common stock at exercise
prices ranging from $45.76 to $76.66 per share that were
outstanding during a portion of the three and nine-month periods
ended December 31, 2006, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive. These options expire through 2016.
5. Stock-Based Compensation
(In
thousands)
:
In August 2007 the stockholders of the Company voted to adopt
the 2007 Equity Incentive Plan (the 2007 Plan) which replaces and
supersedes all prior Stock Option Plans. The 2007 Plan
provides for the granting of incentive and nonqualified stock
options, restricted stock, stock appreciation rights and stock
equivalent units. These awards generally vest in three to
five years. Stock option grants may be exercisable for up to
ten years from the date of issuance. As of December 31, 2007,
13,950 shares were authorized and 10,464 were available for grant
under the 2007 Plan.
Effective April 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" (SFAS 123R). During the nine months
ended December 31, 2007, the Board of Directors awarded stock
options and restricted stock to employees and non-employee
directors. The fair value for stock options is calculated
using the Black-Scholes valuation model and restricted stock is
accounted for at fair value based upon the average high and low
stock price on the date of grant. These compensation costs
are amortized on an even basis (net of estimated forfeitures) over
the requisite service period. The Company has never awarded
stock options or restricted stock below market price on the date of
grant.
Compensation expense of $10,641 ($8,968 net of tax) and $30,719
($25,964 net of tax) was recorded for the three and nine-month
periods ended December 31, 2007. For the three and nine-month
periods ended December 31, 2006, compensation expense of $10,158
($8,597 net of tax) and $28,056 ($23,812 net of tax) was recorded.
This expense was charged to cost of sales, selling, general and
administrative and research and development expense, as
appropriate. Amounts capitalized as part of inventory costs were
not significant.
The weighted average number of diluted common shares outstanding
is reduced by the treasury stock method which, in accordance with
SFAS 123R, takes into consideration the compensation cost
attributed to future services not yet recognized.
6. Business Segment Information:
The Company operates in only one segment. Below is a breakdown
of net sales by therapeutic class:
(In thousands)
|
Three Months Ended
December
31,
|
Nine Months
Ended
December
31,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Central nervous system (CNS)
|
$825,843
|
$728,844
|
$2,330,320
|
$2,077,907
|
Cardiovascular
|
6,478
|
11,734
|
21,746
|
41,055
|
Other
|
85,825
|
89,853
|
251,033
|
248,913
|
|
$918,146
|
$830,431
|
$2,603,099
|
$2,367,875
|
|
=======
|
=======
|
========
|
========
|
7. Long Term Debt
On December 7, 2007, the Company established a $500 million
revolving credit facility for the purpose of providing additional
financial liquidity for the financing of business development and
corporate strategic initiatives. The facility can be increased up
to $750 million based upon agreement with the participating lenders
and expires on December 7, 2012. As of February 8, 2007, the
Company has not drawn any funds from the available credit. The
utilization of the revolving credit facility is subject to the
adherence to certain financial covenants such as leverage and
interest coverage ratios.
8. Income
Taxes
(In thousands)
:
On April 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Interpretation (FIN
48), "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". As a result of the
adoption of FIN 48, the Company increased its tax liabilities by
$13,796 with a corresponding reduction to the April 1, 2007 balance
of retained earnings. In addition, accrued interest related to
unrecognized tax benefits totaled $11,576 as of April 1, 2007.
Interest and penalties, if any, are recorded in income tax expense
and are classified on the balance sheet with the related tax
liability. Unrecognized tax benefits totaling $152,695 have been
reclassified from current income taxes payable to long-term income
taxes payable and totaled $191,266 at December 31, 2007 based on
the Company’s expectation of cash payments within the next
twelve months.
The Company and its subsidiaries file a consolidated U.S.
federal income tax return.
The Company is subject to income taxes in the United States and
several foreign jurisdictions. Significant judgment is required in
determining the worldwide provision for income taxes. The
Company’s tax returns are routinely audited by U.S. federal
and state as well as foreign tax authorities. The Company accrues
liabilities for identified tax contingencies that result from
positions taken by the Company that are being challenged or could
be challenged by tax authorities. The Company believes that its
accrual for tax liabilities is adequate for all open years, based
on Management’s assessment of many factors, including its
interpretations of the tax law and judgments about potential
actions by tax authorities. However, it is possible that the
ultimate resolution of any tax audit may be materially greater or
lower than the amount accrued.
The Company’s income tax returns for fiscal years prior to
1999 are no longer subject to review as such fiscal years are
generally closed. Tax authorities in various jurisdictions are in
the process of reviewing the Company’s tax returns for
various post-1999 fiscal years, including the Internal Revenue
Service (IRS), which has recently concluded its examination of the
Company’s U.S. federal income tax returns for fiscal years
2002 and 2003.
In connection with that examination, in July 2007, the IRS
issued a notice of proposed adjustment primarily relating to the
Company’s intercompany transfer pricing methodology. On
November 5, 2007, the IRS issued a Revenue Agent Report which seeks
to assess approximately $206.7 million of additional U.S.
corporation income tax relating to the examination period,
excluding interest and penalties.
The Company continues to disagree with the IRS position and
adjustment because it believes that it is inconsistent with
applicable tax laws and the Company intends to defend its position
vigorously. In accordance with the Company’s taxpayer appeals
rights, a formal written protest of the proposed adjustment was
filed with the IRS on January 7, 2008, for the issue to be resolved
via an administrative appeals proceeding.
While the resolution of this issue may result in tax liabilities
that are greater or less than the reserves established, Management
believes that the ultimate resolution will not have a material
effect on the Company’s financial position or liquidity. If
the IRS prevails in a position that increases the U.S. tax
liability in excess of established reserves, it is likely that the
IRS could make similar claims for years subsequent to fiscal 2003
which could be material.
FOREST LABORATORIES,
INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in thousands)
Total net revenues increased for the quarter and nine months
ended December 2007 due to growth of our key marketed products
Lexapro® and Namenda® and higher co-promotion income from
Benicar®. During the December 2007 quarter, we signed an
agreement with Daiichi Sankyo to co-promote Azor™. Azor is a
once-daily combination of amlodipine and olmesartan medoxomil
(Benicar) for the treatment of hypertension. Under the terms of the
agreement, we will co-promote the product for a period of three
years and receive co-promotion fees based on net sales. We will
receive residual fees at a reduced rate for the three years
following the co-promotion period. In conjunction with the signing
of the agreement, we paid Daiichi Sankyo $20,000.
On December 18, 2007, the FDA approved our novel beta blocker
Bystolic™ (nebivolol) for the treatment of hypertension. We
licensed the U.S. and Canadian rights to Bystolic from Mylan Inc.
(Mylan) in January 2006. Pursuant to that licensing agreement, we
made a milestone payment of $25,000 upon FDA approval. Our
salesforce launched the product on January 28, 2008.
On January 22, 2008, we entered into an agreement with Novexel,
S.A. (Novexel) for the development, manufacture and
commercialization of Novexel’s novel intravenous beta
lactamase inhibitor, NXL 104 in combination with Forest’s
ceftaroline. NXL 104 is designed to be co-administered with select
antibiotics to enhance their spectrum of activity. Under the terms
of the agreement, we will receive the exclusive rights to
administer NXL 104 with ceftaroline as a combination product in
North America. We intend to initiate Phase I studies of the
ceftaroline/NXL 104 combination in fiscal 2009. Pursuant to the
agreement, we paid Novexel an upfront license payment of
approximately $110,000, which was charged to research and
development expense.
Financial Condition and Liquidity
Net current assets increased by $504,176 from March 31, 2007.
Cash and cash equivalents, short-term marketable securities and
trade accounts receivable increased due to ongoing operations.
During the June 2007 quarter, pursuant to the 2007 Repurchase
Program, we repurchased 1.8 million shares at a cost of $86,003, in
the September quarter we repurchased 4.95 million shares at a cost
of $188,801 and in the current quarter we repurchased 2.125 million
shares at a cost of $81,523, leaving 15.8 million shares still
available for repurchase under the program. Long-term marketable
securities increased as certain funds, not required to fund the
share repurchase program, were shifted to longer-term in order to
receive more favorable rates of return. Of our total cash and
marketable securities position at December 31, 2007, 31%, or about
$789,000, is domiciled domestically, with the remainder held by our
international subsidiaries. Inventories overall increased slightly
during the period primarily to support the launch of Bystolic. We
believe that current inventory levels are adequate to support the
growth in our ongoing business. Other current assets increased
primarily from the prepayment of meeting expenses related to the
Bystolic launch and the renewal of insurance programs in the June
2007 quarter, which are paid in full at the time of renewal and
expensed over the life of the policy years. License agreements,
product rights and other intangibles before accumulated
amortization increased from March 31, 2007 as a result of two
agreements in the current quarter. In October 2007, we paid Daiichi
Sankyo $20,000 in connection with the co-promotion agreement for
Azor. In December 2007, we paid $25,000 to Mylan upon FDA approval
of Bystolic. Non-current deferred income taxes increased as a
result of an upfront licensing charge during the September 2007
quarter in connection with the collaboration agreement with
Microbia, Inc. (Microbia) for the right to co-develop and co-market
linaclotide. Increases in accounts payable and accrued expenses
were due to normal operating activities.
Property, plant and equipment before accumulated depreciation
increased from March 31, 2007. During the September 2007 quarter,
we completed the refurbishment of a 90,000 square foot facility in
Ireland which will provide additional capacity for the
manufacturing of Lexapro and Namenda and capacity for future
products. We also continued to make technology investments to
expand our principal operating systems to enhance supply chain and
salesforce applications.
On April 1, 2007, we adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation (FIN 48),
"Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109". As a result of the adoption of FIN 48, we
increased our tax liabilities by $13,796 with a corresponding
reduction to the April 1, 2007 balance in retained earnings. In
addition, accrued interest, related to unrecognized tax benefits
totaled $11,576 as of April 1, 2007. Interest and penalties, if
any, are recorded in income tax expense and are classified on the
balance sheet with the related tax liability. Unrecognized tax
benefits totaling $152,695 have been reclassified from current
income taxes payable to long-term income taxes payable and totaled
$191,266 at December 31, 2007 based on our expectation of cash
payments within the next twelve months.
During fiscal 2007 our Board of Directors (Board) approved the
2007 Repurchase Program which authorized the purchase of up to 25
million shares of common stock. On August 13, 2007 the Board
authorized the purchase of an additional 10 million shares of
common stock. For the nine months ended December 31, 2007, we have
repurchased a total of 8.875 million shares at a cost of $356,327.
As of February 8, 2008, we have repurchased a total of 19.2 million
shares at a cost of $828,606 under the 2007 Repurchase Program,
leaving us the authority to purchase 15.8 million more shares.
Management believes that current cash levels, coupled with funds
to be generated by ongoing operations, will continue to provide
adequate liquidity to facilitate potential acquisitions of
products, payment of achieved milestones, capital investments and
the continued share repurchases.
Results of Operations
Net sales for the three and nine-month periods ended December
31, 2007 increased 11% and 10%, respectively, from the same periods
last year to $918,146 and $2,603,099, primarily due to strong sales
of Lexapro and Namenda. Lexapro, our SSRI for the treatment of
depression and anxiety in adults and our most significant product,
with net sales of $603,454 and $1,714,830 for the quarter and nine
months, grew 11% and 9%, respectively, and contributed $57,599 and
$139,280 to the net sales change, of which $33,019 and $59,009 was
due to volume and $24,580 and $80,271 was due to price.
Lexapro’s patent is set to expire in March 2012. Caraco
Pharmaceutical Laboratories, Ltd. (Caraco), a generic manufacturer,
has filed an ANDA with a Paragraph IV Certification for a generic
equivalent to Lexapro. Forest, along with our licensing partner, H.
Lundbeck A/S filed a lawsuit in the U.S. District Court for the
Eastern District of Michigan against Caraco for patent
infringement.
Net sales of Namenda, an N-methyl-D-aspartate (NMDA) receptor
antagonist for the treatment of moderate to severe Alzheimer's
disease, grew 26% in both the current quarter and nine months ended
December 31, 2007 and totaled $218,735 and $603,325, respectively.
This represents an increase of $44,853 and $122,776 as compared to
the same periods last year, of which $35,926 and $95,759 was due to
volume and $8,927 and $27,017 was due to price. During the December
quarter, we received notification from several companies that they
filed ANDA’s with Paragraph IV Certifications to obtain
approval to market generic equivalents of Namenda. In January 2008,
we along with our licensing partner Merz Pharma GmbH & Co. KgaA
filed lawsuits in the U.S. District Court for the District of
Delaware against several companies for patent infringement.
Namenda’s patent is set to expire in April 2010. We have
applied for patent term restoration which, if granted, would extend
Namenda’s patent protection until September 2013.
The remainder of the net sales change for the periods presented
was due to price and volume fluctuations of our older non-promoted
product lines.
Contract revenue for the three and nine months ended December
31, 2007 was $52,705 and $156,395, respectively, compared to
$38,914 and $130,485 in the same periods last year primarily due to
co-promotion income from our co-marketing agreement with Daiichi
Sankyo for Benicar of $51,753 and $153,868, respectively, as
compared to $38,664 and $128,695 last year. Under the terms of the
agreement, fiscal 2008 is the final year of co-promotion activities
and accordingly, beginning in fiscal 2009 we will receive a reduced
share of product profits over the remaining six year term of the
agreement.
Interest income for the current quarter increased over the same
period last year primarily due to interest received on higher
levels of invested funds offset by lower average rates of
return.
Cost of sales as a percentage of net sales was 23.3% and 22.7%
for the three and nine-month periods of the current year as
compared with 23.5% for the three and nine-month periods of the
prior year.
Selling, general and administrative expenses increased $17,026
and $55,402 for the three and nine-month periods ended December 31,
2007 as compared to the same periods last year. The increase was
primarily attributable to salesforce activity and promotional
support for products currently marketed as well as launch and
pre-launch costs for Bystolic and milnacipran.
Research and development expense decreased $3,783 for the
quarter ended December 31, 2007. In the current quarter, we paid
$5,000 in connection with a development milestone compared to
$20,000 in the same period last year. For the nine-month period
ended December 31, 2007, research and development expense increased
$71,029. During the current nine-month period we incurred the
following one-time charges: in September 2007 we recorded a $70,000
licensing charge in connection with the collaboration agreement
with Microbia for the right to co-develop and co-market
linaclotide. Linaclotide, which is currently in Phase II testing,
is being investigated for the treatment of constipation-predominant
irritable bowel syndrome and chronic constipation. During the June
2007 quarter we recorded approximately $28,000 in milestone
expenses related to the aclidinium and milnacipran development
programs. During the nine months ended December 2006, we recorded a
one-time $60,000 licensing charge in connection with our
collaboration agreement with Laboratorios Almirall, S.A. (Almirall)
for the U.S. rights to aclidinium.
Research and development expense also reflects ongoing costs
related to the following:
·
During the fourth quarter of
fiscal 2006, we entered into an agreement with Mylan for the
commercialization, development and distribution rights for
nebivolol, a novel beta blocker. On December 18, 2007, we received
FDA approval for Bystolic (nebivolol) for the treatment of
hypertension. We plan to meet with the FDA regarding a
potential regulatory pathway for an additional indication of CHF.
Janssen Pharmaceutica N.V. (Janssen), the owner of U.S.
Patent No. 6,545,040 (RE 90/008,356) (the ‘040 Patent), which
is included in the rights licensed to us for nebivolol, received an
Office Action from the U.S. Patent and Trademark Office (the
Office) in response to a preliminary statement in a reexamination
proceeding commenced by Janssen of such patent. The
‘040 patent is directed to the pharmaceutical composition for
nebivolol and the method of treating hypertension using nebivolol.
The patent examiner has rejected the claims of the ‘040
Patent in view of the prior art cited by the patent owner.
This initial action, which is how the Office raises issues with the
patent owner, will now be followed by Janssen’s response,
which Janssen has indicated it will file by February 13,
2008. While there can be no assurance that Janssen will
prevail, we believe that some or all of the claims will be
successfully restored.
·
In December 2007, we
submitted a New Drug Application (NDA) for milnacipran based on
efficacy and safety data from two pivotal Phase III trials
involving over two thousand patients in which milnacipran
demonstrated improvement compared to placebo. We expect results
from a third randomized pivotal Phase III study in calendar
2008.
·
In connection with our
acquisition of Cerexa, Inc. in January 2007, we acquired worldwide
development and marketing rights (excluding Japan) to ceftaroline,
a next generation, broad spectrum, hospital-based injectable
cephalosporin antibiotic. Two Phase III studies of ceftaroline in
complicated skin and skin structure infections have completed
enrollment. Additionally two Phase III studies in patients with
community acquired pneumonia (CAP) have begun enrollment. We
anticipate the skin and skin structure results in calendar 2008 and
the CAP results in 2009.
·
In April 2006, we entered
into a collaboration agreement with Almirall for the U.S. rights to
aclidinium, a long-acting muscarinic antagonist which is being
developed as an inhaled therapy for the treatment of chronic
obstructive pulmonary disease (COPD). Enrollment of two large Phase
III studies has been completed and we expect to have top-line
results for these studies in the second half of calendar 2008. We
and Almirall are also pursuing the development of a fixed-dose
combination of aclidinium and the beta-agonist formoterol, which is
currently in Phase I testing.
·
During the September 2007
quarter, we entered into a collaboration agreement with Microbia to
co-develop and co-market the compound linaclotide. Linaclotide,
which is currently in Phase II testing, is being investigated for
the treatment of constipation-predominant irritable bowel syndrome
and chronic constipation. We expect to have results of the Phase
IIb studies during the first half of 2008 and hope to initiate
Phase III testing toward the end of the year.
·
In February 2008, we
received preliminary results of a Phase III study of a novel,
once-daily formulation of Namenda for the treatment of moderate to
severe Alzheimer’s disease. The results indicate that
patients treated with this formulation experienced statistically
significant benefits in cognition and clinical global status
compared to placebo. Based on the results of this study, we
plan to pursue an NDA for Namenda using this formulation.
·
During the third quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Gedeon Richter Limited for the North American rights to RGH-188, a
compound which is being developed for the treatment of
schizophrenia, bipolar mania and other psychiatric conditions. A
review of top-line results of a Phase II study in schizophrenia
indicated that RGH-188 demonstrated a nominally statistically
significant (i.e., not adjusted for multiple comparisons)
therapeutic effect compared to placebo in the low-dose arm and a
numerical improvement compared to placebo in the high-dose arm that
did not reach nominal statistical significance. Based on these
results, and subject to a complete review of the full study
results, we intend to continue the development of RGH-188 as a
treatment of schizophrenia. An additional Phase II study of RGH-188
for the treatment of bipolar mania study was commenced in April
2007 and we expect results in calendar 2008.
·
We are currently working
toward generating proof of concept data for neramexane in
Alzheimer’s disease.
·
During the second quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Glenmark Pharmaceuticals S.A. for the North American development
and marketing of GRC3886, a PDE4 inhibitor for the treatment of
asthma and COPD. The FDA had requested additional preclinical work
which we completed and submitted. FDA has now reviewed this
additional data and has given us a response which allows us to move
forward with a larger Phase II proof of concept study in COPD, with
some limitations. In January 2008, we paid a milestone in light of
such regulatory position.
Among other research and development projects we continue to
support are the following: RGH-896, a compound being developed for
the treatment of chronic pain and other CNS conditions; a group of
novel compounds that target the group 1 metabotropic glutamate
receptors (mGLUR1/5); and ME1036, an injectable antibiotic which
has demonstrated excellent pre-clinical activity against both
Gram-positive and Gram-negative bacteria. In addition, we have
entered into several collaborations to conduct pre-clinical drug
discovery.
Our effective tax rate was 22.8% and 21.5% for the respective
three and nine-month periods ended December 31, 2007, as compared
to 21.0% and 21.6% for the same periods last year. The increase in
the current quarter principally resulted from the proportion of
earnings generated in the United States as compared with the lower
taxed foreign jurisdictions. Effective tax rates can be affected by
ongoing tax audits. See Note 8 to the Condensed Consolidated
Financial Statements (Unaudited).
We expect to continue our profitability in the current fiscal
year with continued growth in our principal promoted products.
Inflation has not had a material effect on our operations for
the periods presented.
Critical Accounting Policies
The following accounting policies are important in understanding
our financial condition and results of operations and should be
considered an integral part of the financial review. Refer to the
notes to the consolidated financial statements for additional
policies.
Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the
reporting period. Estimates are made when accounting for sales
allowances, returns, rebates and other pricing adjustments,
depreciation, amortization and certain contingencies. Forest is
subject to risks and uncertainties, which may include but are not
limited to competition, federal or local legislation and
regulations, litigation and overall changes in the healthcare
environment that may cause actual results to vary from estimates.
We review all significant estimates affecting the financial
statements on a recurring basis and record the effect of any
adjustments when necessary. Certain of these risks, uncertainties
and assumptions are discussed further under the section entitled
"Forward Looking Statements".
Revenue Recognition
Revenues are recorded in the period the merchandise is shipped.
As is typical in the pharmaceutical industry, gross product sales
are subject to a variety of deductions, primarily representing
rebates and discounts to government agencies, wholesalers and
managed care organizations. These deductions represent estimates of
the related liabilities and, as such, judgment is required when
estimating the impact of these sales deductions on gross sales for
a reporting period. Historically, our adjustments for actual future
settlements have not been material, and have resulted in either a
net increase or a net decrease to net income. If estimates are not
representative of actual settlement, results could be materially
affected. Provisions for estimated sales allowances, returns,
rebates and other pricing adjustments are accrued at the time
revenues are recognized as a direct reduction of such revenue.
The accruals are estimated based on available information,
including third party data, regarding the portion of sales on which
rebates and discounts can be earned, adjusted as appropriate for
specific known events and the prevailing contractual discount rate.
Provisions are reflected either as a direct reduction to accounts
receivable or, to the extent that they are due to entities other
than customers, as accrued expense. Adjustments to estimates are
recorded when customer credits are issued or payments are made to
third parties.
The sensitivity of estimates can vary by program and type of
customer. However, estimates associated with Medicaid and contract
rebates are most at risk for adjustment because of the extensive
time delay between the recording of the accrual and its ultimate
settlement, an interval that can range up to one year. Because of
this time lag, in any given quarter, adjustments to actual may
incorporate revisions of prior quarters.
Provisions for Medicaid and contract rebates during a period are
recorded based upon the actual historical experience ratio of
rebates paid and actual prescriptions written. The experience ratio
is applied to the period's sales to determine the rebate accrual
and related expense. This experience ratio is evaluated regularly
to ensure that the historical trends are as current as practicable.
As appropriate, we will adjust the ratio to more closely match the
current experience or expected future experience. In assessing this
ratio, we consider current contract terms, such as the effect of
changes in formulary status, discount rate and utilization trends.
Periodically, the accrual is adjusted based upon actual payments
made for rebates. If the ratio is not indicative of future
experience, results could be affected. Rebate accruals for Medicaid
were $26,910 at December 31, 2007 and $32,653 at December 31, 2006.
Commercial discounts and other rebate accruals were $130,409 at
December 31, 2007 and $119,481 at December 31, 2006. These and
other rebate accruals are established in the period the related
revenue was recognized, resulting in a reduction to sales and the
establishment of a liability, which is included in accrued
expenses.
The following table summarizes the activity for the nine-month
period in the accounts related to accrued rebates, sales returns
and discounts
(In thousands)
:
|
Beginning balance
Provision for rebates
Changes in estimates
Settlements
Provision for returns
Changes in estimates
Settlements
Provision for chargebacks and discounts
Changes in estimates
Settlements
Ending balance
|
December 31, 2007
$208,063
317,947
2,500
(
306,782
)
13,665
24,134
(
22,704
)
1,430
262,915
( 7,700)
(
266,145
)
( 10,930)
$212,228
=======
|
|
December 31, 2006
$158,277
275,702
3,301
(
226,685
)
52,318
20,958
(
1,264)
(
15,915
)
3,779
289,565
( 7,053)
(
279,428
)
3,084
$217,458
=======
|
|
Deductions for chargebacks (primarily discounts to group
purchasing organizations and federal government agencies) are
generally settled within 2-3 weeks of incurring the liability.
Based on current contracting trends and chargeback activity, the
Company reduced the estimated liability at December 31, 2007 to
more closely reflect Management’s estimate of future
chargeback settlements.
Forest's policy relating to the supply of inventory at wholesalers
is to maintain stocking levels of up to three weeks and to keep
monthly levels consistent from year to year, based on patterns of
utilization. We have historically closely monitored wholesale
customer stocking levels by purchasing information directly from
customers and by obtaining other third party information. Unusual
or unexpected variations in buying patterns or utilizations are
investigated.
Sales incentives are generally given in connection with a new
product launch. These sales incentives are recorded as a reduction
of revenues and are based on terms fixed at the time goods are
shipped. New product launches may result in expected temporary
increases in wholesaler inventories, which as described above, are
closely monitored and have not resulted in increased product
returns.
|
Forward Looking Statements
Except for the historical information contained herein, the
Management Discussion and other portions of this Form 10-Q contain
forward looking statements that involve a number of risks and
uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products,
the impact of competitive products and pricing, the timely
development and launch of new products, changes in laws and
regulations affecting the healthcare industry, and the risk factors
listed from time to time in our filings with the SEC, including the
Annual Report on Form 10-K for the fiscal year ended March 31,
2007.