UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K
(Mark one)
[X]
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended March 31, 2008
[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from _____ to
_____
Commission File No. 1-5438
FOREST LABORATORIES, INC.
(Exact name of registrant as specified in its
charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
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11-1798614
(I.R.S. Employer
Identification Number)
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909 Third Avenue
New York, New York
(Address of principal executive offices)
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10022-4731
(Zip code)
|
(212) 421-7850
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
|
|
Name of each exchange
on which
registered
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Common Stock, $.10 par value
|
|
New York Stock Exchange
|
Securities registered pursuant to
Section 12(g) of the act:
None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
X
No
.
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
No
X
.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90
days. Yes
X
No
.
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant's knowledge, in the Proxy Statement incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
.
Indicate by a check mark whether the registrant
is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer
X
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
(Do
not check if a Smaller
reporting
company)
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
X
.
The aggregate market value of the voting stock
held by non-affiliates of the registrant as of September 30, 2007
was $11,637,003,638.
Number of shares outstanding of the registrant's Common Stock as
of May 29, 2008: 304,758,195.
The following documents are incorporated by reference
herein:
Portions of the definitive proxy statement to be filed pursuant
to Regulation 14A promulgated under the Securities Exchange Act of
1934 in connection with the 2008 Annual Meeting of Stockholders of
registrant have been incorporated by reference into Part III of
this Form 10-K.
Portions of the registrant's Annual Report to Stockholders for
the fiscal year ended March 31, 2008 have been incorporated by
reference into Parts II and IV of this Form 10-K.
_________________
TABLE OF CONTENTS
(Q
uick Links
)
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
PART
II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL
DATA
I
TEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER
INFORMATION
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE
REGISTRANT
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
S-1 REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
S-2 VALUATION AND QUALIFYING
ACCOUNTS
CONSOLIDATED FINANCIAL
STATEMENTS:
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
REPORTS OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BALANCE SHEETS
STATEMENTS OF INCOME
STATEMENTS OF COMPREHENSIVE
INCOME
STATEMENTS OF STOCKHOLDERS'
EQUITY
STATEMENTS OF CASH FLOW
S
NOTES TO FINANCIAL
STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
EXHIBIT 10.12
EXHIBIT 10.19
EXHIBIT 10.27
EXHIBIT 10.28
EXHIBIT 13
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
PART I
ITEM 1.
BUSINESS
General
Forest
Laboratories, Inc. and its subsidiaries develop, manufacture and
sell both branded and generic forms of ethical drug products which
require a physician's prescription, as well as non-prescription
pharmaceutical products sold over-the-counter. Our most important
United States products consist of branded ethical drug specialties
marketed directly, or "detailed," to physicians by our Forest
Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest
Ethicare and Forest Specialty Sales salesforces. We emphasize
detailing to physicians of those branded ethical drugs which we
believe have the most potential for growth and benefit to patients,
and the development and introduction of new products, including
products developed in collaboration with licensing partners.
Our
products include those developed by us and those acquired from
other pharmaceutical companies and integrated into our marketing
and distribution systems.
We
are a Delaware corporation organized in 1956, and our principal
executive offices are located at 909 Third Avenue, New York, New
York 10022 (telephone number 212-421-7850). Our corporate website
address is http://www.frx.com. We make all electronic filings with
the Securities and Exchange Commission (or SEC), including Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those Reports available on
our corporate website free of charge as soon as practicable after
filing with or furnishing to the SEC.
Recent Developments
Bystolic™:
In December 2007 we received approval from the
United States Food and Drug Administration (or FDA) for the
marketing of Bystolic for the treatment of hypertension. We
commenced the sale and marketing of Bystolic in January 2008.
Bystolic is a novel beta-1 selective beta-blocker with vasodilating
properties that we believe may provide certain advantages compared
to other beta-blockers on the market. In its Phase III study
program, Bystolic demonstrated significant reductions in sitting
diastolic and systolic blood pressure in a general hypertension
population. The studies also found that Bystolic was well
tolerated, with a low incidence of side effects traditionally
associated with beta-blockers. Bystolic has received five years of
marketing exclusivity under the Hatch-Waxman legislation and is
also covered by a U.S. pharmaceutical composition of matter patent
set to expire in 2020 which may offer additional exclusivity. See
"
Business – Patents and Trademarks
." Hypertension
affects approximately 72 million adults in the United States and a
substantial number of patients diagnosed with hypertension have not
reduced their blood pressure to an acceptable range.
We
plan to file a New Drug Application (or NDA) in early calendar 2009
for a congestive heart failure indication based on a completed
Phase III study.
We
license exclusive U.S. and Canadian rights to Bystolic from Mylan
Inc. (or Mylan). In February 2008, we amended our license agreement
with Mylan to terminate Mylan’s further commercial rights for
Bystolic in the U.S. and Canada and to reduce future payment
obligations to Mylan. Pursuant to the amendment, we made a one-time
cash payment of $370 million to Mylan. Following such payment, we
remain obligated to pay Mylan its original contractual royalties
for a period of three years, after which our royalty rate will be
reduced.
Milnacipran:
In January 2004, we entered into a license and
collaboration agreement with Cypress Bioscience, Inc. (or Cypress)
for the development and marketing in the United States of
milnacipran. An NDA was submitted in December 2006 for the use of
milnacipran for the treatment of fibromyalgia syndrome (or FMS).
FDA action with respect to this NDA is expected in October 2008.
FMS is a frequent cause of chronic, widespread pain and is
estimated to affect six to twelve million people in the United
States. There is currently only one product approved by the FDA for
the treatment of this disorder. Pursuant to the collaboration
agreement, we paid Cypress an upfront license fee, milestone
payments on the achievement of specific product development
milestones, and we will pay an additional milestone payment upon
FDA approval of the product. We will also pay Cypress royalties
based on net sales of the product following approval. We will be
responsible for funding further development activities, which will
be jointly managed by the two companies, and will have
responsibility for sales and marketing activities, with Cypress
having the option to perform up to 25% of physician details on a
fee-for-service basis. The license agreement includes two patents
covering the use of milnacipran for the treatment of FMS. In
addition, we believe that, as a new chemical entity not previously
approved by the FDA, milnacipran will qualify for five years of
exclusivity under the Hatch-Waxman Act.
Cerexa, Inc.:
Effective January 10, 2007, we acquired Cerexa,
Inc. (or Cerexa), a biopharmaceutical company based in Alameda,
California, in a cash merger pursuant to which Cerexa became a
wholly-owned subsidiary of the Company.
Pursuant
to the merger, we acquired worldwide development and marketing
rights (excluding Japan) to ceftaroline acetate (or ceftaroline), a
next generation, broad spectrum, hospital-based injectable
cephalosporin antibiotic that exhibits bactericidal activity
against the most resistant strains of gram-positive bacteria,
including MRSA (methicillin resistant Staphylococcus aureus) as
demonstrated by a completed Phase II comparative trial in patients
with complicated skin and skin structure infections (or cSSSI).
Ceftaroline has also demonstrated bactericidal activity against
penicillin resistant Streptococcus pneumonia and common
gram-negative bacteria. Ceftaroline is being developed initially
for the cSSSI indication and for the treatment of community
acquired pneumonia (or CAP). Two Phase III studies of ceftaroline
for cSSSI have completed enrollment. Additionally, two Phase III
studies in CAP have begun enrollment. We anticipate the cSSSI
results in mid 2008 and the CAP results in calendar 2009. Based on
positive results, we anticipate submitting an NDA to the FDA by the
end of calendar 2009.
The
acquisition of Cerexa also included a second development stage
hospital-based antibiotic, ME1036, which has shown activity against
both aerobic and anaerobic gram-positive and gram-negative
bacteria, including common drug-resistant pathogens, such as MRSA,
in preclinical studies. ME1036, for which we have worldwide rights,
is currently in Phase I testing and is expected to move into Phase
II clinical studies in early calendar 2009.
The
rights to ceftaroline and ME1036 are in-licensed by Cerexa on an
exclusive basis from Takeda Pharmaceutical Company and Meiji Seika
Kaisha, Ltd., respectively.
We
paid cash consideration of approximately $494 million in connection
with the merger and certain related expenses. We will be obligated
to pay an additional $100 million in the event that annual United
States sales of ceftaroline exceed $500 million during the five
year period following product launch. The merger consideration paid
at closing was expensed in fiscal 2007 as purchased in-process
research and development.
NXL104:
In January 2008, we entered into an agreement with
Novexel, S.A. (or Novexel) for the development, manufacture and
commercialization of Novexel’s novel intravenous beta
lactamase inhibitor, NXL104 in combination with our ceftaroline
compound. NXL104 is designed to be co-administered with select
antibiotics to enhance their spectrum of activity. Under the terms
of the license, we received the exclusive rights to administer
NXL104 with ceftaroline as a combination product in North America.
We intend to initiate Phase I studies of the ceftaroline/NXL104
combination during calendar 2009. We also received a first
negotiation right in North America to an additional NXL104
combination with ceftazidime, a cephalosporin antibiotic having a
different spectrum of activity compared to ceftaroline. This
combination is currently being studied in Phase I clinical trials
conducted by Novexel.
NXL104
inhibits bacterial enzymes called beta-lactamases that break down
beta-lactam antibiotics (in particular penicillins and
cephalosporins). Beta-lactamase inhibition represents a mechanism
for counteracting resistance and enhancing broad-spectrum activity
of beta-lactam antibiotics. A composition of matter patent which
claims NXL104 would provide protection for the ceftaroline/NXL104
combination product until 2022, subject to possible patent term
extension.
Under
the terms of the agreement, we made an upfront license payment of
approximately $110 million to Novexel. We will fund development and
commercialization of the ceftaroline/NXL104 combination. Additional
milestone payments to Novexel if the combination product is
successfully developed could total a further $110 million.
Following the product’s regulatory marketing approval, we
will pay Novexel a low double digit royalty on product sales
throughout North America.
Linaclotide:
In September 2007, we entered into a 50/50
partnership in the United States with Ironwood Pharmaceuticals,
Inc. (or Ironwood, formerly known as Microbia, Inc.) to co-develop
and co-market Ironwood’s first-in-class compound linaclotide.
Linaclotide is currently being investigated for the treatment of
constipation-predominant irritable bowel syndrome (or IBS-C),
chronic constipation (or CC) and other gastrointestinal
disorders.
Under
the terms of the agreement, we initially paid Ironwood $70 million
in licensing fees. Ironwood and Forest will jointly and equally
fund development and commercialization of linaclotide in the United
States, sharing profits equally. Additionally, we will have
exclusive rights in Canada and Mexico and will pay Ironwood a
royalty on sales in these countries.
Linaclotide
is an agonist of the guanylate cyclase type-C receptor found in the
intestine and acts by a mechanism distinct from previously
developed products for IBS-C and CC. Linaclotide is administered
orally but acts locally in the intestine with no measurable
systemic exposure.
One
out of six adults in developed countries suffers from IBS, a
chronic condition marked by abdominal pain and disturbed bowel
function. IBS accounts for 12% of adult visits to primary care
physicians and is the most common disorder diagnosed by
gastroenterologists. Health care costs associated with IBS exceed
$25 billion annually. IBS patients fall into three subgroups
– constipation-predominant IBS-C, diarrhea-predominant (or
IBS-D), and alternating (or IBS-A) – and 30% to 40% of these
patients suffer from IBS-C. There are currently few available
therapies to treat the nine million U.S. patients diagnosed with
IBS-C.
As
many as 26 million Americans suffer from CC. Patients with CC often
experience hard and lumpy stools, straining during defecation, a
sensation of incomplete evacuation and fewer than three bowel
movements per week. The discomfort of CC significantly affects
patient’s quality of life by impairing their ability to work
and participate in typical daily activities.
In
March 2008, we announced positive top-line results from two Phase
II(b) randomized, double-blind, placebo-controlled studies
assessing the safety, therapeutic effect and dose response of four
different once-daily doses of linaclotide: 75 mcg, 150 mcg, 300
mcg, and 600 mcg. The first study examined the effects of
linaclotide in patients with CC, while the second study examined
its effects in patients with IBS-C. The analysis of the CC study
data and the IBS-C study data indicate that each study met its
primary endpoint. Linaclotide was well tolerated at all doses.
Based on this data we anticipate initiating Phase III studies in
both indications in the second half of calendar 2008.
Aclidinium (LAS 34273)
: In April 2006, we entered into a
collaboration and license agreement with Laboratorios Almirall,
S.A. (or Almirall), a pharmaceutical company headquartered in
Barcelona, Spain, for the development and exclusive United States
marketing rights to aclidinium, Almirall’s novel long-acting
muscarinic antagonist. Aclidinium is being developed as an inhaled
therapy for chronic obstructive pulmonary disease (or COPD).
Aclidinium has been evaluated in Phase II studies that demonstrate
that it has a fast onset of action and provides 24 hours of
bronchodilation when administered once-daily. An international
Phase III program is currently being conducted by us and Almirall.
Enrollment has been completed and we expect top-line results to be
available in the second half of calendar 2008. Aclidinium is
designed to have specific action in the lungs and is believed to be
rapidly metabolized in the lungs with limited systemic exposure.
Studies to date support a favorable side effects profile. The
product is being developed in a Multi-Dose Dry Powder Inhaler (or
MDPI) which we believe represents an improvement in drug delivery
over currently available devices.
COPD
is a debilitating respiratory condition that includes two related
lung diseases: chronic bronchitis and emphysema. It affects
approximately 24 million Americans, a population even larger than
the 20 million who suffer from asthma. However, COPD frequently
goes undiagnosed and untreated because it is difficult to identify
in its early stages. The primary cause of COPD is prolonged
cigarette smoking. It is the fourth leading cause of death in the
United States after heart disease, cancer and stroke. According to
the National Heart, Lung and Blood Institute, COPD’s
prevalence and associated death rate are rising. In 2020, COPD is
projected to become the third leading cause of death in the United
States. Today, the economic burden of COPD on the U.S. healthcare
system is substantial, estimated at over $30 billion annually.
Under
the terms of the agreement, we made an upfront payment of $60
million to Almirall in May 2006, a development milestone payment in
May 2007 and may be obligated to pay future milestone payments. In
addition, Almirall will receive royalty payments based on
aclidinium sales. Forest and Almirall will jointly oversee the
development and regulatory approval of aclidinium and share all
expenses for current and future development programs. Almirall has
granted us certain rights of first negotiation for other Almirall
respiratory products that could be combined with aclidinium.
Pursuant to such rights, we have commenced the development of a
fixed-dose combination of aclidinium and the beta-agonist
formoterol, which is currently in Phase II testing.
We
will be responsible for sales and marketing of aclidinium in the
U.S. and Almirall has retained an option to co-promote the product
in the U.S. in the future while retaining commercialization rights
for the rest of the world
.
In addition
to five years of Hatch-Waxman exclusivity granted upon approval,
aclidinium is protected by an issued U.S. composition of matter
patent expiring in September 2020. We expect a patent term
extension under the Drug Price Competition and Patent Term
Restoration Act.
Lexapro®:
In September 2002, we launched Lexapro
(escitalopram oxalate), a single isomer version of citalopram HBr
for the treatment of major depression, following approval of the
product by the FDA in August 2002. Citalopram is a racemic mixture
with two mirror image molecules, the S- and R-isomers. The S-isomer
of citalopram is the active isomer in terms of its contribution to
citalopram's antidepressant effects, while the R-isomer does not
contribute to the antidepressant activity. With Lexapro, the
R-isomer has been removed, leaving only the active S-isomer.
Clinical trials demonstrate that Lexapro is a more potent selective
serotonin reuptake inhibitor (or SSRI) than its parent compound,
and confirm the antidepressant activity of Lexapro in all major
clinical measures of depression. During fiscal 2008, sales of
Lexapro were $2,292,036,000. According to data published by IMS, an
independent prescription audit firm, as of April 30, 2008, Lexapro
achieved a 17.5% share of total prescriptions for antidepressants
in the SSRI/SNRI category.
In
December 2003, Lexapro received FDA approval for the treatment of
generalized anxiety disorder (or GAD), a disorder characterized by
excessive anxiety and worry about everyday events or activities for
a period of six months or more. The approval was based upon three
GAD studies involving Lexapro which demonstrated significantly
greater improvement in anxiety symptoms relative to placebo. Forest
began marketing Lexapro for the treatment of GAD in January
2004.
In
May 2008, we announced results from a Phase III study of Lexapro in
the treatment of adolescents, aged 12-17, with Major Depressive
Disorder (or MDD). These results indicate that patients treated
with Lexapro experienced statistically significant improvement in
symptoms of depression, as measured by the study’s primary
endpoint, the Children’s Depression Rating Scale-Revised (or
CDRS-R), compared to placebo. The CDRS-R is a commonly used
clinician-rated instrument that covers 17 symptom areas of
depression relevant to adolescents, including impaired schoolwork,
difficulty having fun, social withdrawal, physical complaints and
low self-esteem. Based on these results, along with an earlier
study conducted with the racemate, we submitted a supplemental NDA
to the FDA in May 2008 for Lexapro, to expand the indication to
include the treatment of MDD in adolescent patients.
Lexapro
was developed by us and H. Lundbeck A/S (or Lundbeck), a Danish
pharmaceutical firm which licenses to us the exclusive United
States marketing rights to this compound, as well as Celexa.
Lexapro
is covered by a U.S. composition of matter patent which expires
March 14, 2012, inclusive of additional exclusivity granted as a
result of a pediatric study we performed. In September 2007, the
United States Court of Appeals for the Federal Circuit affirmed a
July 2006 decision by the United States District Court for the
District of Delaware which determined that our composition of
matter patent for Lexapro is valid and upheld our injunction
against Teva Pharmaceuticals (or Teva) preventing Teva from
launching a generic equivalent to Lexapro. During fiscal 2008,
Caraco Pharmaceutical Laboratories (or Caraco), a generic
manufacturer, filed an Abbreviated New Drug Application (or ANDA)
seeking approval to market a generic version of Lexapro. We,
together with Lundbeck, have commenced patent infringement
litigation against Caraco which is pending in the United States
District Court for the Eastern District of Michigan. See "Item 3.
Legal Proceedings
".
Namenda®:
In October 2003, Namenda (memantine HC1) was
approved for marketing and distribution by the FDA for the
treatment of moderate to severe Alzheimer's disease. Namenda is a
moderate-affinity, uncompetitive NMDA receptor antagonist that
modulates the effects of glutamate - a neurotransmitter found in
the brain. Excessive levels of glutamate are hypothesized to
contribute to the dysfunction and eventual death of brain cells
observed in Alzheimer's disease. We believe that Namenda's
mechanism of action is distinct from other drugs currently
available to treat Alzheimer's disease. We obtained the exclusive
rights to develop and market memantine in the United States by
license agreement with Merz Pharma GmbH of Germany (or Merz), the
originator of the product.
Namenda
achieved sales of $829,657,000 during our 2008 fiscal year and,
according to data published by IMS, an independent prescription
audit firm, as of April 30, 2008, Namenda achieved a 33.4% share of
total prescriptions in the Alzheimer’s market. Namenda is
covered by a U.S. patent which expires in 2010 and should be
subject to a patent term extension until September 2013. In January
2008, we and Merz commenced patent infringement litigation against
several generic manufacturers who had filed ANDAs seeking FDA
approval to market generic equivalents of Namenda. The actions are
pending in the United States District Court for the District of
Delaware. We intend to fully enforce our patent rights for
Namenda.
In
February 2008, we received preliminary results of a Phase III study
of memantine HC1 in a novel once-daily formulation. The study
evaluated the efficacy, safety and tolerability of an innovative,
proprietary, 28 mg memantine extended-release, once-daily
formulation compared to placebo in outpatients with moderate to
severe Alzheimer’s disease currently treated with a
cholinesterase inhibitor. The results indicate that patients
treated with memantine 28 mg extended-release formulation
experienced statistically significant benefits in cognition and
clinical global status compared to placebo. Based on the results of
this study, we intend to prepare and file an NDA for this new
formulation.
Finally,
during fiscal 2006 we completed a Phase II "proof of concept" study
of neramexane, in moderate to severe Alzheimer’s disease.
Neramexane is a second NMDA receptor antagonist which we licensed
from Merz. Based on an analysis of the results of this study, we
have determined to discontinue development of the product.
Benicar® Co-Promotion with Daiichi Sankyo:
In December
2001, we entered into a co-promotion agreement with Daiichi Sankyo
(or Sankyo) for the co-promotion in the United States of Benicar
(olmesartan medoxomil) an angiotensin receptor blocker (or ARB)
discovered and developed by Sankyo for the treatment of
hypertension. The NDA for Benicar was approved by the FDA in April
2002. In August 2003, the FDA approved Benicar HCT®, a
combination of Benicar and hydrochlorothiazide, which is also
jointly promoted by Forest and Sankyo.
Pursuant
to the co-promotion agreement with Sankyo, we shared with Sankyo in
the detailing of the product to physicians, hospitals, managed care
organizations and other institutional users of pharmaceutical
products over a six-year period ended March 31, 2008 (we
subsequently agreed to perform limited additional detailing through
May 2008). We received co-promotion income based upon the relative
contribution of the two companies to the co-promotion effort
through fiscal year ended March 31, 2008, and will receive residual
payments on a reduced basis following the end of the co-promotion
period based on sales levels achieved through the fiscal year
ending March 31, 2014. During fiscal 2008, we received co-promotion
income of $212,100,000. According to market share data published by
IMS, an independent prescription audit firm, as of April 30, 2008,
Benicar and Benicar HCT achieved a combined 17.0% share of total
prescriptions in the ARB market.
On
May 12, 2008, we and Sankyo announced that effective July 1, 2008,
we have terminated our co-promotion agreement for Azor™
(amlodipine and olmesartan medoxomil), Sankyo’s fixed-dose
combination of two antihypertensives, the calcium channel blocker
amlodipine besylate and the angiotensin receptor blocker olmesartan
medoxomil. We will record a one-time charge of approximately
$44,100,000 which is composed of a one-time payment to Sankyo of
approximately $26,600,000 related to the termination of the
agreement and $17,500,000 related to the unamortized portion of the
initial upfront payment. We determined that the resources we had
allocated to the Azor co-promotion will be better utilized in
providing additional support for our other currently marketed
products.
RGH-188:
In November 2004, we entered into a collaboration and
license agreement with Gedeon Richter Ltd. (or Richter), based in
Budapest, Hungary, for the development of and exclusive United
States rights to Richter's RGH-188 and related compounds, being
developed as an atypical antipsychotic for the treatment of
schizophrenia, bipolar mania and other psychiatric conditions.
During
fiscal 2008, we received top-line results of a Phase II study in
schizophrenia that indicated that RGH-188 demonstrated a nominally
statistically significant (
i.e.
, not adjusted for multiple
comparisons) therapeutic effect compared to placebo in a low-dose
arm and a numerical improvement compared to placebo in a high-dose
arm that did not reach nominal statistical significance. Based on
the review of the results, we will be initiating a Phase II
dose-ranging study in schizophrenic patients in the first half of
fiscal 2009. An additional Phase II study of RGH-188 for the
treatment of bipolar mania was commenced in 2007 and results are
expected in calendar 2008. RGH-188 is currently claimed by a U.S.
Patent application which, if issued, will expire in 2024.
Upon
execution of the collaboration agreement, we paid Richter an
upfront license fee and we will be obligated to pay further
milestone payments if development and commercialization are
successfully completed. We are also obligated to pay Richter a
royalty based on net sales and to purchase our requirements of the
active pharmaceutical ingredient from them. Our license grants us
exclusive development and commercialization rights in the United
States and Canada. We will collaborate with Richter in product
development and will jointly fund such development activities.
RGH-896; mGLUR1/5 Compounds:
In November 2005, we entered into
two new collaboration agreements with Richter with whom we are
currently developing RGH-188 for the treatment of schizophrenia and
bipolar mania.
The
first collaboration will focus upon a group of compounds that
target the NR2B receptor that will be developed for the treatment
of chronic pain and other central nervous system (or CNS)
conditions. RGH-896 is the first of this group and is currently in
early clinical development. We paid Richter an upfront payment and
will become obligated to pay milestone payments based upon
achievement of development objectives. The two companies will
jointly fund the development program. Forest has exclusive
marketing rights in the United States and Canada and will pay
Richter a royalty on net sales. RGH-896 has patent applications
that, if allowed, will provide us patent protection until at least
2022.
The
second new collaboration will focus upon a series of novel
compounds that target metabotropic glutamate receptors (or
mGLUR1/5). mGLUR1/5 antagonists represent novel potential agents
for the treatment of anxiety, depression and other CNS conditions.
Richter and Forest intend to advance promising leads to clinical
trials within the next two to three years. We paid Richter an
upfront payment and will pay milestone payments based upon the
achievement of development objectives in addition to royalties. We
will have exclusive marketing rights in North America while Richter
will retain exclusive rights in Europe and countries comprising the
former Soviet Union. The two companies will share rights in other
countries.
GRC 3886:
In September 2004, we entered into a collaboration
and license agreement with Glenmark Pharmaceuticals Ltd. (or
Glenmark), of Mumbai, India, covering Glenmark's PDE4 inhibitor
referred to as GRC 3886. GRC 3886 is a novel, orally available
phosphodiesterase-IV (or PDE4) inhibitor in development for COPD
and asthma, and may also have use in other conditions.
Bronchodilators
and anticholinergics are the most commonly prescribed therapies in
COPD, but do not address the underlying inflammation. PDE4
inhibitors represent a new class of drugs that are interesting
because they have the potential to relax the smooth muscles of the
airway resulting in bronchodilation, as well as inhibit
inflammatory cell activity, thus providing both short-term relief
and control over the progression of the disease.
We
have commenced a Phase II study of this compound for the COPD
indication with results expected in the second half of calendar
2009. GRC 3886 is currently claimed by U.S. patent applications
which, if issued, will expire in 2024.
We
will develop, register and commercialize GRC 3886 for the North
American market, while Glenmark will retain commercialization
rights for the rest of the world. We paid Glenmark an upfront
payment upon initiation of the agreement and additional milestone
payments upon the successful completion of the antigen challenge
study in asthma patients and in connection with proceeding with the
Phase II study program. We will be required to pay future
milestones if the development and commercialization of the product
is successfully completed in the North American market.
Additionally, after commercial launch, Glenmark will earn a royalty
from us on net sales of the product, and will supply all active
pharmaceutical ingredient required by us.
Campral®:
Campral (acamprosate calcium) was approved by the
FDA in July 2004, for the maintenance of abstinence from alcohol in
patients with alcohol dependence who are abstinent at treatment
initiation. Sales of Campral were $30,921,000 in fiscal 2008.
The
mechanism of action of Campral in maintenance of alcohol abstinence
is not completely understood. Chronic alcohol exposure is
hypothesized to alter the normal balance between neuronal
excitation and inhibition. Campral interacts with neurotransmitter
systems and is hypothesized to restore the normal balance. This
mechanism of action is different from that ascribed to other
currently available medications, which either block the "high"
associated with alcohol consumption or induce vomiting if alcohol
is ingested. Treatment with Campral should be part of a
comprehensive management program that includes psychosocial
support.
Campral
was developed by Merck Sante s.a.s., a subsidiary of Merck KGaA of
Darmstadt, Germany, and is licensed to us for exclusive marketing
and distribution in the United States. Our license requires
us to purchase our requirements of Campral's active pharmaceutical
ingredient from Merck Sante. Campral’s five years of
exclusivity under the Hatch-Waxman Act will expire in fiscal
2010.
Termination of Desmoteplase License:
During fiscal 2008, we
terminated our license agreement for Desmoteplase, being developed
for the treatment of acute ischemic stroke. We terminated this
license based upon the receipt of unfavorable data upon completion
of a Phase II study.
Share Repurchase Program:
On May 18, 2006 our Board of
Directors (or the Board) authorized a share repurchase program for
up to 25 million shares of our common stock (or the 2007 Repurchase
Program). On August 13, 2007 the Board authorized the purchase of
an additional 10 million shares of common stock. The authorizations
became effective immediately and have no set expiration dates. We
expect to make the repurchases from time to time on the open
market, depending on market conditions. As of May 29, 2008,
25,843,600 shares have been repurchased and we continue to have
authority to purchase up to an additional 9,156,400 shares under
the 2007 Repurchase Program.
Forward Looking Statements:
Except for the historical
information contained herein, this report contains 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 impact of legislative and
regulatory developments on the manufacture and marketing of
pharmaceutical products and the uncertainty and timing of the
development and launch of new pharmaceutical products.
Principal Products
We
actively promote in the United States those branded products which
we believe have the most potential for growth and patient benefit,
and which enable our salesforces to concentrate on groups of
physicians who are high prescribers of our products. Such products
include: Lexapro, our SSRI for the treatment of major depression
and GAD; Namenda, our NMDA antagonist for the treatment of moderate
to severe Alzheimer's disease; Bystolic, our novel beta-blocker for
the treatment of hypertension; and Campral, for the maintenance of
alcohol abstinence.
Sales
of Lexapro, launched in September 2002, accounted for 66% of our
sales for the fiscal year ended March 31, 2008 and 66% and 67% of
our sales for our fiscal years ended 2007 and 2006,
respectively.
Sales
of Namenda, launched in December 2003, accounted for 24% of our
sales for the fiscal year ended March 31, 2008 and 21% and 18%,
respectively, of our sales for fiscal 2007 and 2006.
Our
generic line, marketed by our Inwood Laboratories, Inc. subsidiary,
includes generic equivalents to certain of our branded products,
including Tiazac, as well as products using our controlled release
technology.
Our
United Kingdom and Ireland subsidiaries sell both ethical products
requiring a doctor's prescription and over-the-counter
preparations. Their most important products include Sudocrem®,
a topical preparation for the treatment of diaper rash;
Colomycin®, an antibiotic used in the treatment of cystic
fibrosis; Infacol®, used to treat infant colic; and
Exorex®, used in the treatment of eczema and psoriasis.
Marketing
In
the United States, we directly market our products through our
domestic salesforces, Forest Pharmaceuticals, Forest Therapeutics,
Forest Healthcare, Forest Ethicare and Forest Specialty Sales,
currently numbering approximately 2,700 persons, which detail
products directly to physicians, pharmacies, hospitals, managed
care and other healthcare organizations. In the United Kingdom, our
Forest Laboratories U.K. subsidiary's salesforce, currently 38
persons, markets its products directly. Our products are sold
elsewhere through independent distributors.
Competition
The
pharmaceutical industry is highly competitive as to the sale of
products, research for new or improved products and the development
and application of competitive drug formulation and delivery
technologies. There are numerous companies in the United States and
abroad engaged in the manufacture and sale of both proprietary and
generic drugs of the kind which we sell. Many of these companies
have substantially greater financial resources than we do. We also
face competition for the acquisition or licensing of new product
opportunities from other companies. In addition, the marketing of
pharmaceutical products is increasingly affected by the growing
role of managed care organizations, including pharmaceutical
benefit management companies, in the provision of health services.
Such organizations negotiate with pharmaceutical manufacturers for
highly competitive prices for pharmaceutical products in equivalent
therapeutic categories, including certain of our principal promoted
products. Failure to be included or to have a preferred position in
a managed care organization's drug formulary could result in
decreased prescriptions of a manufacturer's products.
Government Regulation
The
pharmaceutical industry is subject to comprehensive government
regulation which substantially increases the difficulty and cost
incurred in obtaining the approval to market newly proposed drug
products and maintaining the approval to market existing drugs. In
the United States, products which we develop, manufacture or sell
are subject to regulation by the FDA, principally under the Federal
Food, Drug and Cosmetic Act, as well as by other federal and state
agencies. The FDA regulates all aspects of the testing,
manufacture, safety, labeling, storage, record keeping, advertising
and promotion of new and old drugs, including the monitoring of
compliance with good manufacturing practice regulations.
Non-compliance with applicable requirements can result in fines and
other sanctions, including the initiation of product seizures,
injunction actions and criminal prosecutions based on practices
that violate statutory requirements. In addition, administrative
remedies can involve voluntary recall of products as well as the
withdrawal of approval of products in accordance with due process
procedures. Similar regulations exist in most foreign countries in
which our products are manufactured or sold. In many foreign
countries, such as the United Kingdom, reimbursement under national
health insurance programs frequently require that manufacturers and
sellers of pharmaceutical products obtain government approval of
initial prices and increases if the ultimate consumer is to be
eligible for reimbursement for the cost of such products.
During
the past several years, the FDA, in accordance with its standard
practice, has conducted a number of inspections of our
manufacturing facilities. Following these inspections, the FDA
called our attention to certain "Good Manufacturing Practices"
compliance and record keeping deficiencies. We have responded to
the FDA's comments and modified our procedures to comply with the
requests made by the FDA.
The
cost of human healthcare products continues to be a subject of
investigation and action by governmental agencies, legislative
bodies and private organizations in the United States and other
countries. In the United States, most states have enacted generic
substitution legislation requiring or permitting a dispensing
pharmacist to substitute a different manufacturer's version of a
drug for the one prescribed. Federal and state governments continue
to press efforts to reduce costs of Medicare and Medicaid programs,
including restrictions on amounts agencies will reimburse for the
use of products. In addition, several states have adopted
prescription drug benefit programs which supplement Medicaid
programs and are seeking discounts or rebates from pharmaceutical
manufacturers to subsidize such programs. Failure to provide such
discounts or rebates may lead to restrictions upon the availability
of a manufacturer's products in health programs, including
Medicaid, run by such states. Under the Omnibus Budget
Reconciliation Act of 1990 (or OBRA), manufacturers must pay
certain statutorily-prescribed rebates on Medicaid purchases for
reimbursement of prescription drugs under state Medicaid plans.
Federal Medicaid reimbursement for drug products of original
NDA-holders is denied if less expensive generic versions are
available from other manufacturers. In addition, the Federal
government follows a diagnosis related group (or DRG) payment
system for certain institutional services provided under Medicare
or Medicaid. The DRG system entitles a healthcare facility to a
fixed reimbursement based on discharge diagnoses rather than actual
costs incurred in patient treatment, thereby increasing the
incentive for the facility to limit or control expenditures for
many healthcare products. Under the Prescription Drug
User Fee Act of 1992, the FDA has imposed fees on various aspects
of the approval, manufacture and sale of prescription drugs.
In
April 2003, the Federal Office of the Inspector General published
guidance for pharmaceutical manufacturers with respect to
compliance programs to assure manufacturer compliance with Federal
laws and programs relating to healthcare. In addition, several
states have adopted laws and regulations requiring certain specific
disclosures with respect to our compliance program and our
practices relating to interactions with physicians and other
healthcare providers. We maintain a company-wide compliance program
to assure compliance with applicable laws and regulations, as well
as the standards of professional bodies governing interactions
between pharmaceutical manufacturers and physicians, and believe we
are in compliance with all material legal requirements and
standards.
A
prescription-drug benefit for Medicare beneficiaries was
established pursuant to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003. Under the program, pharmaceutical
benefit managers and health programs offer discounted prices on
prescription drugs to qualified Medicare recipients reflecting
discounts negotiated with manufacturers. The failure of a
manufacturer to offer discounts to these programs could result in
reduced use of the manufacturer's products.
From
time to time, we have implemented revised product labeling in
accordance with FDA requirements. There can be no assurance that
such labeling changes or changes which may be required by
subsequent rulemaking will not have an adverse effect upon the
marketing of our products. In addition, the FDA continues to review
various aspects of our NDAs and product labeling for approved
products as we submit supplements seeking approval for new
indications or dosage forms, labeling changes or to comply with FDA
requests, and at the agency’s own initiative in light of
post-marketing experience. In connection with such reviews, the FDA
may request labeling changes based on the data submitted by us or
from other sources, including post-marketing experience data.
Sometimes those requested changes may apply to an entire class of
drugs which includes one of our products, and sometimes the changes
requested may apply only to our product. In some cases, the
labeling changes requested, if implemented, might adversely affect
the prescribing of our products by physicians. If we believe
changes requested by the FDA are not correct, we may submit further
data and analyses to the FDA which may modify the agency’s
position. There can be no assurance, however, that the FDA will
ultimately agree with our position or that post-marketing clinical
experience will not require labeling changes, either initiated by
us or by the FDA, which may adversely affect our products’
acceptance and utilization.
We
expect that competing healthcare reform proposals will continue to
be introduced and debated. The adoption of any such proposal may
entail new regulatory requirements and may affect the marketing of
prescription drugs. We cannot predict the outcome or effect on the
marketing of prescription drug products of the legislative and
political process.
Principal Customers
The
following sets forth information with respect to the percentage of
net sales accounted for by our principal customers:
Customer
|
2008
|
2007
|
2006
|
|
|
|
|
McKesson Drug Company
|
38%
|
37%
|
35%
|
Cardinal Health, Inc.
|
30%
|
27%
|
26%
|
AmeriSource Bergen Corporation
|
15%
|
13%
|
20%
|
No other customer accounted for 10% or more of our net sales for
the fiscal years presented.
Geographic Area Financial Information
For
financial information concerning the geographic areas in which we
operate, see Note 3 to our Consolidated Financial Statements
incorporated by reference herein.
Environmental Standards
We
anticipate that the effects of compliance with federal, state and
local laws and regulations relating to the discharge of materials
into the environment will not have any material effect on our
capital expenditures, earnings or competitive position.
Raw Materials
The
active pharmaceutical ingredients in our principal promoted
products, including Lexapro, Namenda, Bystolic and Campral, are
patented or otherwise available to us only pursuant to our
contractual arrangements with our licensing partners. Other raw
materials used by us are purchased in the open market. We have not
experienced any significant shortage in supplies of active
pharmaceutical ingredients or other raw materials.
Product Liability Insurance
We
currently maintain $140 million of product liability coverage per
"occurrence" and in the aggregate. Although in the past there have
been product liability claims asserted against us, none for which
we have been found liable, there can be no assurance that all
potential claims which may be asserted against us in the future
would be covered by our present insurance. See "Item 3.
Legal
Proceedings
" and "Item 1A.
Risk Factors
".
Research and Development
During
the year ended March 31, 2008, we spent $670,973,000 for research
and development, as compared to $941,003,000 and $410,431,000 in
the fiscal years ended March 31, 2007 and 2006, respectively.
Included in research and development expense are payments made
pursuant to licensing and acquisition agreements for new product
opportunities where FDA approval has not yet been received and
accordingly payments made in connection with acquiring the product
rights are charged to research and development. Research and
development expense for fiscal 2008 included an upfront payment of
$70,000,000 in connection with the collaboration agreement with
Ironwood for the rights to co-develop and co-market linaclotide and
an upfront license payment of approximately $110,000,000 made to
Novexel in connection with the acquisition of rights to develop,
manufacture and commercialize NXL104 in combination with
ceftaroline. Research and development expenses for fiscal 2007
included approximately $476,000,000 of acquisition and related
costs incurred in the acquisition of Cerexa, which was treated as
the acquisition of in-process research and development and
approximately $60,000,000 in upfront license payments to Almirall
for aclidinium. With respect to the 2006 fiscal year, such payments
included upfront and milestone payments of $75,000,000 and
$60,000,000 to Mylan and Replidyne, Inc., respectively, in
connection with our acquisition of rights to nebivolol and
faropenem medoxomil. During fiscal 2007, we terminated our further
participation in faropenem development. Other research and
development expenditures consist primarily of the conduct of
pre-clinical and clinical studies required to obtain approval of
new products, as well as clinical studies designed to further
differentiate our products from those of our competitors or to
obtain additional labeling indications.
Employees
At
March 31, 2008, we had a total of 5,211 employees.
Patents and Trademarks
Forest
seeks to obtain, where possible, patents and trademarks for
Forest’s products in the United States and all countries of
major marketing interest to Forest. Forest owns or has licenses to
a substantial number of patents and patent applications. Several of
these patents, which expire during the period 2012 to 2021, are
believed to be of material importance in the operation of
Forest’s business. Forest believes that patents, licenses and
trademarks (or related group of patents, licenses, or trademarks)
covering our marketed products are material in relation to
Forest’s business as a whole.
The
following patents, licenses and trademarks are significant for
Forest’s business: those related to Lexapro, those related to
Namenda, those related to olmesartan medoxomil (which is sold under
the trademark Benicar, and Benicar HCT) and those related to
Bystolic. The U.S. composition of matter patent covering
escitalopram oxalate is licensed from Lundbeck and will expire in
2012. The principal U.S. method of use patent related to memantine
hydrochloride is licensed from Merz and will expire in 2010.
(Forest has filed a patent term extension application to extend
this patent until 2013.) The U.S. composition of matter patent
covering olmesartan medoxomil is owned by Daiichi-Sankyo and
expires in 2016. A U.S. method of use patent related to olmesartan
medoxomil/hydrochlorothiazide expires in 2021. Forest and Daiichi
Sankyo are parties to a co-promotion agreement with respect to
Benicar and Benicar HCT pursuant to which Forest will continue to
receive contract revenues through March 2014. The U.S. composition
of matter patent covering nebivolol hydrochloride is licensed from
Mylan and expires in 2020 (Forest has submitted a patent term
extension application to extend this patent until 2021). On January
26, 2007, Janssen Pharmaceutica N.V., the owner of the patent,
filed a request with the U.S. Patent and Trademark Office (or the
Office) for re-examination of the patent covering nebivolol
hydrochloride. While the timing for resolution of the
re-examination cannot be predicted, we expect that the Office will
again certify that the claims of the patent are valid. Litigation
involving Forest’s patents covering escitalopram oxalate and
memantine HCl is discussed at "Item 3.
Legal
Proceedings
".
When
a product patent expires, the patent holder often loses effective
market exclusivity for the product. This can result in a severe and
rapid decline in sales of the formerly patented product,
particularly in the United States. However, in some cases the
innovator company may achieve exclusivity beyond the expiry of the
product patent through manufacturing trade secrets, later-expiring
patents on methods of use or formulations, or data-based
exclusivity that may be available under pharmaceutical regulatory
laws.
We
own or exclusively license various trademarks and trade names which
we believe are of significant benefit to our business.
Backlog - Seasonality
Backlog
of orders is not considered material to our business prospects. Our
business is not seasonal in nature.
ITEM 1A.
RISK FACTORS
We are Substantially Dependent on Sales of Our Two Principal
Products.
For
the 2008 fiscal year, sales of Lexapro and Namenda accounted for
66% and 24%, respectively, of our net sales. Any unexpected
negative development with respect to such products (for example,
loss of market exclusivity or an unexpected safety or efficacy
concern) would have a material adverse effect on our results of
operations, financial condition and liquidity. While the validity
and enforceability of our patent covering escitalopram, the active
ingredient in Lexapro, were upheld in September 2007 by decision of
the United States Court of Appeals for the Federal Circuit, we are
currently prosecuting patent infringement litigation against a
generic manufacturer who is seeking FDA approval to market a
generic equivalent to Lexapro. In addition, we have instituted
patent infringement litigation against multiple generic
manufacturers who are seeking FDA approval to market generic
versions of Namenda. See "Item 3.
Legal Proceedings
".
Pharmaceutical Research is Expensive and Uncertain.
New
product development is subject to a great deal of uncertainty, risk
and expense. Promising pharmaceutical candidates may fail at
various stages of the research and development process, often after
a great deal of financial and other resources have been invested in
their exploration and development. Further, even where
pharmaceutical development is successfully completed, a product may
fail to reach the market or have limited commercial success because
the safety and efficacy profile achieved during the course of
development is not as favorable as originally anticipated or
favorable in light of new and competing therapies which may become
available during the lengthy period of drug development.
Regulatory Compliance Issues Could Materially Affect Our
Operations.
The
marketing and promotional practices of pharmaceutical
manufacturers, as well as the manner in which manufacturers
interact with prescribers of pharmaceutical products and other
healthcare decision makers, are subject to extensive regulation.
Such regulation takes the form of explicit governmental regulation
and guidance, as well as practices established by healthcare and
industry codes of conduct. In addition, both federal and state
governmental authorities actively seek to enforce such regulations
and can assert both civil and criminal theories of enforcement not
specifically prescribed by published regulations or standards and
accordingly with little objective guidance to permit voluntary
industry compliance. Such enforcement can include actions initially
commenced by "whistleblowers" under the Federal False Claims Act
which provides incentives to whistleblowers based upon penalties
successfully imposed as a result of the investigation or related
legal proceedings or settlements. See "Item 3.
Legal
Proceedings
" for information about pending government
investigations of our marketing and promotional practices. There
can be no assurance that the resolution of pending or future
claims, as well as the resolution of shareholder or consumer
litigation which may be associated with any such claims or their
resolution, will not entail material fines, penalties or settlement
payments. In addition, the manufacturing, testing, storage and
shipment of pharmaceutical products is highly regulated and the
failure to comply with regulatory standards can lead to product
withdrawals or seizures or to delays in FDA approval of products
pending resolution of such issues. Moreover, even when a
manufacturer has fully complied with applicable regulatory
standards, products manufactured and distributed may ultimately
fail to comply with applicable specifications, leading to product
withdrawals or recalls.
Our Business Depends on Intellectual Property
Protection.
Our
ability to generate the returns necessary to support our investment
in acquiring and developing new product opportunities, as well as
the commitment of resources to successfully market our products,
greatly depends on effective intellectual property protection to
ensure we can take advantage of lawful market exclusivity.
Manufacturers of generic products have strong incentives to
challenge the patents which cover our principal products. While we
believe that our patent portfolio, together with market exclusivity
periods granted by the Hatch-Waxman Act, offers adequate
exclusivity protection for our current products, there can be no
assurance that some of our patents will not be determined to be
invalid or unenforceable, resulting in unanticipated early generic
competition for the affected product. See "Item 3.
Legal
Proceedings
" for a description of pending patent litigation
involving Lexapro and Namenda, our principal products.
Our Business Model Currently Depends on the Successful
In-Licensing or Acquisition of New Product Opportunities.
In
order to remain competitive, we must continue to develop and launch
new pharmaceutical products. Our pipeline of new products is
currently dependent on the licensing and acquisition of new product
opportunities. To successfully accomplish these transactions, we
commit substantial effort and expense to seeking out, evaluating
and negotiating collaboration arrangements and acquisitions. The
competition for attractive product opportunities may require us to
devote substantial resources to an opportunity with no assurance
that such efforts will result in a commercially successful
product.
Pharmaceutical Cost-Containment Initiatives May Negatively
Affect Our Net Income.
The
Medicare Prescription Drug Improvement and Modernization Act of
2003 included a prescription drug benefit for Medicare
participants. Companies that negotiate prices on behalf of Medicare
drug plans will have a significant degree of purchasing power and
we expect pricing pressure as a result. In addition, our net income
continues to be impacted by cost-containment initiatives adopted by
managed care organizations and pharmaceutical benefit managers
which negotiate discounted prices from pharmaceutical manufacturers
in order to secure placement on formularies adopted by such
organizations or their health-plan or employer customers. Failure
to be included in such formularies or to achieve favorable
formulary status may negatively impact the utilization of our
products.
We Face Substantial Competition from Other Pharmaceutical
Manufacturers and Generic Product Distributors.
Our
industry is characterized by significant technological innovation
and change. Many of our competitors are conducting research and
development activities in therapeutic areas served by our products
and our product-development candidates. The introduction of novel
therapies as alternatives to our products may negatively impact our
revenues or reduce the value of specific product development
programs. In addition, generic alternatives to branded products,
including alternatives to brands of other manufacturers in
therapeutic categories where we market products, may be preferred
by doctors, patients or third-party payors.
Our Business, and in Particular the Treatment of CNS
Disorders, Presents Risk of Product Liability Claims.
As
more fully discussed in "Item 3.
Legal Proceedings
", we are
subject to approximately 45 legal actions asserting product
liability claims relating to the use of Celexa or Lexapro. These
cases include claims for wrongful death from suicide or injury from
suicide attempts while using Celexa or Lexapro. We believe that
suicide and related events are inherent in the symptoms and
consequences of major depressive disorder and therefore these types
of occurrences are not unexpected from patients who are being
treated for such condition, including patients who may be using our
products. While we believe there is no merit to the cases which
have been brought against us, litigation is inherently subject to
uncertainties and there can be no assurance that we will not be
required to expend substantial amounts in the defense or resolution
of some of these matters.
The Effective Rate of Taxation upon Our Results of Operations
is Dependent on Multi-National Tax Considerations.
A
portion of our earnings is taxed at more favorable rates applicable
to the activities undertaken by our subsidiaries based or
incorporated in the Republic of Ireland. Changes in tax laws or in
their application or interpretation, such as to the transfer
pricing between Forest’s non-U.S. operations and the United
States, could increase our effective tax rate and negatively affect
our results of operations. Our transfer pricing is the subject of
an ongoing audit by the Internal Revenue Service (or IRS). In
connection with such audit, the IRS has issued a Revenue Agent
Report which seeks to assess approximately $206.7 million of
additional corporation income tax with respect to the 2002 and 2003
fiscal years, excluding interest and penalties. We continue to
disagree with the IRS position and have filed a formal written
protest of the proposed adjustment. 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.
See Note 14 to our Consolidated Financial Statements incorporated
by reference herein.
Our Business Could be Negatively Affected by the Performance
of Our Collaboration Partners.
Our
principal products, as well as certain of our principal product
development opportunities, involve strategic alliances with other
companies. Our alliance partners typically possess significant
patents or other technology which are licensed to us and remain
significantly involved in product research and development
activities and in the exclusive manufacture and supply of active
pharmaceutical ingredients upon which our products are based. While
some of our collaboration partners are large well-established
companies, others are smaller companies, often in the "start-up"
stage. A failure or inability of our partners to perform their
collaboration obligations could materially negatively affect our
operations or business plans. In addition, while our relationships
with our strategic partners have been good, differences of opinion
upon significant matters arise from time to time. Any such
differences of opinion, as well as disputes or conflicting
corporate priorities, could be a source of delay or uncertainty as
to the expected benefits of the alliance.
Many of Our Principal Products and Active Pharmaceutical
Ingredients are Only Available From a Single Manufacturing
Source.
As
described immediately above, many of the proprietary active
ingredients in our principal products are available to us only
pursuant to contractual supply arrangements with our collaboration
partners. In addition, our manufacturing facilities in the Republic
of Ireland are the exclusive qualified manufacturing facilities for
finished dosage forms of our principal products, including Lexapro
and Namenda. While we continue to expand our manufacturing
capabilities (see "Item 2.
Properties
"), difficulties or
delays in product manufacture or the inability to locate and
qualify third party alternative sources, if necessary, in a timely
manner, could lead to shortages or long-term product
unavailability, which would adversely affect our operations and
results.
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We
own a 372,000 square foot building on 28 acres in Commack, New
York. This facility is used for packaging, warehousing,
administration and sales training. In addition, we lease a portion
of a hotel facility in Hauppauge, New York, for the purpose of
housing sales representatives during sales training. We also own a
105,000 square foot facility in Hauppauge, which is used for
warehousing, administrative offices and clinical packaging. We
lease an additional 57,000 square foot facility in Hauppauge, which
is used for our information technology departments.
We
own buildings of 180,000, 100,000 and 20,000 square feet in
Commack, New York, which are or will be part of our research and
development complex. The 100,000 and 20,000 square foot facilities
are operational; the 180,000 square foot facility (on 11 acres) is
currently sub-leased to a tenant through fiscal 2009. We also lease
28,000 square feet in Hauppauge, as well as approximately 59,000
square feet in Farmingdale, New York, both of which facilities are
used as laboratory testing facilities.
During
fiscal 2007, we closed our facilities in Inwood, New York totaling
approximately 105,000 square feet which had been used for
manufacturing, research and development, warehousing and
administration. The buildings and certain machinery and equipment
were sold in September 2007.
We
presently lease approximately 120,000 square feet of executive
office space at 909 Third Avenue, New York, New York. The lease
expires in 2010.
We
also lease approximately 203,000 square feet of office space in
Jersey City, New Jersey, which is used by certain of our medical,
scientific and regulatory personnel. The lease expires in 2017.
Forest
Pharmaceuticals, Inc. (or FPI), a wholly-owned subsidiary, owns two
facilities in Cincinnati, Ohio, aggregating approximately 150,000
square feet used for manufacturing, warehousing and administration.
In St. Louis, Missouri, FPI owns a 471,000 square foot facility on
26 acres of land. This facility is being used for warehousing,
distribution and administration. FPI also owns a 40,000 square foot
facility near its current distribution center, which is being used
as offices and a data center.
Cerexa,
Inc., a wholly-owned subsidiary, leases approximately 25,000 square
feet of office space in Alameda, California, which is used by
research and administrative personnel. The lease expires in
2009.
Forest
Laboratories UK, a wholly-owned subsidiary, owns an approximately
95,000 square foot complex in the London suburb of Bexley, England,
which is used for manufacturing and administration.
Our
Tosara subsidiary owns a 33,000 square foot manufacturing and
distribution facility located in an industrial park in Dublin,
Ireland. Forest Ireland Limited, a wholly-owned subsidiary, owns an
approximately 130,000 square foot manufacturing and distribution
facility located in Dublin, Ireland. The facility is currently used
principally for the manufacture and distribution to the United
States of Lexapro and Namenda tablets. Forest Ireland Limited also
owns a 90,000 square foot facility in Dublin which will provide
complete redundancy for the manufacture of Lexapro and Namenda and
additional capacity for future products. This facility commenced
limited operations in April 2008.
We
believe that our current facilities will adequately meet our
operating needs for the foreseeable future.
Net
rentals for leased space for the fiscal year ended March 31, 2008
aggregated approximately $17,694,000 and for the fiscal year ended
March 31, 2007 aggregated approximately $16,696,000.
ITEM 3.
LEGAL
PROCEEDINGS
We
remain a defendant in actions filed in various federal district
courts alleging certain violations of the federal anti-trust laws
in the marketing of pharmaceutical products. In each case, the
actions were filed against many pharmaceutical manufacturers and
suppliers and allege price discrimination and conspiracy to fix
prices in the sale of pharmaceutical products. The actions were
brought by various pharmacies (both individually and, with respect
to certain claims, as a class action) and seek injunctive relief
and monetary damages. The Judicial Panel on Multi-District
Litigation ordered these actions coordinated (and, with respect to
those actions brought as class actions, consolidated) in the
Federal District Court for the Northern District of Illinois
(Chicago) under the caption
"In re Brand Name Prescription Drugs
Antitrust Litigation."
On
November 30, 1998, the defendants remaining in the consolidated
federal class action (which proceeded to trial beginning in
September 1998), including Forest, were granted a directed verdict
by the trial court after the plaintiffs had concluded their case.
In ruling in favor of the defendants, the trial judge held that no
reasonable jury could reach a verdict in favor of the plaintiffs
and stated "the evidence of conspiracy is meager, and the evidence
as to individual defendants paltry or non-existent." The Court of
Appeals for the Seventh Circuit subsequently affirmed the granting
of the directed verdict in the federal class case in our favor.
Following
the Seventh Circuit’s affirmation of the directed verdict in
our favor, we have secured the voluntary dismissal of the
conspiracy allegations contained in all of the federal cases
brought by individual plaintiffs who elected to "opt-out" of the
federal class action, which cases were included in the coordinated
proceedings, as well as the dismissal of similar conspiracy and
price discrimination claims pending in various state courts. We
remain a defendant, together with other manufacturers, in many of
the federal opt-out cases included in the coordinated proceedings
to the extent of claims alleging price discrimination in violation
of the Robinson-Patman Act. While no discovery or other significant
proceedings with respect to us have been taken to date in respect
of such claims, there can be no assurance that we will not be
required to actively defend such claims or to pay substantial
amounts to dispose of such claims. However, by way of a decision
dated January 25, 2007, the judge handling the Robinson-Patman Act
cases for certain of a smaller group of designated defendants whose
claims are being litigated on a test basis, granted summary
judgment to those designated defendants due to plaintiffs’
failure to demonstrate any antitrust injury. Subsequently, the
Court also granted the designated defendants’ motion for
summary judgment with respect to plaintiffs’ effort to obtain
injunctive relief. It is likely that the plaintiffs will pursue an
appeal of both rulings.
We
and certain of our officers have been named as defendants in
consolidated securities cases brought in the U.S. District Court
for the Southern District of New York (or the Court) on behalf of a
purported class of all purchasers of our securities between August
15, 2002 and August 31, 2004 or September 1, 2004 and consolidated
under the caption "
In re Forest Laboratories, Inc. Securities
Litigation
, 05-CV-2827-RMB." The consolidated complaints, which
assert substantially similar claims, allege that the defendants
made materially false and misleading statements and omitted to
disclose material facts with respect to our business, prospects and
operations, in violation of Section 19(b) and 20(a) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder. In
July 2006, the Court granted in part and denied in part our motion
to dismiss. Claims remain pending with respect to alleged marketing
statements and omissions with respect to our drugs for the
treatment of depression. The complaint seeks unspecified damages
and attorneys’ fees. Fact and expert discovery have been
completed and a trial date is expected to be set shortly. In
addition, our directors and certain of our officers have been named
as defendants in two derivative actions purportedly brought on
behalf of the company, filed in the same Court and consolidated
under the caption "
In re Forest Laboratories, Inc. Derivative
Litigation
, 05-CV-3489 (RJH)." The complaints in these
derivative actions allege that the defendants have breached their
fiduciary duties by, among other things, causing Forest to
misrepresent its financial results and prospects, selling shares of
our common stock while in possession of proprietary non-public
information concerning our financial condition and future
prospects, abusing their control and mismanaging the company and
wasting corporate assets. The complaint seeks damages in an
unspecified amount and various forms of equitable relief. In
September 2006, the Court granted our motion to dismiss this case
on the ground that the plaintiffs failed to make a pre-suit demand
on our Board of Directors. By stipulation, plaintiffs appeal of
this decision to the United States Court of Appeals for the Second
Circuit and any other actions in this litigation have been stayed
until August 31, 2008.
Forest
Laboratories, Inc. and Forest Pharmaceuticals, Inc. are named, in
one capacity or another, as defendants, along with numerous other
manufacturers of pharmaceutical products in various actions which
allege that the plaintiffs (all governmental entities) were
overcharged for their share of Medicaid drug reimbursement costs as
a result of reporting by manufacturers of "average wholesale
prices" (or AWP) which did not correspond to actual provider costs
of prescription drugs. Actions brought by nearly all of the
counties of the State of New York (first action commenced January
14, 2003) and by the State of Iowa (commenced October 9, 2007) are
pending in the United States District Court for the District of
Massachusetts under the caption "
In re Pharmaceutical Industry
AWP Litigations
" for coordinated treatment. In addition,
various state court actions are pending in actions brought by the
States of Alabama (commenced January 26, 2005), Alaska (commenced
October 6, 2006), Hawaii (commenced April 27, 2006), Idaho
(commenced June 8, 2007), Illinois (commenced February 7, 2005) and
Mississippi (commenced October 20, 2005), as well as actions
brought by the Commonwealth of Kentucky (commenced November 4,
2004) and the State of Utah (commenced in May 2008). Furthermore,
state court actions pending in the State Court of New York were
brought by three of the New York counties, Erie (commenced March 8,
2005), Schenectady (commenced May 10, 2006) and Oswego (commenced
May 11, 2006).
Motions
to dismiss have been filed with respect to most of the actions.
While the motions to dismiss largely have been denied, some claims
have been dismissed, including RICO claims brought by various New
York counties whose remaining claims are pending in the MDL
proceeding in Massachusetts. Discovery is ongoing. As of this date,
no trials have been scheduled with respect to Forest, and it is not
anticipated that any trial involving Forest will take place before
the end of calendar 2009, at the earliest.
We
are a defendant in an action commenced on December 27, 2004, in the
District of Columbia entitled
Louisiana Wholesale Drug Company,
Inc. and Rochester Drug Cooperative v. Biovail Corporation and
Forest Laboratories, Inc
. The complaint alleges attempts to
monopolize under Section 2 of the Sherman Act with respect to the
product Tiazac resulting from Biovail’s January 2001 patent
listing in the Food and Drug Administration’s "Orange Book"
of Approved Drug Products with Therapeutic Equivalence Evaluations.
Biovail withdrew the Orange Book listing of the patent at issue
following an April 2002 Consent Order between Biovail and the
Federal Trade Commission. Biovail is the owner of the NDA covering
Tiazac which we distribute in the United States under license from
Biovail. The action, which purports to be brought as a class action
on behalf of all persons or entities who purchased Tiazac directly
from us from February 12, 2001 to the present, seeks treble damages
and related relief arising from the allegedly unlawful acts. By way
of a ruling dated March 31, 2005, Judge Robertson granted
Biovail’s motion for summary judgment in a related action
(Twin Cities v. Biovail) to which we are not a party. The
plaintiffs in the Louisiana Wholesale case then amended their
complaint to add a conspiracy charge against Biovail and Forest and
an allegation that plaintiffs were damaged as a result of a delay
by Biovail and Forest in marketing their own generic version of
Tiazac. We and Biovail filed a motion for summary judgment and a
motion to dismiss directed to the complaint. By way of a decision
dated June 22, 2006, Judge Robertson granted defendants’
motion for summary judgment, both with respect to original claims,
as well as the newly-added claim asserted by the Louisiana
Wholesale plaintiffs. That decision, along with the original Twin
Cities decision, is now
sub judice
before the United States
Court of Appeals for the District of Columbia.
The
United States Attorney’s Office for the District of
Massachusetts is investigating whether we may have committed civil
or criminal violations of the federal "Anti-Kickback" laws and laws
and regulations related to "off-label" promotional activities in
connection with our marketing of Celexa, Lexapro and other
products. As part of this investigation, we received a subpoena
from the Office of Inspector General of the Federal Office of
Personnel Management requesting documents relating to Celexa and
have subsequently received further subpoenas from the United States
Attorney’s Office concerning Lexapro and other products,
including Namenda and Combunox. The subpoenas request documents
relating to a broad range of our marketing and promotional
activities during the period from January 1, 1997 to the present.
In April 2006, we received an additional subpoena from the United
States Attorney’s Office for the District of Massachusetts
requesting documents concerning our manufacture and marketing of
Levothroid, our levothyroxine supplement for the treatment of
hypothyroidism. We understand that this subpoena was issued in
connection with that office’s investigation of potential
civil or criminal violation of federal health laws in connection
with Levothroid. We are continuing to cooperate with this
investigation.
We
received a subpoena dated January 26, 2006 from the United States
Attorney’s Office for the District of Massachusetts
requesting documents related to our commercial relationship with
Omnicare, Inc. (or Omnicare), a long term care pharmacy provider,
including but not limited to documents concerning our contracts
with Omnicare, and rebates and other payments made by us to
Omnicare. We understand that the subpoena was issued in connection
with that office’s investigation of potential criminal
violations of federal healthcare laws by Omnicare and potentially
others. We are cooperating in this investigation.
In
September 2007, the United States Court of Appeals for the Federal
Circuit upheld the validity of our composition of matter patent
covering Lexapro and the decision of the United States District
Court for the District of Delaware granting us an injunction
preventing Teva from marketing a generic version of Lexapro. In
July 2006, we and Lundbeck commenced similar patent infringement
litigation against Caraco Pharmaceutical Laboratories, Ltd., who
had filed an ANDA with the FDA seeking to market a generic
equivalent to Lexapro, in the United States District Court for the
Eastern District of Michigan under the caption
Forest
Laboratories, Inc. et al. v. Caraco Pharmaceutical Laboratories,
Ltd. et al.
This case was stayed during the pendency of the
Federal Circuit appeal in the case against Teva. A status
conference is scheduled for June 12, 2008.
In
February 2007, Caraco filed a single-count declaratory judgment
action against us and Lundbeck in the United States District Court
for the Eastern District of Michigan for non-infringement of a
different patent for Lexapro that is listed in the FDA’s
Orange Book. After Forest and Lundbeck granted Caraco an
irrevocable covenant not to sue, Chief Judge Freidman dismissed
Caraco’s action for lack of subject matter jurisdiction. On
April 1, 2008, a three-judge panel of the United States Court of
Appeals for the Federal Circuit reversed and remanded Chief Judge
Freidman’s decision. We have filed a combined petition for
panel rehearing and hearing
en banc
.
Beginning
in January 2008, Forest and Merz, our licensor for Namenda,
commenced a series of patent infringement lawsuits in the United
States District Court for the District of Delaware and other
districts, including the United States District Court for the
Eastern District of North Carolina, against several companies
(including Teva, Mylan and Barr Laboratories, Inc.) who have
notified us that they have filed ANDAs with the FDA seeking to
obtain approval to market generic versions of Namenda. These
actions are in the early stages and no scheduling order has been
entered.
On
July 14, 2006, we were named as a defendant, together with
approximately 20 other pharmaceutical manufacturers and wholesalers
in an action brought by RxUSA Wholesale, Inc. in the United States
District Court for the Eastern District of New York under the
caption
RxUSA Wholesale, Inc. v. Alcon Laboratories, et al
.
The action alleges various antitrust and related claims arising out
of an alleged concerted refusal by the defendant manufacturers and
wholesalers to sell prescription drugs to plaintiff, a secondary
drug wholesaler. Motions to dismiss have been filed by all of the
defendants, and those motions are now
sub judice
before the
court.
In
April 2006, an action was commenced in the United States District
Court for the Southern District of New York against us and Lundbeck
under the caption
Infosint S.A. v. H. Lundbeck A/S, H. Lundbeck
Inc. and Forest Laboratories, Inc
. In the action, the plaintiff
alleges that the importation and sale in the United States of
"citalopram products" by Lundbeck and us infringes certain claims
of a manufacturing process patent owned by plaintiff. The action
seeks injunctive relief as well as damages under U.S. patent laws.
We believe that the plaintiff’s claim is without merit.
Further, we believe that our license agreements with Lundbeck
require Lundbeck to indemnify us from the cost of defending this
action and from any associated damages or awards.
We
have been named in approximately 45 product liability lawsuits that
remain active. Most of the lawsuits allege that Celexa or Lexapro
caused or contributed to individuals committing or attempting
suicide. The suits seek substantial compensatory and punitive
damages. We are vigorously defending these suits. A multi-district
proceeding (or MDL) has been established for this litigation, with
the federal court cases being transferred to Judge Rodney Sippel in
the United States District Court for the Eastern District of
Missouri.
We
expect the MDL will ease the burden of defending these cases. While
litigation is inherently subject to uncertainty and accordingly we
cannot predict or determine the outcome of this litigation, we
believe there is no merit to these actions and that the
consolidated proceedings will promote the economical and efficient
resolution of these lawsuits and provide us with a meaningful
opportunity to vindicate our products. We currently maintain $140
million of product liability coverage per "occurrence" and in the
aggregate.
We
received two subpoenas dated April 27, 2007 from the Office of the
Attorney General of the State of Delaware requesting documents
relating to our use of the "nominal price" exception to the
Medicaid program’s "Best Price" rules. We understand
that comparable subpoenas have been or will be issued to other
pharmaceutical manufacturers as part of that office’s
investigation of the use of the "nominal price" exception. We are
complying with the subpoenas.
We
are also subject to various legal proceedings that arise from time
to time in the ordinary course of our business. Although we believe
that the proceedings brought against us, including the product
liability cases described above, are without merit and we have
product liability and other insurance, litigation is subject to
many factors which are difficult to predict and there can be no
assurance that we will not incur material costs in the resolution
of these matters.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE
OF SECURITY
HOLDERS
Not
Applicable.
PART II
ITEM 5. MARKET FOR
REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
EQUITY
SECURITIES
Market Information, Holders and Performance Graph
The
information required by this item is incorporated by reference to
the information under the heading
Stock Market Data
in our
Annual Report.
Dividends
We
have never paid cash dividends on our common stock. We presently
intend to retain all available funds for the development of our
business, for use as working capital and for the share repurchase
programs. Future dividend policy will depend upon our earnings,
capital requirements, financial condition and other relevant
factors.
Issuer Repurchases of Equity Securities
In
July 2004, our Board of Directors approved the repurchase of up to
20 million shares of our outstanding Common Stock (or 2005
Repurchase Program) which was increased to 30 million shares in
December 2004. Under the 2005 Repurchase Program we repurchased the
shares from time-to-time at prevailing prices and as permitted by
applicable securities laws (including SEC Rule 10b-18) and New York
Stock Exchange requirements, and subject to market conditions. As
of May 11, 2005, all shares authorized for repurchase under the
2005 Repurchase Program have been purchased.
On
May 10, 2005 our Board of Directors authorized a share repurchase
program (or 2006 Repurchase Program) for up to 25 million shares of
our common stock. Under the 2006 Repurchase Program, we repurchased
the shares from time to time on the open market at prevailing
prices and as permitted by applicable securities laws (including
SEC Rule 10b-18) and New York Stock Exchange requirements. As of
February 27, 2006, all shares authorized for repurchase under the
2006 Repurchase Program have been purchased.
On
May 18, 2006 our Board of Directors authorized a new share
repurchase program (or 2007 Repurchase Program) for up to 25
million shares of our common stock. On August 13, 2007 the Board
authorized the purchase of an additional 10 million shares of
common stock. The authorizations became effective immediately and
have no set expiration dates. We expect to make the repurchases
from time to time on the open market, depending on market
conditions and as permitted by applicable securities laws
(including SEC Rule 10b-18) and New York Stock Exchange
requirements. As of May 29, 2008, 25,843,600 shares have been
repurchased and we continue to have authority to purchase up to an
additional 9,156,400 shares under the 2007 Repurchase Program.
ITEM 6.
SELECTED FINANCIAL DATA
The
information required by this item is incorporated by reference to
the information under the heading
Selected Financial Data
in
our Annual Report.
ITEM 7. MANAGEMENT'S
DISCUSSION
AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
The
information required by this item is incorporated by reference to
the information under the heading
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
in our Annual Report.
I
TEM 7A. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
information required by this item is incorporated by reference to
the information under the heading
Quantitative and Qualitative
Disclosures About Market Risk
in our Annual Report.
ITEM 8. FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY DATA
The
information required by this item is incorporated by reference to
from the
Consolidated Financial Statements and Notes to
Consolidated Financial Statements and the related Reports of
Independent Registered Public Accounting Firm
in our Annual
Report.
ITEM 9. CHANGES
IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL
DISCLOSURE
Not
Applicable.
ITEM
9A.
CONTROLS AND PROCEDURES
Disclosure Controls
As
of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (or
Exchange Act)). Based on this evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
Management's
report on internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act), and the related report of our independent registered public
accounting firm, are included in our Annual Report under the
headings
Management's Report on Internal Control Over Financial
Reporting
and
Reports of Independent Registered Public
Accounting Firm
, respectively, and are incorporated by
reference.
Changes in Internal Control Over Financial Reporting
During
our most recent fiscal quarter, there has not occurred any change
in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B.
OTHER
INFORMATION
None.
PART III
In
accordance with General Instruction G(3), and except for certain of
the information called for by Items 10 and 12 which is set forth
below, the information called for by Items 10 through 14 of Part
III is incorporated by reference from Forest's definitive proxy
statement to be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 in connection with Forest's
2008 Annual Meeting of Stockholders.
ITEM
10.
DIRECTORS AND OFFICERS OF THE
REGISTRANT
Code of Ethics
We
have adopted a written code of business conduct and ethics that
applies to our Chief Executive Officer, Chief Financial Officer and
all of our officers and employees and can be found on our website,
which is located at www.frx.com under the "Investors" link. We will
also provide a copy of our code of ethics to any person without
charge upon his or her request. Any such request should be directed
to our Corporate Secretary at 909 Third Avenue, New York, New York
10022. We intend to make all required disclosures concerning any
amendments to or waivers from our code of business conduct and
ethics on our website.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following sets forth certain information as of March 31, 2008 with
respect to our compensation plans under which Forest securities may
be issued:
Equity
Compensation Plan Information
Plan category
|
Number of securities to be issued upon exercise of outstanding
options
|
Weighted-average exercise price of outstanding options
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in first
column)
|
Equity compensation plans approved by security holders
|
19,293,850
|
$40.38
|
10,368,325
|
Equity compensation plans not approved by security
holders
|
|
N/A
|
|
Total
|
19,293,850
|
$40.38
|
10,368,325
|
PART IV
|
|
ITEM 15.
|
|
|
(a)
|
1.
|
Financial statements. The following consolidated financial
statements of Forest Laboratories, Inc. and Subsidiaries included
in the Annual Report are incorporated by reference herein in
Item 8:
|
|
Management's report on internal control over financial
reporting
|
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated balance sheets –
March 31, 2008 and 2007
|
|
|
|
Consolidated statements of income –
years ended March 31, 2008, 2007 and 2006
|
|
|
|
Consolidated statements of comprehensive income –
years ended March 31, 2008, 2007 and 2006
|
|
|
|
Consolidated statements of stockholders' equity –
years ended March 31, 2008, 2007 and 2006
|
|
|
|
Consolidated statements of cash flows –
years ended March 31, 2008, 2007 and 2006
|
|
|
|
Notes to consolidated financial statements
|
|
2.
|
Financial statement schedules. The following consolidated
financial statement schedules of Forest Laboratories, Inc. and
Subsidiaries are included herein:
|
|
|
Report of Independent Registered Public Accounting Firm
|
S-1
|
Schedule II
|
Valuation and Qualifying Accounts
|
S-2
|
|
All other schedules for which provision is made in the
applicable accounting regulations of the
Securities and Exchange Commission are not required under the
related instructions or are
inapplicable, and therefore have been omitted.
|
|
|
|
|
3.
|
Exhibits:
|
|
|
|
|
(3)(a)
|
Articles of Incorporation of Forest, as amended. Incorporated by
reference from the Current Report on Form 8-K dated March 9, 1981
filed by Forest, from Registration Statement on Form S-1
(Registration No. 2-97792) filed by Forest on May 16, 1985, from
Forest's definitive proxy statement filed pursuant to Regulation
14A with respect to Forest's 1987, 1988 and 1993 Annual Meetings of
Stockholders and from the Current Report on Form 8-K dated March
15, 1988.
|
|
(3)(b)
|
By-laws of Forest. Incorporated by reference to Forest's Current
Report on Form 8-K dated October 11, 1994.
|
|
|
|
|
(10)
|
Material Contracts
|
|
|
|
|
10.1
|
Benefit Continuation Agreement dated as of December 1, 1989
between Forest and Howard Solomon. Incorporated by reference to
Forest's Annual Report on Form 10-K for the fiscal year ended
March 31, 1990 (or 1990 l0-K).
|
|
|
|
|
10.2
|
Benefit Continuation Agreement dated as of May 27, 1990
between Forest and Kenneth E. Goodman. Incorporated by reference to
the 1990 10-K.
|
|
|
|
|
10.3
|
Employment Agreement dated as of September 30, 1994 by and
between Forest and Howard Solomon. Incorporated by reference to
Forest’s Annual Report on Form 10-K for the fiscal year ended
March 31, 1995.
|
|
|
|
|
10.4
|
Employment Agreement dated June 24, 1997 between Forest and
Elaine Hochberg. Incorporated by reference to Forest's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998.
|
|
|
|
|
10.5
|
Employment Agreement dated November 22, 2000 between Forest and
Charles E. Triano. Incorporated by reference to Forest's Annual
Report on Form 10-K for the fiscal year ended March 31, 2001.
|
|
|
|
|
10.6
|
Letter Agreement dated as of September 6, 2004 between Forest
and Francis I. Perier, Jr. Incorporated by reference to Forest's
Current Report on Form 8-K dated September 30, 2004 (or September
30, 2004 8-K).
|
|
|
|
|
10.7
|
Employment Agreement dated as of October 5, 2004 between Forest
and Francis I. Perier, Jr. Incorporated by reference to September
30, 2004 8-K.
|
|
|
|
|
10.8
|
Letter Agreement dated as of January 30, 2006 between Forest and
Herschel S. Weinstein. Incorporated by reference to Forest’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2006
(or 2006 10-K).
|
|
|
|
|
10.9
|
Employment Agreement dated as of January 30, 2006 between Forest
and Herschel S. Weinstein. Incorporated by reference to the 2006
10-K.
|
|
|
|
|
10.10
|
Letter Agreement dated September 5, 2006 between Forest and Dr.
Lawrence S. Olanoff. Incorporated by reference to Forest’s
Quarterly Report on Form 10-Q for the Quarter ended September 30,
2006 (or September 30, 2006 10-Q).
|
|
|
|
|
10.11
|
Employment Agreement dated September 5, 2006 between Forest and
Dr. Lawrence S. Olanoff. Incorporated by reference to the September
30, 2006 10-Q.
|
|
|
|
|
10.12
|
Separation Agreement and General Release dated February 11, 2008
by and between Dr. Ivan Gergel and Forest Laboratories, Inc.
|
|
|
|
|
10.13
|
1998 Stock Option Plan of Forest Laboratories, Inc. Incorporated
by reference to Forest's Proxy Statement for the fiscal year ended
March 31, 1998.
|
|
|
|
|
10.14
|
2000 Stock Option Plan of Forest Laboratories, Inc. Incorporated
by reference to Forest's Proxy Statement for the fiscal year ended
March 31, 2000.
|
|
|
|
|
10.15
|
2004 Stock Option Plan of Forest Laboratories, Inc. Incorporated
by reference to Forest's Proxy Statement for the fiscal year ended
March 31, 2004.
|
|
|
|
|
10.16
|
2007 Equity Incentive Plan of Forest Laboratories, Inc.
Incorporated by reference to Forest’s Proxy Statement for the
fiscal year ended March 31, 2007.
|
|
|
|
|
10.17
|
Form of Director Restricted Stock Agreement under the 2007
Equity Incentive Plan of Forest Laboratories, Inc. Incorporated by
reference to Forest’s Form S-8 on Registration Statement No.
333-145415, dated August 13, 2007.
|
|
|
|
|
10.18
|
Form of Director Stock Option Agreement under the 2007 Equity
Incentive Plan of Forest Laboratories, Inc. Incorporated by
reference to Forest’s Quarterly Report on Form 10-Q for the
Quarter ended September 30, 2007 (or September 30, 2007 10-Q).
|
|
|
|
|
10.19
|
Form of Employee Restricted Stock Agreement (Time-Based) under
the 2007 Equity Incentive Plan of Forest Laboratories, Inc.
|
|
|
|
|
10.20
|
Form of Employee Stock Option Agreement under the 2007 Equity
Incentive Plan of Forest Laboratories, Inc. Incorporated by
reference to September 30, 2007 10-Q.
|
|
|
|
10.21
|
Co-Promotion Agreement dated December 10, 2001 by and between
Sankyo Pharma Inc. and Forest Laboratories, Inc. Incorporated by
reference to Forest's Annual Report on Form 10-K for the fiscal
year ended March 31, 2002 (or 2002 10-K).
|
|
|
|
|
10.22
|
S-Enantiomer License Agreement dated May 29, 2002 by and between
Forest Laboratories Ireland Limited and H. Lundbeck A/S.
Incorporated by reference to the 2002 10-K.
|
|
|
|
|
10.23
|
S-Enantiomer Supply Agreement dated May 29, 2002 by and between
Forest Laboratories Ireland Limited and H. Lundbeck A/S.
Incorporated by reference to the 2002 10-K.
|
|
|
|
|
10.24
|
License and Cooperation Agreement dated June 28, 2000 by and
between Merz & Co. GmbH and Forest Laboratories Ireland
Limited. Incorporated by reference to Forest's Annual Report on
Form 10-K for the fiscal year ended March 31, 2004.
|
|
|
|
|
10.25
|
Settlement Agreement by and between Forest Laboratories, Inc.,
Forest Laboratories Holdings Limited and H. Lundbeck A/S and
Alphapharm Pty Ltd. effective October 3, 2005. Incorporated by
reference to Forest’s Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2005.
|
|
|
|
|
10.26
|
Agreement and Plan of Merger dated December 13, 2006 by and
among Forest Laboratories, Inc., FL Acquisition Corp., Cerexa, Inc.
and Dennis Podlesak and Eckard Weber, M.D., as Shareholders’
Agents. Incorporated by reference to Forest’s Quarterly
Report on Form 10-Q for the quarter ended December 31, 2006.
|
|
|
|
|
10.27
|
Nebivolol Development and Commercialization Agreement by and
between Forest Laboratories Holdings Limited and Mylan Inc. dated
as of January 6, 2006.
|
|
|
|
|
10.28
|
Amendment Agreement, dated as of February 27, 2008, by and
between Forest Laboratories Holdings Limited and Mylan Inc. to that
certain Nebivolol Development and Commercialization Agreement dated
as of January 6, 2006.
|
|
|
|
|
10.29
|
Credit Agreement, dated December 7, 2007, by and among Forest
Laboratories, Inc., Forest Laboratories Holdings Limited, Forest
Laboratories Ireland Limited, Forest Finance B.V., Forest
Laboratories UK Limited, the lenders party thereto, and JPMorgan
Chase Bank, N.A. Incorporated by reference to Forest’s
Current Report on Form 8-K dated December 7, 2007.
|
|
|
|
|
13
|
Portions of the Registrant's 2008 Annual Report to
Stockholders.
|
|
|
|
|
21
|
List of Subsidiaries. Incorporated by reference to
Forest's Annual Report on Form 10-K for the fiscal year ended March
31, 2007.
|
|
|
|
|
23
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
32.2
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
SIGNATURES
Pursuant
to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Forest has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 30, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
Forest and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE
OFFICERS:
|
/s/ Howard
Solomon
Howard Solomon
|
Chairman of the
Board, Chief
Executive Officer
and Director
|
May 30, 2008
|
/s/ Lawrence S.
Olanoff
Lawrence S. Olanoff
|
President, Chief
Operating Officer
and Director
|
May 30, 2008
|
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
|
/s/ Francis I. Perier,
Jr.
Francis I. Perier, Jr.
|
Senior Vice President -
Finance and Chief
Financial Officer
|
May 30, 2008
|
DIRECTORS:
|
|
|
/s/ Nesli Basgoz
Nesli Basgoz
|
Director
|
May 30, 2008
|
/s/ William J. Candee,
III
William J. Candee, III
|
Director
|
May 30, 2008
|
/s/ George S.
Cohan
George S. Cohan
|
Director
|
May 30, 2008
|
/s/ Dan L.
Goldwasser
Dan L. Goldwasser
|
Director
|
May 30, 2008
|
/s/ Kenneth E.
Goodman
Kenneth E. Goodman
|
Director
|
May 30, 2008
|
/s/ Lester B.
Salans
Lester B. Salans
|
Director
|
May 30, 2008
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Forest Laboratories, Inc.
The audits referred to in our report dated May 28, 2008 relating to
the consolidated financial statements of Forest Laboratories Inc.
and Subsidiaries, which is contained in Item 8 of this Form 10-K,
included the audit of the financial statement schedule listed in
the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is
to express an opinion on the financial statement schedule based on
our audits.
In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
May 28, 2008
S-1
|
|
|
|
|
|
|
SCHEDULE II
|
|
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
|
Column A
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
Description
|
Balance
at beginning
of period
|
|
Additions
|
|
Deductions
|
|
Balance
at end
of period
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
$20,033,000
|
|
$ 906,000
|
|
$ 1,057,000
|
(i)
|
$19,882,000
|
|
Allowance for cash
discounts
|
11,237,000
|
|
84,722,000
|
|
84,144,000
|
(ii)
|
11,815,000
|
|
Inventory reserve
|
22,165,000
|
|
5,100,000
|
|
8,495,000
|
(i)
|
18,770,000
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
$18,941,000
|
|
$ 1,280,000
|
|
$ 188,000
|
(i)
|
$20,033,000
|
|
Allowance for cash
discounts
|
11,157,000
|
|
77,316,000
|
|
77,236,000
|
(ii)
|
11,237,000
|
|
Inventory reserve
|
12,004,000
|
|
11,536,000
|
|
1,375,000
|
(i)
|
22,165,000
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
$20,773,000
|
|
$ 45,000
|
|
$ 1,877,000
|
(i)
|
$18,941,000
|
|
Allowance for cash
discounts
|
13,890,000
|
|
65,396,000
|
|
68,129,000
|
(ii)
|
11,157,000
|
|
Inventory reserve
|
12,278,000
|
|
1,963,000
|
|
2,237,000
|
(i)
|
12,004,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Represents actual amounts written
off.
|
(ii) Represents cash discounts
given.
|
S-2
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America. Our internal
control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the
Board; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control
over financial reporting as of March 31, 2008. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment and
those criteria, management believes that we maintained effective
internal control over financial reporting as of March 31, 2008.
Our independent registered public accounting firm has issued an
attestation report on management's assessment of our internal
control over financial reporting which is included herein.
/s/ Howard Solomon
Howard Solomon
Chairman and
Chief Executive Officer
/s/ Francis I. Perier, Jr.
Francis I. Perier, Jr.
Senior Vice President-Finance and
Chief Financial Officer
May 30, 2008
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Forest Laboratories, Inc.
New York, New York
We have audited Forest
Laboratories, Inc. and Subsidiaries internal control over financial
reporting as of March 31, 2008, based on criteria established in
Internal Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Forest Laboratories, Inc. and
Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, "Internal Control
Over Financial Reporting". Our responsibility is to express an
opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Forest
Laboratories, Inc. and Subsidiaries maintained in all material
respects, effective internal control over financial reporting as of
March 31, 2008, based on the COSO criteria.
We have also audited, in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of
Forest Laboratories, Inc. and Subsidiaries as of March 31, 2008 and
March 31, 2007 and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended March 31, 2008, and our
report dated May 28, 2008 expressed an unqualified opinion
thereon.
/s/ BDO Seidman,
LLP
BDO Seidman, LLP
New York, New York
May 28, 2008
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Forest Laboratories, Inc.
New York, New York
We have audited the accompanying consolidated
balance sheets of Forest Laboratories, Inc. and Subsidiaries as of
March 31, 2008 and 2007, and the related consolidated statements of
income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 2008.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Forest Laboratories, Inc. and
Subsidiaries at March 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the
period ended March 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated
financial statements, effective April 1, 2007 Forest Laboratories,
Inc. and Subsidiaries adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109".
As discussed in Note 1 to the consolidated
financial statements, in 2007 Forest Laboratories, Inc. and
Subsidiaries changed its method of accounting for stock-based
compensation in accordance with Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment".
We also have audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the
effectiveness of Forest Laboratories, Inc. and Subsidiaries'
internal control over financial reporting as of March 31, 2008,
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated May 28, 2008
expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
May 28, 2008
FOREST LABORATORIES,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(
In thousands
)
|
MARCH
31,
|
|
2008
|
|
2007
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
Cash (including cash equivalent
investments of
$833,018 in 2008
and $556,586 in 2007)
|
$ 833,052
|
|
$ 563,663
|
Marketable securities
|
943,972
|
|
788,951
|
Accounts receivable, less allowance for
doubtful
accounts of $19,882
in 2008 and $20,033 in 2007
|
445,987
|
|
382,655
|
Inventories, net
|
425,138
|
|
434,163
|
Deferred income taxes
|
226,095
|
|
226,433
|
Other current assets
|
33,260
|
|
26,852
|
Total current
assets
|
2,907,504
|
|
2,422,717
|
|
|
|
|
Marketable securities
|
663,625
|
|
660,392
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
Land and buildings
|
309,474
|
|
301,040
|
Machinery, equipment and other
|
257,857
|
|
231,821
|
|
567,331
|
|
532,861
|
Less: accumulated depreciation
|
217,294
|
|
171,775
|
|
350,037
|
|
361,086
|
Other assets:
|
|
|
|
Goodwill
|
14,965
|
|
14,965
|
License agreements, product rights
and
|
|
|
|
other
intangibles, net
|
527,787
|
|
157,049
|
Deferred income taxes
|
59,778
|
|
27,681
|
Other
|
1,671
|
|
9,482
|
|
604,201
|
|
209,177
|
|
|
|
|
|
$4,525,367
|
|
$3,653,372
|
|
========
|
|
========
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par
values)
|
MARCH
31,
|
|
2008
|
|
2007
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$ 223,720
|
|
$ 154,614
|
Accrued expenses
|
387,105
|
|
332,995
|
Income taxes payable
|
|
|
139,999
|
Total current
liabilities
|
610,825
|
|
627,608
|
|
|
|
|
Long-term liabilities:
|
|
|
|
Income tax liabilities
|
198,410
|
|
|
Deferred income taxes
|
815
|
|
951
|
|
199,225
|
|
951
|
Commitments and contingencies
|
|
|
|
|
|
|
|
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
421,421 shares in 2008 and
420,695 shares in
2007
|
42,142
|
|
42,069
|
Additional paid-in capital
|
1,434,172
|
|
1,354,264
|
Retained earnings
|
5,611,493
|
|
4,657,356
|
Accumulated other comprehensive
income
|
34,592
|
|
21,879
|
Treasury stock, at cost
(110,014 shares in
2008 and 101,143 shares in 2007)
|
(
3,407,082
)
|
|
(
3,050,755
)
|
|
3,715,317
|
|
3,024,813
|
|
|
|
|
|
$4,525,367
|
|
$3,653,372
|
|
========
|
|
========
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
YEARS ENDED MARCH 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Net sales
|
$3,501,802
|
|
$3,183,324
|
|
$2,793,934
|
Contract revenue
|
216,500
|
|
176,943
|
|
118,170
|
Interest income
|
108,680
|
|
80,200
|
|
50,286
|
Other income
|
9,347
|
|
1,318
|
|
|
|
3,836,329
|
|
3,441,785
|
|
2,962,390
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
Cost of sales
|
800,114
|
|
745,602
|
|
650,996
|
Selling, general and administrative
|
1,154,845
|
|
1,046,336
|
|
1,031,451
|
Research and development
|
670,973
|
|
941,003
|
|
410,431
|
|
2,625,932
|
|
2,732,941
|
|
2,092,878
|
|
|
|
|
|
|
Income before income tax expense
|
1,210,397
|
|
708,844
|
|
869,512
|
|
|
|
|
|
|
Income tax expense
|
242,464
|
|
254,741
|
|
160,998
|
|
|
|
|
|
|
Net income
|
$ 967,933
|
|
$ 454,103
|
|
$ 708,514
|
|
========
|
|
========
|
|
========
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$3.08
|
|
$1.43
|
|
$2.11
|
|
====
|
|
====
|
|
====
|
Diluted
|
$3.06
|
|
$1.41
|
|
$2.08
|
|
====
|
|
====
|
|
====
|
Weighted average number of common
|
|
|
|
|
|
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
314,660
|
|
318,539
|
|
335,912
|
|
======
|
|
======
|
|
======
|
Diluted
|
316,133
|
|
322,781
|
|
340,321
|
|
======
|
|
======
|
|
======
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
YEARS ENDED MARCH 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Net income
|
$967,933
|
|
$454,103
|
|
$708,514
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation gains
(losses)
|
25,815
|
|
13,753
|
|
( 8,909)
|
Unrealized gains (losses) on
securities:
|
|
|
|
|
|
Unrealized
holding (loss) gain arising
|
|
|
|
|
|
during
the period, net of tax
|
(
13,102
)
|
|
1,364
|
|
6,643
|
Other comprehensive income (loss)
|
12,713
|
|
15,117
|
|
(
2,266
)
|
|
|
|
|
|
|
Comprehensive income
|
$980,646
|
|
$469,220
|
|
$706,248
|
|
=======
|
|
=======
|
|
=======
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
(In thousands)
|
Common
stock
|
|
Additional paid-in
|
Retained
|
Accumulated
other
comprehensive
|
Treasury
stock
|
|
Shares
|
Amount
|
|
capital
|
earnings
|
income (loss)
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2005
|
407,234
|
$40,723
|
|
$893,864
|
$3,494,739
|
$9,028
|
59,591
|
|
$1,305,969
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon exercise of stock
|
|
|
|
|
|
|
|
|
|
options
|
4,890
|
489
|
|
83,234
|
|
|
|
|
|
Treasury stock acquired from employees
|
|
|
|
|
|
|
|
|
|
upon exercise of stock
options
|
|
|
|
|
|
|
123
|
|
5,057
|
Purchase of treasury stock
|
|
|
|
|
|
|
31,070
|
|
1,265,471
|
Tax benefit related to stock options
|
|
|
|
|
|
|
|
|
|
exercised by employees
|
|
|
|
45,981
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
( 2,266)
|
|
|
|
Net income
|
|
|
|
|
708,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006
|
412,124
|
41,212
|
|
1,023,079
|
4,203,253
|
6,762
|
90,784
|
|
2,576,497
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon exercise of stock
|
8,571
|
857
|
|
212,043
|
|
|
|
|
|
options
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired from employees
|
|
|
|
|
|
|
|
|
|
upon exercise of stock
options
|
|
|
|
|
|
|
44
|
|
1,979
|
Purchase of treasury stock
|
|
|
|
|
|
|
10,315
|
|
472,279
|
Tax benefit related to stock options
|
|
|
|
|
|
|
|
|
|
exercised by employees
|
|
|
|
78,372
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
40,770
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
15,117
|
|
|
|
Net income
|
|
|
|
|
454,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007
|
420,695
|
42,069
|
|
1,354,264
|
4,657,356
|
21,879
|
101,143
|
|
3,050,755
|
|
|
|
|
|
|
|
|
|
|
Adoption of new accounting standard
|
|
|
|
|
( 13,796)
|
|
|
|
|
Shares issued upon exercise of stock
|
|
|
|
|
|
|
|
|
|
options and vesting of restricted
stock
|
726
|
73
|
|
26,582
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
8,871
|
|
356,327
|
Tax benefit related to stock options
|
|
|
|
|
|
|
|
|
|
exercised by employees
|
|
|
|
11,069
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
42,257
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
12,713
|
|
|
|
Net income
|
|
|
|
|
967,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
|
421,421
|
$42,142
|
|
$1,434,172
|
$5,611,493
|
$34,592
|
110,014
|
|
$3,407,082
|
|
======
|
======
|
|
========
|
========
|
======
|
======
|
|
========
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
In thousands
)
|
YEARS ENDED MARCH
31,
|
|
2008
|
2007
|
2006
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$ 967,933
|
$ 454,103
|
$ 708,514
|
Adjustments to reconcile net
income to
|
|
|
|
net cash
provided by operating activities:
|
|
|
|
Depreciation
|
47,101
|
45,444
|
40,712
|
Amortization,
impairments and write-offs
|
44,646
|
55,699
|
52,385
|
Stock-based
compensation expense
|
42,257
|
40,770
|
|
Deferred
income tax benefit
|
( 22,581)
|
( 84,919)
|
( 33,034)
|
Foreign
currency transaction (gain) loss
|
( 2,051)
|
( 779)
|
727
|
Net
change in operating assets and liabilities:
|
|
|
|
Decrease
(increase) in:
|
|
|
|
Accounts
receivable, net
|
( 63,332)
|
( 16,117)
|
( 43,409)
|
Inventories,
net
|
9,025
|
201,556
|
( 21,816)
|
Other
current assets
|
( 6,408)
|
( 6,690)
|
( 13)
|
Other
assets
|
7,811
|
( 8,225)
|
2
|
Increase
(decrease) in:
|
|
|
|
Accounts
payable
|
69,106
|
13,703
|
( 87,105)
|
Accrued
expenses
|
54,110
|
90,205
|
( 15,122)
|
Income
tax liabilities
|
44,615
|
102,733
|
(
40,496
)
|
|
|
|
|
Net
cash provided by operating activities
|
1,192,232
|
887,483
|
561,345
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase of property, plant and
equipment
|
( 34,888)
|
( 29,987)
|
( 55,017)
|
Purchase of marketable
securities
|
( 3,141,953)
|
( 2,559,653)
|
( 826,543)
|
Redemption of marketable
securities
|
2,983,699
|
2,018,325
|
1,100,855
|
Purchase of license agreements,
product
|
|
|
|
rights
and other intangibles
|
(
415,000
)
|
|
(
1,397
)
|
|
|
|
|
Net
cash provided by (used in) investing
|
|
|
|
activities
|
(
608,142
)
|
(
571,315
)
|
217,898
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Net proceeds from common stock
options
|
|
|
|
exercised by
employees under stock option plans
|
26,655
|
210,920
|
78,666
|
Tax benefit realized from the
exercise of stock
|
|
|
|
options
by employees
|
1,755
|
80,225
|
35,311
|
Purchase of treasury
stock
|
(
356,327
)
|
(
472,279
)
|
(
1,265,471
)
|
|
|
|
|
Net
cash used in financing
|
|
|
|
activities
|
( 327,917)
|
( 181,134)
|
( 1,151,494)
|
|
|
|
|
Effect of exchange rate changes on
cash
|
13,216
|
14,050
|
(
1,723
)
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents
|
269,389
|
149,084
|
( 373,974)
|
Cash and cash equivalents, beginning of
year
|
563,663
|
414,579
|
788,553
|
Cash and cash equivalents, end of year
|
$ 833,052
|
$ 563,663
|
$ 414,579
|
|
========
|
=========
|
========
|
See accompanying notes to consolidated
financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
In thousands
)
|
YEARS ENDED MARCH
31,
|
|
2008
|
2007
|
2006
|
Supplemental disclosures of cash flow
|
|
|
|
information:
|
|
|
|
Cash paid during the year for:
|
|
|
|
Income taxes
|
$226,022
|
$135,555
|
$199,560
|
|
=======
|
=======
|
=======
|
See accompanying notes to consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
(In thousands, except for estimated useful lives which are
stated in years)
:
Basis of consolidation:
The consolidated financial
statements include the accounts of Forest Laboratories, Inc. (or
the Company) and its subsidiaries, all of which are wholly-owned.
All significant intercompany accounts and transactions have been
eliminated.
Estimates and assumptions:
The preparation of
financial statements in conformity with generally accepted
accounting principles requires the Company 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, tax assets and liabilities and certain contingencies.
The Company 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. The Company reviews all significant estimates affecting
the financial statements on a recurring basis and records the
effect of any adjustments when necessary.
Foreign currency translation:
A European
subsidiary group of the Company reports its financial position and
results of operations in the reporting currency of the Company. The
financial position and results of operations of the Company's other
foreign subsidiaries, which in the aggregate are immaterial, are
determined using the respective local currency.
Cash equivalents:
Cash equivalents consist of
short-term, highly liquid investments purchased with original
maturities of three months or less and are readily convertible into
cash at par value (cost).
Inventories:
Inventories are stated at the lower
of cost or market, with cost determined on the first-in, first-out
basis.
Pre-launch inventories:
The Company may scale-up
and make commercial quantities of certain of its product candidates
prior to the date it anticipates that such products will receive
final FDA approval. The scale-up and commercial production of
pre-launch inventories involves the risk that such products may not
be approved for marketing by the FDA on a timely basis, or ever.
This risk notwithstanding, the Company plans to continue to
scale-up and build pre-launch inventories of certain products that
have not yet received final governmental approval when the Company
believes that such action is appropriate in relation to the
commercial value of the product launch opportunity. As of fiscal
years ended March 31, 2008 and 2007, the Company had no such
pre-launch inventory quantities.
Marketable securities:
Marketable securities,
which are all accounted for as available-for-sale, are stated at
fair value based on quoted market prices in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", and consist
of high quality investments.
Accounts receivable and credit policies
:
The
carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management's best estimate of the amounts
that will not be collected. In addition to reviewing delinquent
accounts receivable, management considers many factors in
estimating its general allowance, including historical data,
experience, customer types, credit worthiness and economic trends.
From time to time, management may adjust its assumptions for
anticipated changes in any of those or other factors expected to
affect collectability.
Property, plant and equipment and depreciation:
Property, plant and equipment are stated at cost. Depreciation is
provided primarily by the straight-line method over the following
estimated useful lives:
|
|
Years
|
Buildings and improvements
|
|
10-50
|
Machinery, equipment and other
|
|
3-10
|
Leasehold improvements are depreciated over the lesser of the
useful life of the assets or the lease term. Included in property,
plant and equipment in fiscal 2008 is construction in progress of
$40,017 for facility expansions at various locations necessary to
support the Company’s current and future operations. Projects
currently in-process or under evaluation are estimated to cost
approximately $10,000 to complete.
Goodwill and other intangible assets:
The Company
has made acquisitions in the past that include goodwill, license
agreements, product rights and other intangibles. Goodwill is not
amortized but is subject to an annual impairment test based on its
estimated fair value. License agreements, product rights and other
intangibles are amortized over their useful lives and are tested
periodically to determine if they are recoverable from future cash
flows on an undiscounted basis over their remaining useful
lives.
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. If
estimates are not representative of actual future 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.
Deductions for chargebacks (primarily discounts to group
purchasing organizations and federal government agencies) closely
approximate actual as these deductions are settled generally within
2-3 weeks of incurring the liability.
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 are closely monitored
and historically have not resulted in increased product
returns.
Shipping and handling costs:
Presently, the
Company does not charge its customers for any freight costs. The
amounts of such costs are included in selling, general and
administrative expenses and are not material.
Research and development:
Expenditures for
research and development, including licensing fees and milestone
payments (or License Payments) associated with development products
that have not yet been approved by the FDA, are charged to expense
as incurred. Once a product receives approval, subsequent License
Payments are recorded as an asset and classified as License
agreements, product rights and other intangibles, net.
Savings and profit sharing plan:
Substantially all
non-bargaining unit employees of the Company's domestic
subsidiaries may participate in the savings and profit sharing plan
after becoming eligible (as defined). Profit sharing contributions
are primarily at the discretion of the Company. The savings plan
contributions include a matching contribution made by the Company.
Savings and profit sharing contributions amounted to approximately
$32,100, $29,500 and $28,200 for fiscal 2008, 2007 and 2006,
respectively.
Earnings per share:
Basic earnings per share
includes no dilution and is computed by dividing income available
to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflect, in periods in which they have a dilutive effect, the
effect of common shares issuable upon exercise of stock options and
restricted stock. The weighted average number of diluted common
shares outstanding is reduced by the treasury stock method which,
in accordance with Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment", takes into consideration the
compensation cost attributed to future services not yet
recognized.
Accumulated other comprehensive income:
Other
comprehensive income (loss) refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
excluded from net income as these amounts are recorded directly as
an adjustment to stockholders' equity. Accumulated other
comprehensive income is comprised of the cumulative effects of
foreign currency translation and unrealized gains (losses) on
securities which amounted to approximately $47,780 and ($13,188) at
March 31, 2008 and $21,965 and ($86) at March 31, 2007,
respectively.
Income taxes:
The Company accounts for income
taxes using the liability method. Under the liability method,
deferred income taxes are provided on the differences in bases of
assets and liabilities between financial reporting and tax returns
using enacted tax rates.
Effective April 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board (or FASB) Interpretation No.
48 (or FIN 48), "Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement No. 109". Pursuant to FIN 48,
the Company must recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate resolution. See
Note 14 for further discussion of the impact of adopting FIN
48.
Long-lived assets:
Long-lived assets, such as
intangible assets, property and equipment and certain sundry
assets, are evaluated for impairment periodically or when events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair
value.
Fair value of financial instruments:
The carrying
amounts of cash, accounts receivable, accounts payable, accrued
expenses and income taxes payable are reasonable estimates of their
fair value because of the maturity of these items.
Stock-based compensation:
Effective April 1, 2006,
the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" (or SFAS
123R). The Board of Directors awards 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
previously accounted for its stock option awards to employees under
the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price
of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company has
never granted options below market price on the date of grant.
In fiscal 2007, the Company elected to adopt the modified
prospective application method provided by SFAS 123R, and
accordingly, compensation expense of $42,257 ($35,423 net of tax)
and $40,770 ($34,229 net of tax) was recorded for the years ended
March 31, 2008 and March 31, 2007, respectively, to cost of sales,
selling, general and administrative and research and development
expense, as appropriate, while the pro forma schedule required for
SFAS 123 below shows the compensation expense for the year ended
March 31, 2006. Total compensation cost related to non-vested stock
based awards not yet recognized as of March 31, 2008 was $96,368
pre-tax and the weighted-average period over which the cost is
expected to be recognized is approximately 3.1 years. Amounts
capitalized as part of inventory costs were not significant.
Under the accounting provisions of SFAS 123R, the Company's
prior period net income and net income per share would have been
reduced to the pro forma amounts indicated below:
Year ended March 31, (In thousands, except per
share data)
|
2006
|
Net income:
|
|
As reported
|
$708,514
|
Deduct: Total
stock-based employee compensation expense
|
|
determined
under fair value method, net of tax
|
(
35,631
)
|
Pro forma
|
$672,883
|
|
=======
|
Net income per common share:
|
|
Basic:
|
|
As reported
|
$2.11
|
Pro forma
|
$2.00
|
Diluted:
|
|
As reported
|
$2.08
|
Pro forma
|
$1.98
|
The following weighted-average assumptions were used in
determining the fair values of stock options using the
Black-Scholes model:
Years ended March 31,
|
2008
|
2007
|
2006
|
Expected dividend yield
|
0%
|
0%
|
0%
|
Expected stock price volatility
|
31.15%
|
29.63%
|
27.86%
|
Risk-free interest rate
|
4.2%
|
4.8%
|
4.3%
|
Expected life of options (years)
|
6
|
5
|
5
|
The Company has never declared a cash dividend. The expected
stock price volatility is based on implied volatilities from traded
options on the Company’s stock as well as historical
volatility. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant in conjunction
with considering the expected life of options. The expected life is
based on vesting and represents the period of time that granted
options are expected to be outstanding.
Recent accounting standards:
In March 2008, the
FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133"
(or SFAS 161). This statement revises the requirements for the
disclosure of derivative instruments and hedging activities that
include the reasons a company uses derivative instruments, how
derivative instruments and related hedged items are accounted under
SFAS 133 and how derivative instruments and related hedged items
affect a company’s financial position, financial performance
and cash flows. SFAS 161 will be effective in the fourth quarter of
fiscal 2009. The Company is currently evaluating the impact of
adopting SFAS 161 and does not anticipate a material effect.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" (or SFAS 141(R)) which is a revision of
SFAS 141. SFAS 141(R) requires an acquirer in a business
combination to measure all assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at their fair
values on the date of acquisition with limited exceptions. This
Statement also requires the acquirer in a business combination
achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values. SFAS 141(R)
will further require that acquired in-process research and
development as of the acquisition date is to be capitalized at fair
value. Assets acquired and liabilities assumed arising from
contingencies at the acquisition date are to be measured at their
fair value and acquisition costs generally will be expensed as
incurred. This statement is effective for business combinations for
which the acquisition date is on or after April 1, 2009. The
Company is currently evaluating the impact of adopting SFAS
141(R).
In December 2007 and in conjunction with SFAS 141(R), the FASB
issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - An Amendment of ARB No. 51" (or SFAS 160).
This Statement requires companies to report a noncontrolling
interest in a subsidiary as equity in its consolidated financial
statements and to disclose the amount of consolidated net income
attributable to the parent and to the noncontrolling interest in
the consolidated statement of income. SFAS 160 also clarifies that
a transaction resulting in a change to the parent’s ownership
in a subsidiary that does not result in deconsolidation will be
deemed as an equity transaction, while a gain or loss will be
recognized by the parent when a subsidiary is deconsolidated. This
statement is effective as of the beginning of fiscal 2010. The
Company is currently evaluating the impact of adopting SFAS 141(R)
and does not anticipate a material effect.
In December 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) on Issue No. 07-1, "Accounting
for Collaborative Arrangements" (EITF 07-1). This Issue
defines a collaborative arrangement, establishes reporting
requirements and clarifies the manner in which revenues, costs and
sharing payments between parties and with third parties be
presented in the consolidated statement of income. This Issue is
effective as of the beginning of fiscal 2010. The Company is
currently evaluating the impact of adopting EITF 07-1.
In June 2007, the FASB ratified the consensus reached by EITF on
Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and
Development Activities" (EITF 07-3). Nonrefundable advance payments
for goods or services that will be used or rendered for future
research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense
when the related goods are delivered or services are performed, or
when the goods or services are no longer expected to be
provided. This Issue is effective as of the beginning of
fiscal 2009. EITF 07-3 is not expected to have a material
effect on the Company’s consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159 (or SFAS 159),
"The Fair Value Option for Financial Assets and Financial
Liabilities" which permits an entity to measure certain financial
assets and financial liabilities at fair value. The purpose of SFAS
159 is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement
of related assets and liabilities using different attributes,
without having to apply complex hedge accounting provisions. Under
SFAS 159, entities that elect the fair value option (by instrument)
will report unrealized gains and losses in earnings at each
subsequent reporting date. The fair value option election is
irrevocable, unless a new election date occurs. SFAS 159
establishes presentation and disclosure requirements to help
financial statement users understand the effect of the
entity’s election on its earnings, but does not eliminate
disclosure requirements of other accounting standards. Assets and
liabilities that are measured at fair value must be displayed on
the face of the balance sheet. This statement is effective as of
the beginning of fiscal 2009. The Company is currently evaluating
the impact of adopting SFAS 159 and does not anticipate a material
effect, if adopted.
In September 2006, the FASB issued SFAS No. 157 (or SFAS
157), "Fair Value Measurements". This pronouncement defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement is
effective as of the beginning of fiscal 2009. In February 2008, the
FASB issued FSP FAS 157-2 which delays the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This
FSP partially defers the effective date of SFAS No. 157 to the
beginning of fiscal 2010, and interim periods within those fiscal
years for items within the scope of this FSP. The Company is
currently evaluating the impact of adopting SFAS 157 and does not
anticipate a material effect.
2. Net income per share:
A reconciliation of shares used in calculating basic and diluted
net income per share follows:
Years ended March 31, (In
thousands)
|
2008
|
2007
|
2006
|
Basic
|
314,660
|
318,539
|
335,912
|
Effect of assumed conversion
|
|
|
|
of employee stock options
|
|
|
|
and restricted stock
|
1,473
|
4,242
|
4,409
|
Diluted
|
316,133
|
322,781
|
340,321
|
|
======
|
======
|
======
|
Options to purchase approximately 12,312, 6,000 and 7,401 shares
of common stock at exercise prices ranging from $36.50 to $76.66
per share were outstanding during a portion of fiscal 2008, 2007
and 2006, respectively, but were not included in the computation of
diluted earnings per share because they were anti-dilutive. These
options expire through 2018.
3. Business operations:
The Company and its subsidiaries, which are located in the
United States, Ireland and the United Kingdom, manufacture and
market ethical and other pharmaceutical products. The Company
operates in only one segment. Sales are made primarily in the
United States and European markets. The net sales and long-lived
assets for the years ended March 31, 2008, 2007 and 2006, are from
the Company's or one of its subsidiaries' country of origin, as
follows:
|
|
|
|
|
|
(In thousands)
|
2008
|
|
2007
|
2006
|
|
|
|
Long-lived
|
|
|
|
Long-lived
|
|
|
|
Long-lived
|
|
Net
sales
|
|
Assets
|
|
Net
sales
|
|
assets
|
|
Net
sales
|
|
assets
|
United States
|
$3,433,233
|
|
$371,442
|
|
$3,121,091
|
|
$410,211
|
|
$2,738,592
|
|
$474,451
|
Ireland
|
17,729
|
|
513,559
|
|
13,680
|
|
121,610
|
|
11,064
|
|
118,786
|
United Kingdom
|
50,840
|
|
9,459
|
|
48,553
|
|
10,761
|
|
44,278
|
|
10,430
|
|
$3,501,802
|
|
$894,460
|
|
$3,183,324
|
|
$542,582
|
|
$2,793,934
|
|
$603,667
|
|
========
|
|
=======
|
|
========
|
|
=======
|
|
========
|
|
=======
|
Net sales exclude sales between the Company and its
subsidiaries.
Net sales by therapeutic class are as follows:
Years ended March 31, (In
thousands)
|
2008
|
2007
|
2006
|
|
|
|
|
Central nervous system (CNS)
|
$3,137,878
|
$2,794,685
|
$2,400,304
|
Cardiovascular
|
35,616
|
50,199
|
67,002
|
Other
|
328,308
|
338,440
|
326,628
|
|
$3,501,802
|
$3,183,324
|
$2,793,934
|
|
========
|
========
|
========
|
The Company's CNS franchise consisting of Lexapro
®,
Celexa
®
and
Namenda
®
accounted for 90%, 88% and 86%
of the Company's net sales for the years ended March 31, 2008, 2007
and 2006, respectively.
The following illustrates net sales to the Company’s
principal customers:
|
2008
|
2007
|
2006
|
|
|
|
|
McKesson Drug Company
|
38%
|
37%
|
35%
|
Cardinal Health, Inc.
|
30%
|
27%
|
26%
|
AmeriSource Bergen Corporation
|
15%
|
13%
|
20%
|
4. Accounts receivable:
Accounts receivable, net, consist of the following:
March 31,
(In thousands)
|
2008
|
2007
|
Trade
|
$377,779
|
$330,580
|
Other
|
68,208
|
52,075
|
|
$445,987
|
$382,655
|
|
=======
|
=======
|
5. Inventories:
Inventories, net of reserves for obsolescence, consist of the
following:
March 31,
(In thousands)
|
2008
|
2007
|
Raw materials
|
$234,288
|
$257,042
|
Work in process
|
1,360
|
8,449
|
Finished goods
|
189,490
|
168,672
|
|
$425,138
|
$434,163
|
|
=======
|
=======
|
6. Acquisitions
(In
thousands)
:
On January 10, 2007, the Company acquired Cerexa, Inc. (or
Cerexa), a biopharmaceutical company based in Alameda, California
for approximately $494,000 in a merger pursuant to which Cerexa
became a wholly-owned subsidiary of the Company. The Company
acquired worldwide development and marketing rights (excluding
Japan) to ceftaroline acetate (or ceftaroline), a next generation,
broad spectrum, hospital-based injectable cephalosporin
antibiotic. The acquisition of Cerexa also included a second
development-stage hospital-based antibiotic, ME1036, which has
shown activity against both aerobic and anaerobic gram-positive and
gram-negative bacteria, including common drug-resistant pathogens,
such as methicillin resistant Staphylococcus aureus, in preclinical
studies. The rights to ceftaroline and ME1036 are in-licensed
by Cerexa on an exclusive basis from Takeda Pharmaceutical Company
and Meiji Seika Kaisha, Ltd., respectively. The Company will
be obligated to pay an additional $100,000 in the event that annual
United States sales of ceftaroline exceed $500,000 during the five
year period following product launch. The acquisition was accounted
for under the purchase method of accounting and accordingly,
Cerexa’s results of operations are included in the
accompanying consolidated financial statements from the acquisition
date.
Of the $494,000 purchase price, $476,000 was assigned as
in-process research and development (or IPR&D). Substantially
all of this charge represented the value assigned to ceftaroline,
which had completed a Phase II clinical trial program in patients
with complicated skin and skin structure infections (or cSSSI).
Ceftaroline is being developed initially for the cSSSI indication
and the treatment of community acquired pneumonia (or CAP). Phase
III studies of ceftaroline for cSSSI began in February 2007. ME1036
was still in preclinical development at the acquisition date. These
compounds had not yet achieved regulatory approval for marketing
and consequently, the IPR&D was taken as a charge against
income during the fourth quarter of fiscal 2007. This charge was
not deductible for tax purposes.
In order to determine the estimated fair value of IPR&D, the
"income method" was utilized. This method applies a probability
weighting to the estimated future net cash flows that are derived
from projected sales revenues and estimated costs. These
projections are based on factors such as relevant market size,
patent protection, historical pricing of similar products and
expected industry trends. The estimated future net cash flows were
then discounted to the present value using a discount rate of 16%.
This analysis was performed for each compound independently.
For purposes of applying the income method, the projected launch
dates following FDA approval were estimated for ceftaroline and
ME1036, at which times the Company would expect the resulting
products to generate cash flows. The cost to complete these
development programs will depend on whether these programs are
brought to their final stages of development and are ultimately
submitted to the FDA for approval. All internal and external
research and development expenses are expensed as incurred. All of
our development programs are subject to the normal risks and
uncertainties associated with demonstrating the safety and efficacy
required to obtain FDA or other regulatory approvals.
During fiscal 2008, two Phase III studies of ceftaroline in
complicated skin and skin structure infections completed enrollment
and two Phase III studies in patients with community acquired
pneumonia began enrollment. The Company anticipates the cSSSI
results in calendar 2008 and the CAP results in 2009.
7. Marketable securities:
Available-for-sale debt securities consist of the following:
(In thousands)
|
March 31,
2008
|
|
Estimated fair
value
|
|
Gains in accumulated other
comprehensive
income
|
|
Losses in accumulated other
comprehensive
income
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Variable rate demand
notes
|
$ 177,900
|
|
|
|
|
Municipal bonds and
notes
|
59,144
|
|
$ 309
|
|
|
Commercial
paper
|
684,506
|
|
3,393
|
|
|
Floating rate
notes
|
22,422
|
|
|
|
(
$ 506
)
|
Total
current securities
|
943,972
|
|
3,702
|
|
(
506
)
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
Variable rate demand
notes
|
$ 129,145
|
|
$ 10
|
|
|
Municipal bonds and
notes
|
70,009
|
|
798
|
|
|
Auction rate
notes
|
55,340
|
|
|
|
|
Floating rate
notes
|
409,131
|
|
|
|
($
18,297
)
|
Total
noncurrent securities
|
663,625
|
|
808
|
|
(
18,297
)
|
|
|
|
|
|
|
Total available-for-sale debt
securities
|
$1,607,597
|
|
$4,510
|
|
($18,803)
|
|
========
|
|
=====
|
|
======
|
|
March 31,
2007
|
|
Estimated fair
value
|
|
Gains in accumulated other
comprehensive
income
|
|
Losses in accumulated other
comprehensive
income
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Variable rate demand
notes
|
$ 404,780
|
|
|
|
|
Municipal bonds and
notes
|
54,237
|
|
|
|
($ 31)
|
Commercial
paper
|
329,934
|
|
|
|
|
Total
current securities
|
788,951
|
|
|
|
(
31
)
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
Variable rate demand
notes
|
$ 116,580
|
|
|
|
|
Municipal bonds and
notes
|
78,757
|
|
|
|
($ 55)
|
Auction rate
notes
|
109,375
|
|
|
|
|
Floating rate
notes
|
355,680
|
|
|
|
|
Total
noncurrent securities
|
660,392
|
|
|
|
(
55
)
|
|
|
|
|
|
|
Total available-for-sale debt
securities
|
$1,449,343
|
|
|
|
($ 86)
|
|
========
|
|
|
|
====
|
Proceeds from the sales of available-for-sale debt securities
were $2,983,699 and $2,018,325 during 2008 and 2007, respectively.
Gross realized gains on those sales during 2008 and 2007 were
$22,318 and $3,517, respectively. For purpose of determining gross
realized gains and losses, the cost of securities is based on
average cost. Net unrealized holding losses on available-for-sale
debt securities in the amount of $14,293 and $86 for the years
ended March 31, 2008 and March 31, 2007, respectively, have been
included in Stockholders’ equity: Accumulated other
comprehensive income.
Contractual maturities of available-for-sale debt
securities at March 31, 2008, are as follows:
(In
thousands)
|
Estimated fair
value
|
Within one year
|
$ 943,972
|
After 1-5 years
|
373,096
|
After 5-10 years
|
71,456
|
After 10 years
|
219,073
|
|
$1,607,597
|
|
========
|
Actual maturities may differ from contractual maturities because
some borrowers have the right to call or prepay obligations with or
without call penalties.
The Company currently invests funds in Variable Rate Demand
Notes, Municipal Bonds and Notes, Commercial Paper including money
market instruments, Auction Rate Securities and European Bank
Floating Rate Notes that have major bank liquidity agreements.
Certain securities are subject to a hard-put option(s) where the
principal amount is contractually assured by the issuer and any
resistance to the exercise of these options would be deemed as a
default by the issuer. Such a potential default would be reflected
in the issuer’s respective credit rating, for which the
Company maintains investment grade requirements pursuant to its
corporate investment guidelines. While the Company believes its
investments that have net unrealized losses are temporary, further
declines in the value of these investments may be deemed other than
temporary if the credit and capital markets were to continue to
deteriorate in future periods. The Company has the ability and
intends to hold its investments until a recovery of fair value,
which may be at maturity. Therefore, the Company does not consider
these investments to be other-than-temporarily impaired and will
continue to monitor global market conditions to minimize the
uncertainty of impairments in future periods.
8. Intangible assets:
License agreements, product rights and other intangibles consist
of the following:
|
|
|
|
(In thousands, except for
amortization
|
|
March 31,
2008
|
Ma
rch 31,
2007
|
periods which are
stated in years)
|
Weighted average
|
Gross carrying
|
Accumulated
|
Gross carrying
|
Accumulated
|
|
amortization
period
|
amount
|
amortization
|
amount
|
amortization
|
Amortized intangible assets:
|
|
|
|
|
|
License agreements
|
11
|
$191,300
|
$95,374
|
$225,209
|
$151,556
|
Product rights
|
11
|
71,350
|
29,963
|
83,008
|
31,224
|
Buy-out of royalty
agreements
|
11
|
465,061
|
82,768
|
95,061
|
74,262
|
Trade names
|
20
|
34,190
|
26,076
|
34,190
|
23,487
|
Non-compete agreements
|
13
|
16,000
|
16,000
|
22,987
|
22,987
|
Other
|
1
|
3,921
|
3,854
|
8,848
|
8,738
|
Total
|
11
|
781,822
|
$254,035
|
$469,303
|
$312,254
|
|
|
========
|
========
|
========
|
========
|
Amortization of license agreements, product rights and other
intangibles was charged to selling, general and administrative
expense for fiscal years ended March 2008, 2007 and 2006 and
amounted to approximately $44,646, $54,736 and $44,385,
respectively. Future annual amortization expense expected is as
follows:
Years ending March 31, (In
thousands)
|
|
2009
|
$ 56,632
|
2010
|
33,286
|
2011
|
23,767
|
2012
|
39,555
|
2013
|
41,723
|
|
$194,963
|
|
=======
|
In fiscal 2008 and 2007, the Company determined that certain
license agreements and product rights were impaired due to a
significant reduction in sales of those products because of
heightened competition. These impairments amounted to $5,080 in
fiscal 2008 and $12,564 in fiscal 2007, and were included in
amortization expense.
In December 2007, the Company received marketing approval from
the FDA for Bystolic™, its novel beta-blocker for the
treatment of hypertension. Upon approval, the Company paid Mylan
Inc. (or Mylan), its licensor for the product, $25,000. This
milestone payment is currently being amortized using the
straight-line method over the useful life of the product and is
being recorded to selling, general and administrative expense. In
February 2008, the Company and Mylan amended their agreement which
terminated Mylan’s further commercial rights for Bystolic and
reduced the Company’s future payment obligations to Mylan.
Pursuant to the amendment, the Company paid Mylan $370,000 and
remains obligated to pay Mylan its original contractual royalties
for a period of three years after which the royalty rate will be
reduced. The payment will be amortized beginning in the fourth
quarter of fiscal 2011, the point at which the Company begins
deriving the benefit of the payment. This amount was recorded to
Buy-out of royalty agreements.
Also in fiscal 2008, the Company made a milestone payment of
$20,000 to Daiichi Sankyo (or Sankyo) for the co-promotion rights
to Azor™. On May 12, 2008 the Company and Sankyo terminated
their co-promotion agreement for Azor, effective July 1, 2008. See
Note 16 to the Consolidated Financial Statements.
In fiscal 2008, the Company entered into two license agreements:
the first was with Ironwood Pharmaceuticals, Inc. (or Ironwood,
formerly know as Microbia, Inc.) for their first-in-class compound
linaclotide, currently being developed for the treatment of
constipation predominant irritable bowel syndrome (or IBS-C),
chronic constipation (or CC) and other gastrointestinal disorders.
The second was with Novexel, S.A. (or Novexel) for the development
of Novexel’s novel intravenous beta lactamase inhibitor,
NXL104 in combination with the Company’s ceftaroline. These
upfront payments were recorded to research and development expense
since these products are in the early states of development.
In fiscal 2007, the Company entered into a license agreement
with Laboratorios Almirall, S.A. (or Almirall), a pharmaceutical
company headquartered in Barcelona, Spain for the development and
exclusive U.S. marketing rights to aclidinium (or LAS 34273),
Almirall’s novel long-acting muscarinic antagonist.
For fiscal years ended March 31, 2008 and 2007, the upfront and
milestone payments made in conjunction with new license agreements
recorded to research and development expense amounted to $180,000
and $80,000, respectively.
9. Accrued expenses:
Accrued expenses consist of the
following:
March 31, (In thousands)
|
2008
|
2007
|
Managed care and Medicaid rebates
|
$ 173,705
|
$146,500
|
Employee compensation and other
benefits
|
111,129
|
83,003
|
Clinical research and development
costs
|
65,608
|
69,973
|
Other
|
36,663
|
33,519
|
|
$387,105
|
$332,995
|
|
=======
|
=======
|
10. Long Term Debt
(In
thousands)
:
On December 7, 2007, the Company established a $500,000
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 $750,000 based upon agreement with the participating lenders and
expires on December 7, 2012. As of May 28, 2008, 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.
11. Commitments
(In
thousands)
:
Leases:
The Company leases manufacturing, office and
warehouse facilities, equipment and automobiles under operating
leases expiring through fiscal 2018. Rent expense approximated
$3
4,630, $33,149 and
$30,814 for fiscal years ended March 31, 2008, 2007 and 2006,
respectively. Future minimum rental payments under noncancellable
leases are as follows:
Years ending March 31,
|
|
2009
|
$ 32,594
|
2010
|
24,510
|
2011
|
14,505
|
2012
|
8,973
|
2013
|
9,162
|
Thereafter
|
35,433
|
|
$125,177
|
|
=======
|
Royalty agreements:
The Company has royalty agreements on
certain of its licensed products. Royalties are paid based on a
percentage of sales, as defined. For fiscal years ended March 31,
2008, 2007 and 2006, royalty expense amounted to $1,071, $4,742 and
$5,896, respectively.
License agreements
: The Company has entered into several
license agreements for products currently under development. The
Company may be obligated in future periods to pay additional
amounts subject to the achievement of certain product milestones,
as defined.
Inventory purchase commitments:
The Company has inventory
purchase commitments of $136,209 as of March 31, 2008.
12. Stockholders' equity
(In thousands,
except per share data)
:
In August 2007, the stockholders of the Company voted to adopt
the 2007 Equity Incentive Plan (or the 2007 Plan) which replaces
and supersedes all prior stock option plans. Under the 2007 Plan,
13,950 shares were authorized to be issued to employees of the
Company and its subsidiaries at prices not less than the fair
market value of the common stock at the date of grant. 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.
The following table summarizes information about stock options
outstanding at March 31, 2008:
|
|
Options
outstanding
|
Options
exercisable
|
|
|
|
Weighted average
|
|
|
|
|
|
|
remaining
|
|
|
|
Range of
|
|
Number
|
contractual life
|
Weighted average
|
Number
|
Weighted average
|
exercise
prices
|
|
outstanding
|
(in
years)
|
exercise
price
|
exercisable
|
exercise
price
|
|
|
|
|
|
|
|
$ 9.77 to $30.00
|
|
1,916
|
1.4
|
$12.90
|
1,916
|
$12.90
|
30.01 to 50.00
|
|
13,784
|
4.4
|
40.52
|
7,383
|
40.42
|
50.01 to 76.66
|
|
3,594
|
4.9
|
54.46
|
1,480
|
56.68
|
|
|
19,294
|
4.2
|
40.38
|
10,779
|
37.77
|
|
|
=====
|
|
|
=====
|
|
Transactions under the stock option plan are summarized as
follows:
|
|
|
Weighted average
|
|
|
|
|
remaining
|
Aggregate
|
|
|
Weighted average
|
contractual life
|
intrinsic
|
|
Shares
|
exercise
price
|
(in
years)
|
value
|
Stock options:
|
|
|
|
|
Outstanding at March 31, 2005
|
|
|
|
|
(at $4.55 to $76.66 per share)
|
27,603
|
30.92
|
|
|
Granted (at $36.50 to $45.76 per
share)
|
2,950
|
40.45
|
|
|
Exercised (at $4.55 to $48.34 per
share)
|
( 4,890)
|
17.13
|
|
|
Forfeited
|
(
1,598
)
|
44.46
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
|
|
(at $4.55 to $76.66 per share)
|
24,065
|
33.98
|
|
|
Granted (at $38.94 to $51.54 per
share)
|
3,859
|
49.35
|
|
|
Exercised (at $4.55 to $53.23 per
share)
|
( 8,568)
|
24.84
|
|
|
Forfeited
|
(
1,132
)
|
38.90
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
|
|
(at $5.64 to $76.66 per share)
|
18,224
|
40.91
|
|
|
Granted (at $37.26 to $51.96 per
share)
|
3,248
|
38.68
|
|
|
Exercised (at $5.64 to $53.23 per
share)
|
( 734)
|
36.68
|
|
|
Forfeited
|
(
1,444
)
|
44.62
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
|
|
(at $9.77 to $76.66 per share)
|
19,294
|
$40.38
|
4.2
|
$74
|
|
=====
|
=====
|
===
|
====
|
|
|
|
|
|
Exercisable at March 31, 2008
|
10,779
|
$37.77
|
3.0
|
$69
|
|
=====
|
=====
|
===
|
====
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
grant date
|
|
|
|
|
fair
value
|
|
|
Restricted stock:
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
|
|
Granted
|
453
|
$37.33
|
|
|
Vested
|
(
2
)
|
$39.88
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
|
|
|
451
|
$37.32
|
|
|
|
=====
|
=====
|
|
|
At March 31, 2008, 10,368 shares were available for grant.
The total intrinsic value of stock options exercised during the
years ended March 31, 2008, 2007 and 2006 was $9,461, $203,105, and
$109,638, respectively, and the total intrinsic value of restricted
stock vested during the year ended March 31, 2008 was $62. The
weighted average grant date fair value per stock option granted
during the years ended March 31, 2008, 2007 and 2006 were $15.20,
$16.52 and $14.91, respectively. The total cash received as a
result of stock option exercises for the years ended March 31,
2008, 2007 and 2006 was approximately $26,655, $210,920 and
$78,666, respectively. In connection with these exercises, the tax
benefit realized was $1,755, $80,225 and $35,311, respectively. The
Company settles employee stock option exercises with newly issued
common shares.
13. Contingencies:
The Company remains a defendant in actions filed in various
federal district courts alleging certain violations of the federal
anti-trust laws in the marketing of pharmaceutical products. In
each case, the actions were filed against many pharmaceutical
manufacturers and suppliers and allege price discrimination and
conspiracy to fix prices in the sale of pharmaceutical products.
The actions were brought by various pharmacies (both individually
and, with respect to certain claims, as a class action) and seek
injunctive relief and monetary damages. The Judicial Panel on
Multi-District Litigation ordered these actions coordinated (and,
with respect to those actions brought as class actions,
consolidated) in the Federal District Court for the Northern
District of Illinois (Chicago) under the caption
"In re Brand
Name Prescription Drugs Antitrust Litigation."
On November 30, 1998, the defendants remaining in the
consolidated federal class action (which proceeded to trial
beginning in September 1998), including the Company, were granted a
directed verdict by the trial court after the plaintiffs had
concluded their case. In ruling in favor of the defendants, the
trial judge held that no reasonable jury could reach a verdict in
favor of the plaintiffs and stated "the evidence of conspiracy is
meager, and the evidence as to individual defendants paltry or
non-existent." The Court of Appeals for the Seventh Circuit
subsequently affirmed the granting of the directed verdict in the
federal class case in the Company’s favor.
Following the Seventh Circuit’s affirmation of the
directed verdict in the Company’s favor, the Company secured
the voluntary dismissal of the conspiracy allegations contained in
all of the federal cases brought by individual plaintiffs who
elected to "opt-out" of the federal class action, which cases were
included in the coordinated proceedings, as well as the dismissal
of similar conspiracy and price discrimination claims pending in
various state courts. The Company remains a defendant, together
with other manufacturers, in many of the federal opt-out cases
included in the coordinated proceedings to the extent of claims
alleging price discrimination in violation of the Robinson-Patman
Act. While no discovery or other significant proceedings with
respect to the Company has been taken to date in respect of such
claims, there can be no assurance that the Company will not be
required to actively defend such claims or to pay substantial
amounts to dispose of such claims. However, by way of a decision
dated January 25, 2007, the judge handling the Robinson-Patman Act
cases for certain of a smaller group of designated defendants whose
claims are being litigated on a test basis, granted summary
judgment to those designated defendants due to plaintiffs’
failure to demonstrate any antitrust injury. Subsequently, the
Court also granted the designated defendants’ motion for
summary judgment with respect to plaintiffs’ effort to obtain
injunctive relief. It is likely that the plaintiffs will pursue an
appeal of both rulings.
The Company and certain of its officers have been named as
defendants in consolidated securities cases brought in the U.S.
District Court for the Southern District of New York (or the Court)
on behalf of a purported class of all purchasers of the
Company’s securities between August 15, 2002 and August 31,
2004 or September 1, 2004 and consolidated under the caption "
In
re Forest Laboratories, Inc. Securities Litigation
,
05-CV-2827-RMB." The consolidated complaints, which assert
substantially similar claims, allege that the defendants made
materially false and misleading statements and omitted to disclose
material facts with respect to the Company’s business,
prospects and operations, in violation of Section 19(b) and 20(a)
of the Securities Exchange Act of 1934 and SEC Rule 10b-5
thereunder. In July 2006, the Court granted in part and denied in
part the Company’s motion to dismiss. Claims remain pending
with respect to alleged marketing statements and omissions with
respect to the Company’s drugs for the treatment of
depression. The complaint seeks unspecified damages and
attorneys’ fees. Fact and expert discovery have been
completed and a trial date is expected to be set shortly. In
addition, the Company’s directors and certain of its officers
have been named as defendants in two derivative actions purportedly
brought on behalf of the Company, filed in the same Court and
consolidated under the caption "
In re Forest Laboratories, Inc.
Derivative Litigation
, 05-CV-3489 (RJH)." The complaints in
these derivative actions allege that the defendants have breached
their fiduciary duties by, among other things, causing the Company
to misrepresent its financial results and prospects, selling shares
of its common stock while in possession of proprietary non-public
information concerning its financial condition and future
prospects, abusing its control and mismanaging the Company and
wasting corporate assets. The complaint seeks damages in an
unspecified amount and various forms of equitable relief. In
September 2006, the Court granted the Company’s motion to
dismiss this case on the ground that the plaintiffs failed to make
a pre-suit demand on our Board of Directors. By stipulation,
plaintiffs appeal of this decision to the United States Court of
Appeals for the Second Circuit and any other actions in this
litigation have been stayed until August 31, 2008.
Forest Laboratories, Inc. and Forest Pharmaceuticals, Inc. are
named, in one capacity or another, as defendants, along with
numerous other manufacturers of pharmaceutical products in various
actions which allege that the plaintiffs (all governmental
entities) were overcharged for their share of Medicaid drug
reimbursement costs as a result of reporting by manufacturers of
"average wholesale prices" (or AWP) which did not correspond to
actual provider costs of prescription drugs. Actions brought by
nearly all of the counties of the State of New York (first action
commenced January 14, 2003) and by the State of Iowa (commenced
October 9, 2007) are pending in the United States District Court
for the District of Massachusetts under the caption "
In re
Pharmaceutical Industry AWP Litigations
" for coordinated
treatment. In addition, various state court actions are pending in
actions brought by the States of Alabama (commenced January 26,
2005), Alaska (commenced October 6, 2006), Hawaii (commenced April
27, 2006), Idaho (commenced June 8, 2007), Illinois (commenced
February 7, 2005) and Mississippi (commenced October 20, 2005), as
well as actions brought by the Commonwealth of Kentucky (commenced
November 4, 2004) and the State of Utah (commenced in May 2008).
Furthermore, state court actions pending in the State Court of New
York were brought by three of the New York counties, Erie
(commenced March 8, 2005), Schenectady (commenced May 10, 2006) and
Oswego (commenced May 11, 2006).
Motions to dismiss have been filed with respect to most of the
actions. While the motions to dismiss largely have been denied,
some claims have been dismissed, including RICO claims brought by
various New York counties whose remaining claims are pending in the
MDL proceeding in Massachusetts. Discovery is ongoing. As of this
date, no trials have been scheduled with respect to The Company,
and it is not anticipated that any trial involving the Company will
take place before the end of calendar 2009, at the earliest.
The Company is a defendant in an action commenced on December
27, 2004, in the District of Columbia entitled
Louisiana
Wholesale Drug Company, Inc. and Rochester Drug Cooperative v.
Biovail Corporation and Forest Laboratories, Inc.
The complaint
alleges attempts to monopolize under Section 2 of the Sherman Act
with respect to the product Tiazac resulting from Biovail’s
January 2001 patent listing in the Food and Drug
Administration’s "Orange Book" of Approved Drug Products with
Therapeutic Equivalence Evaluations. Biovail withdrew the Orange
Book listing of the patent at issue following an April 2002 Consent
Order between Biovail and the Federal Trade Commission. Biovail is
the owner of the NDA covering Tiazac which the Company distributes
in the United States under license from Biovail. The action, which
purports to be brought as a class action on behalf of all persons
or entities who purchased Tiazac directly from the Company from
February 12, 2001 to the present, seeks treble damages and related
relief arising from the allegedly unlawful acts. By way of a ruling
dated March 31, 2005, Judge Robertson granted Biovail’s
motion for summary judgment in a related action (Twin Cities v.
Biovail) to which the Company is not a party. The plaintiffs in the
Louisiana Wholesale case then amended their complaint to add a
conspiracy charge against Biovail and Forest and an allegation that
plaintiffs were damaged as a result of a delay by Biovail and
Forest in marketing their own generic version of Tiazac. The
Company and Biovail filed a motion for summary judgment and a
motion to dismiss directed to the complaint. By way of a decision
dated June 22, 2006, Judge Robertson granted defendants’
motion for summary judgment, both with respect to original claims,
as well as the newly-added claim asserted by the Louisiana
Wholesale plaintiffs. That decision, along with the original Twin
Cities decision, is now
sub judice
before the United States
Court of Appeals for the District of Columbia.
The United States Attorney’s Office for the District of
Massachusetts is investigating whether the Company may have
committed civil or criminal violations of the federal
"Anti-Kickback" laws and laws and regulations related to
"off-label" promotional activities in connection with our marketing
of Celexa, Lexapro and other products. As part of this
investigation, the Company received a subpoena from the Office of
Inspector General of the Federal Office of Personnel Management
requesting documents relating to Celexa and have subsequently
received further subpoenas from the United States Attorney’s
Office concerning Lexapro and other products, including Namenda and
Combunox. The subpoenas request documents relating to a broad range
of the Company’s marketing and promotional activities during
the period from January 1, 1997 to the present. In April 2006, the
Company received an additional subpoena from the United States
Attorney’s Office for the District of Massachusetts
requesting documents concerning its manufacture and marketing of
Levothroid, the Company’s levothyroxine supplement for the
treatment of hypothyroidism. The Company understands that this
subpoena was issued in connection with that office’s
investigation of potential civil or criminal violation of federal
health laws in connection with Levothroid. The Company is
continuing to cooperate with this investigation.
The Company received a subpoena dated January 26, 2006 from the
United States Attorney’s Office for the District of
Massachusetts requesting documents related to its commercial
relationship with Omnicare, Inc. (or Omnicare), a long term care
pharmacy provider, including but not limited to documents
concerning its contracts with Omnicare, and rebates and other
payments made by the Company to Omnicare. The Company understands
that the subpoena was issued in connection with that office’s
investigation of potential criminal violations of federal
healthcare laws by Omnicare and potentially others and is
cooperating in this investigation.
In September 2007, the United States Court of Appeals for the
Federal Circuit upheld the validity of the Company’s
composition of matter patent covering Lexapro and the decision of
the United States District Court for the District of Delaware
granting the Company an injunction preventing Teva from marketing a
generic version of Lexapro. In July 2006, the Company and Lundbeck
commenced similar patent infringement litigation against Caraco
Pharmaceutical Laboratories, Ltd., who had filed an ANDA with the
FDA seeking to market a generic equivalent to Lexapro, in the
United States District Court for the Eastern District of Michigan
under the caption
Forest Laboratories, Inc. et al. v. Caraco
Pharmaceutical Laboratories, Ltd. et al
. This case was stayed
during the pendency of the Federal Circuit appeal in the case
against Teva. A status conference is scheduled for June 12,
2008.
In February 2007, Caraco filed a single-count declaratory
judgment action against the Company and Lundbeck in the United
States District Court for the Eastern District in Michigan for
non-infringement of a different patent for Lexapro that is listed
in the FDA’s Orange Book. After Forest and Lundbeck granted
Caraco an irrevocable covenant not to sue, Chief Judge Friedman
dismissed Caraco’s action for lack of subject matter
jurisdiction. On April 1, 2008, a three-judge panel of the United
States Court of Appeals for the Federal Circuit reversed and
remanded Chief Judge Friedman’s decision. We have filed a
combined petition for panel rehearing and hearing
en
banc
.
Beginning in January 2008, the Company and Merz, its licensor
for Namenda, commenced a series of patent infringement lawsuits in
the United States District Court for the District of Delaware and
other districts, including the United States District Court for the
Eastern District of North Carolina, against several companies
(including Teva, Mylan and Barr Laboratories, Inc.) who have
notified them that they have filed ANDAs with the FDA seeking to
obtain approval to market generic versions of Namenda. These
actions are in the early stages and no scheduling order has been
entered.
On July 14, 2006, the Company was named as a defendant, together
with approximately 20 other pharmaceutical manufacturers and
wholesalers in an action brought by RxUSA Wholesale, Inc. in the
United States District Court for the Eastern District of New York
under the caption
RxUSA Wholesale, Inc. v. Alcon Laboratories,
et al.
The action alleges various antitrust and related claims
arising out of an alleged concerted refusal by the defendant
manufacturers and wholesalers to sell prescription drugs to
plaintiff, a secondary drug wholesaler. Motions to dismiss have
been filed by all of the defendants, and those motions are now
sub judice
before the court.
In April 2006, an action was commenced in the United States
District Court for the Southern District of New York against the
Company and Lundbeck under the caption
Infosint S.A. v. H.
Lundbeck A/S, H. Lundbeck Inc. and Forest Laboratories, Inc
. In
the action, the plaintiff alleges that the importation and sale in
the United States of "citalopram products" by Lundbeck and the
Company infringes certain claims of a manufacturing process patent
owned by plaintiff. The action seeks injunctive relief as well as
damages under U.S. patent laws. The Company believes that the
plaintiff’s claim is without merit. Further, the Company
believes that its license agreements with Lundbeck require Lundbeck
to indemnify the Company from the cost of defending this action and
from any associated damages or awards.
The Company has been named in approximately 45 product liability
lawsuits that remain active. Most of the lawsuits allege that
Celexa or Lexapro caused or contributed to individuals committing
or attempting suicide. The suits seek substantial compensatory and
punitive damages. The Company is vigorously defending these suits.
A multi-district proceeding (or MDL) has been established for this
litigation, with the federal court cases being transferred to Judge
Rodney Sippel in the United States District Court for the Eastern
District of Missouri.
The Company expects the MDL will ease the burden of defending
these cases. While litigation is inherently subject to uncertainty
and accordingly the Company cannot predict or determine the outcome
of this litigation, the Company believes there is no merit to these
actions and that the consolidated proceedings will promote the
economical and efficient resolution of these lawsuits and provide
the Company with a meaningful opportunity to vindicate the
Company’s products. The Company currently maintains $140
million of product liability coverage per "occurrence" and in the
aggregate.
The Company received two subpoenas dated April 27, 2007
from the Office of the Attorney General of the State of Delaware
requesting documents relating to its use of the "nominal price"
exception to the Medicaid program’s "Best Price" rules.
The Company understands that comparable subpoenas have been or will
be issued to other pharmaceutical manufacturers as part of that
office’s investigation of the use of the "nominal price"
exception and is complying with the subpoenas.
The Company is also subject to various legal proceedings that
arise from time to time in the ordinary course of its business.
Although the Company believes that the proceedings brought against
it, including the product liability cases described above, are
without merit and it has product liability and other insurance,
litigation is subject to many factors which are difficult to
predict and there can be no assurance that the Company will not
incur material costs in the resolution of these matters.
14. Income taxes:
The components of income before income tax expense were:
|
|
|
|
Years ended March 31, (In
thousands)
|
2008
|
2007
|
2006
|
|
|
|
|
U.S.
|
$ 440,271
|
($ 26,935)
|
$446,610
|
Foreign
|
770,126
|
735,779
|
422,902
|
Income before income tax expense
|
$1,210,397
|
$708,844
|
$869,512
|
|
========
|
=======
|
=======
|
The provision for income taxes consists of the following:
|
|
|
|
Years ended March 31, (In
thousands)
|
2008
|
2007
|
2006
|
Current:
|
|
|
|
U.S. federal
|
$194,491
|
$248,846
|
$155,906
|
Section 965
repatriation
|
|
|
( 36,414)
|
State and local
|
18,139
|
15,397
|
12,690
|
Foreign
|
56,885
|
61,230
|
61,850
|
|
269,515
|
325,473
|
194,032
|
Deferred:
|
|
|
|
U.S.
|
( 26,549)
|
( 79,147)
|
( 14,499)
|
Foreign
|
(
502
)
|
8,415
|
(
18,535
)
|
|
( 27,051)
|
(
70,732
)
|
(
33,034
)
|
|
|
|
|
|
$242,464
|
$254,741
|
$160,998
|
|
=======
|
=======
|
=======
|
The reasons for the difference between the provision for income
taxes and expected federal income taxes at statutory rates are as
follows:
Years ended March 31, (percentage of
income
before income tax
expense)
|
2008
|
2007
|
2006
|
U.S. statutory rate
|
35.0%
|
35.0%
|
35.0%
|
Acquired in-process research and
development
|
|
23.5
|
|
Effect of foreign operations
|
(14.5)
|
(21.8)
|
(10.8)
|
Impact of Section 965 repatriation
|
|
|
( 4.2)
|
Research credit
|
( 1.6)
|
( 2.2)
|
( 1.5)
|
State and local taxes, less federal tax
benefit
|
1.4
|
2.4
|
0.8
|
Permanent differences and other items
|
(
0.3
)
|
(
1.0
)
|
(
0.8
)
|
|
20.0%
|
35.9%
|
18.5%
|
|
===
|
===
|
===
|
The Company’s effective tax rate for fiscal 2008 and 2006,
respectively, is lower than the statutory rate principally as a
result of the proportion of earnings generated in lower-taxed
foreign jurisdictions as compared with the United States. These
earnings include development and manufacturing income from our
operations in Ireland, which operate under tax incentives that
currently expire in 2010. The Company's effective tax rate in
fiscal 2007 was higher than the statutory rate principally as a
result of the in-process R&D expensed as part of the Cerexa
acquisition completed in January 2007.
Net deferred income taxes relate to the following timing
differences:
March 31,
(In
thousands)
|
2008
|
2007
|
Inventory reserves
|
$ 47,278
|
$ 40,631
|
Receivable allowances and other
reserves
|
93,900
|
85,486
|
Depreciation
|
( 2,097)
|
( 4,031)
|
Amortization
|
52,212
|
23,467
|
Carryforwards and credits
|
81,334
|
91,566
|
Accrued liabilities
|
21,548
|
22,886
|
Employee stock option tax benefits
|
1,932
|
16,139
|
Other
|
12,723
|
743
|
|
308,830
|
276,887
|
Valuation allowance
|
(
23,772
)
|
(
23,724
)
|
Deferred taxes, net
|
$285,058
|
$253,163
|
|
=======
|
=======
|
The Company has net operating loss carryforwards primarily
related to the purchase of Cerexa in January 2007 as well as excess
charitable contribution carryovers which are available to reduce
future U.S. federal and state taxable income, expiring at various
times between 2008 and 2025. Although not material, valuation
allowances have been established for a portion of deferred tax
assets acquired as part of the Cerexa purchase as the Company has
determined that it was more likely than not that these benefits
will not be realized.
On October 22, 2004, the American Jobs Creation Act of 2004 (or
the Act) was signed into law. One of the key provisions of the Act,
Internal Revenue Code Section §965, included a temporary
incentive for U.S. multinationals to repatriate foreign earnings by
providing an elective 85% dividends received deduction for certain
cash dividends from controlled foreign corporations.
Pursuant to the provision, in fiscal 2005, the Company
repatriated $1,238,900 and recorded a resulting tax cost of
$90,657. In fiscal 2006, the Company reversed $36,414 of the prior
year accrual due to updated guidance issued by the U.S. Treasury
Department. The originally enacted law did not specifically address
whether the dividends received deduction applied to the required
tax gross-up related to the dividend. As of the date the financial
statements were prepared for the March 2005 fiscal year, the
Company accrued the tax assuming the deduction did not apply, which
represented the additional $36,414 of tax. In May 2005, the U.S.
Treasury Department clarified that the dividends received deduction
in fact did apply to the tax gross-up amount and accordingly the
$36,414 tax accrual was reversed in the March 2006 fiscal year.
The Company has satisfied all of the requirements of this
provision including that the dividend amounts have been invested in
the United States pursuant to the domestic reinvestment plan. As of
fiscal 2006, the Company has made 100% of the required expenditures
under the safe harbor provided by the Internal Revenue Service (or
IRS).
Excluding the repatriation discussed above, no provision has
been made for income taxes on the remaining undistributed earnings
of the Company’s foreign subsidiaries of approximately
$2,335,962 at March 31, 2008 as the Company intends to indefinitely
reinvest such earnings.
The Company is subject to income taxes in the United States and
several foreign jurisdictions. The Company and its U.S.
subsidiaries file a consolidated U.S. federal income tax return.
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 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 files tax returns in the United States and certain
foreign jurisdictions including Ireland. The Company’s income
tax returns for fiscal years prior to 1999 in most jurisdictions
and prior to 2002 in Ireland 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, which has recently concluded its
examination of the Company’s U.S. federal income tax returns
for fiscal 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 has been filed with the IRS and the
matter is in administrative appeals.
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. However, at this time
Management believes that it is unlikely that the ultimate outcome
will be determined within the next 12 months.
On April 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board (or FASB) Interpretation 48
(or FIN 48), "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". As a result of adoption
of FIN 48, the Company recognized an increase of $13,796, net of
related tax benefits, to the unrecognized tax benefits (or UTB)
balance with a corresponding reduction to the April 1, 2007 balance
of retained earnings, resulting in an opening UTB balance of
$143,605. As of March 31, 2008, the Company’s consolidated
balance sheet reflects UTBs of $178,471, of which $167,671 would
impact the effective tax rate if recognized. A reconciliation of
the beginning and ending amount of UTBs is as follows:
(In thousands)
Balance as of April 1, 2007
|
$143,605
|
Additions related to prior year
positions
|
16,883
|
Reduction related to prior year
positions
|
( 24,435)
|
Additions related to current year
positions
|
42,418
|
Balance as of March 31, 2008
|
$178,471
|
|
=======
|
The Company recognized interest accrued related to UTBs in
income tax expense and related liability accounts on the balance
sheet. During the fiscal year ended March 31, 2008, the Company
recognized $9,599 of interest. Accrued interest related to UTBs
totaled $19,939 as of March 31, 2008.
It is anticipated that the amount of UTBs will not change
significantly within the next 12 months.
15. Quarterly financial data (unaudited):
(In thousands, except per share
data)
|
|
|
|
Diluted
|
|
|
|
Net
|
earnings (loss)
|
|
Net sales
|
Gross profit
|
income (loss)
|
per share
|
2008
|
|
|
|
|
First quarter
|
$842,616
|
$656,376
|
$268,162
|
$0.83
|
Second quarter
|
842,337
|
652,345
|
225,244
|
0.71
|
Third quarter
|
918,146
|
704,640
|
301,757
|
0.96
|
Fourth quarter
|
898,703
|
688,327
|
172,770
|
0.55
|
|
|
|
|
|
2007
|
|
|
|
|
First quarter
|
$758,768
|
$583,083
|
$200,607
|
$0.62
|
Second quarter
|
778,676
|
593,578
|
241,111
|
0.75
|
Third quarter
|
830,431
|
634,892
|
250,301
|
0.78
|
Fourth quarter (a)
|
815,449
|
626,169
|
( 237,916)
|
( 0.75)
|
|
|
|
|
|
(a) Includes a $476,000 charge to IPR&D related to the
Cerexa acquisition.
16. Subsequent Event
(In
thousands)
:
On May 12, 2008, the Company and its licensing partner Daiichi
Sankyo, Inc. (or Sankyo) announced that effective July 1, 2008,
they have terminated their co-promotion agreement for Azor
(amlodipine and olmesartan medoxomil), Sankyo’s fixed-dose
combination of two antihypertensives, the calcium channel blocker
amlodipine besylate and the angiotensin receptor blocker olmesartan
medoxomil. In the first quarter of fiscal 2009, the Company will
record a one-time charge of approximately $44,100 which is composed
of a one-time payment to Sankyo of approximately $26,600 related to
the termination of the agreement and $17,500 related to the
unamortized portion of the initial upfront payment. The Company
determined that the resources it had allocated to the Azor
co-promotion will be better utilized in providing additional
support for the Company’s currently marketed products.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in thousands)
This year marked continued growth of our key marketed products,
continued investment in research and development to enhance and
develop our pipeline of products and support behind a fourth fiscal
quarter new product launch. For the fiscal year ended March 31,
2008, total net revenues increased by $394,544 to a record high of
$3,836,329 as a result of increased sales growth of our key
marketed products Lexapro® and Namenda® and higher
co-promotion income from Benicar®.
On December 18, 2007, the United States Food and Drug
Administration (or 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.
(or Mylan) in January 2006. Pursuant to that licensing agreement,
we made a milestone payment of $25,000 upon FDA approval. We
commenced the sale and marketing of Bystolic in January 2008. On
February 27, 2008, we amended the agreement with Mylan to terminate
Mylan’s further commercial rights for Bystolic in the United
States and Canada and to reduce further payment obligations to
Mylan. In connection with this modified agreement, we made a
one-time cash payment of $370,000 to Mylan and will continue to
make contractual royalty payments through calendar 2010, after
which our royalty rate will be reduced.
On January 22, 2008, we entered into an agreement with Novexel,
S.A. (or Novexel) for the development, manufacture and
commercialization of Novexel’s novel intravenous beta
lactamase inhibitor, NXL104 in combination with Forest’s
ceftaroline. NXL104 inhibits bacterial enzymes called
beta-lactamases that break down beta-lactam antibiotics (in
particular penicillins and cephalosporins). Beta-lactamase
inhibition represents a mechanism for counteracting resistance and
enhancing broad-spectrum activity of beta-lactam antibiotics. Under
the terms of the agreement, we received the exclusive rights to
administer NXL104 with ceftaroline as a combination product in
North America. We intend to initiate Phase I studies of the
ceftaroline/NXL104 combination in calendar 2009. Pursuant to the
agreement, we paid Novexel an upfront license payment of
approximately $110,000, which was charged to research and
development expense. Additional milestone payments to Novexel, if
the combination product is successfully developed, could total
another $110 million. Following the product’s regulatory
marketing approval, we will pay Novexel a low double-digit royalty
on product sales throughout North America.
On May 12, 2008, we and our licensing partner Daiichi Sankyo,
Inc. (or Sankyo) announced that effective July 1, 2008 we have
terminated our co-promotion agreement for Azor™ (amlodipine
and olmesartan medoxomil), Sankyo’s fixed-dose combination of
two antihypertensives, the calcium channel blocker amlodipine
besylate and the angiotensin receptor blocker olmesartan medoxomil.
In the first quarter of fiscal 2009, we will record a one-time
charge of approximately $44,100 which is composed of a one-time
payment to Sankyo of approximately $26,600 related to the
termination of the agreement and $17,500 related to the unamortized
portion of the initial upfront payment. We determined that the
resources we had allocated to the Azor co-promotion will be better
utilized in providing additional support for our other currently
marketed products.
In September 2007, we entered into a 50/50 partnership in the
United States with Ironwood Pharmaceuticals, Inc. (or Ironwood,
formerly known as Microbia, Inc.) to co-develop and co-market
Ironwood’s first-in-class compound linaclotide. Linaclotide
is currently being investigated for the treatment of
constipation-predominant irritable bowel syndrome (or IBS-C),
chronic constipation (or CC) and other gastrointestinal disorders.
Under the terms of the agreement, we initially paid Ironwood
$70,000 in licensing fees. We and Ironwood will jointly and equally
fund development and commercialization of linaclotide in the United
States, sharing profits equally. Additionally, we will have
exclusive rights in Canada and Mexico and will pay Ironwood a
royalty on sales in these countries.
During fiscal 2007 our Board of Directors (or the 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 year ended March 31, 2008, we have
repurchased a total of 8.9 million shares at a cost of $356,327. As
of May 29, 2008, we have repurchased, cumulatively, a total of 25.8
million shares at a cost of $1,059,791 under the 2007 Repurchase
Program, leaving us the authority to purchase 9.2 million more
shares.
Financial Condition and Liquidity
Net current assets increased by $501,570 for fiscal 2008. Cash,
marketable securities and accounts receivable increased from
ongoing operations. During fiscal 2008 we had significant outlays
of cash. In the fourth quarter of 2008, we made a one-time payment
of $370,000 to Mylan in connection with amending our agreement for
Bystolic as discussed above. During the first three quarters of
fiscal 2008, pursuant to the 2007 Repurchase Program, we
repurchased 8.9 million shares of common stock at a cost of
$356,327. No shares were repurchased during the fourth quarter and
15.8 million shares were available for repurchase under the program
at March 31, 2008. Of our total cash and marketable securities
position at March 31, 2008, 42%, or about $1,029,000, was domiciled
domestically with the remainder held by our international
subsidiaries. We currently invest funds in Variable Rate Demand
Notes, Municipal Bonds and Notes, Commercial Paper including money
market instruments, Auction Rate Securities and European Bank
Floating Rate Notes that have major bank liquidity agreements.
These investments, which are subject to general credit, liquidity
and market risks, have not been materially affected by the U.S.
sub-prime mortgage defaults that have affected certain sectors of
the financial markets and caused credit and liquidity issues. At
March 31, 2008, approximately 26% of our investments were affected
by net unrealized losses. While we believe that these net
unrealized losses are temporary, further declines in the value of
these investments may be deemed other than temporary if the credit
and capital markets were to continue to deteriorate in future
periods. We have the ability and intend to hold our investments
until a recovery of fair value, which may be at maturity.
Therefore, we do not consider these investments to be
other-than-temporarily impaired and will continue to monitor global
market conditions to minimize the uncertainty of impairments in
future periods. Raw materials and work in process inventories
decreased as we are bringing these balances to more normalized
levels. Finished goods inventory increased in order to support
continued demand for our products including the recent launch of
Bystolic. We believe that current inventory levels are adequate to
support the growth of our ongoing business. License agreements,
product rights and other intangibles before accumulated
amortization increased during fiscal 2008 as a result of three
agreements. 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. In
February 2008, we paid an additional $370,000 to Mylan in
connection with the amended agreement. Non-current deferred income
taxes increased as a result of an upfront licensing charge in
connection with the collaboration agreement with Ironwood 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 fiscal 2007. During the year we completed the
refurbishment of a 90,000 square foot facility in Ireland which
will provide additional capacity for the manufacturing of Lexapro,
Namenda and for future products. This facility commenced operations
in April 2008. 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 (or FASB) Interpretation (or FIN 48),
"Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109". As a result of adoption
of FIN 48, we recognized an increase of $13,796, net of related tax
benefits, to the unrecognized tax benefits (or UTB) balance with a
corresponding reduction to the April 1, 2007 balance of retained
earnings, resulting in an opening UTB balance of $143,605. As of
March 31, 2008, our consolidated balance sheet reflects UTBs of
$178,471, of which $167,671 would impact the effective tax rate if
recognized. We also recognized interest accrued related to UTBs in
income tax expense and related liability accounts on the balance
sheet. During the fiscal year ended March 31, 2008, we recognized
$9,599 of interest. Accrued interest related to UTBs totaled
$19,939 as of March 31, 2008.
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
continued share repurchases.
Contractual Obligations
The following table shows our contractual obligations related to
lease obligations and inventory purchase commitments as of March
31, 2008:
|
|
Payments due by period
(in
thousands)
|
|
<1
year
|
1-3 years
|
3-5 years
|
>5 years
|
Total
|
|
|
|
|
|
|
Operating lease obligations
|
$ 32,594
|
$39,015
|
$18,135
|
$35,433
|
$125,177
|
|
|
|
|
|
|
Inventory purchase commitments
|
136,209
|
|
|
|
136,209
|
|
$168,803
|
$39,015
|
$18,135
|
$35,433
|
$261,386
|
|
=======
|
======
|
======
|
======
|
=======
|
The Company’s income tax liabilities are not included in
this table because the Company cannot be certain as to when they
will become due. See Note 14 to the Consolidated Financial
Statements.
Off-Balance Sheet Arrangements
Forest is a party to several license agreements for products
currently under development. Such agreements may require us to make
future payments to the licensors, subject to the achievement of
specific product or commercial development milestones, as
defined.
Results of Operations
Net sales increased $318,478 or 10% to $3,501,802 in fiscal 2008
from $3,183,324 in fiscal 2007 and $389,390 or 13.9% in fiscal 2007
as compared to $2,793,934 in fiscal 2006 primarily due to strong
sales of Lexapro and Namenda.
Lexapro, which is indicated for the treatment of major
depressive disorder and generalized anxiety disorder, and is our
most significant product, had sales of $2,292,036 in fiscal 2008,
growing 9% and contributing $186,046 to the net sales change as
compared with fiscal 2007, of which $106,205 was due to price and
$79,841 was related to volume. In fiscal 2007, Lexapro sales
totaled $2,105,990 and contributed $232,735 to the net sales change
compared to fiscal 2006, of which $136,196 was due to price and
$96,539 was related to volume. Lexapro achieved a 17.7% share of
total prescriptions for antidepressants in the SSRI/SNRI category
in fiscal 2008.
We expect Lexapro sales to remain strong
during fiscal 2009. In fiscal 2004, we, along with our licensing
partner, H. Lundbeck A/S (or Lundbeck) filed suit against Teva
Pharmaceuticals (or Teva) for patent infringement related to our
Lexapro patent. A trial was held regarding the patent litigation
with Teva in March 2006 and on July 13, 2006, the U.S. District
Court for the District of Delaware determined that the patent
covering Lexapro is valid and enforceable. Lexapro’s patent
is set to expire in March 2012. Teva filed an appeal of the
court’s ruling, and on September 5, 2007, a federal appeals
court upheld the patent’s validity. Another generic
manufacturer, Caraco Pharmaceutical Laboratories, Ltd. (or Caraco),
has filed an Abbreviated New Drug Application (or ANDA) with a
Paragraph IV Certification for a generic equivalent to Lexapro.
Forest and Lundbeck have filed a lawsuit in the U.S. District Court
for the Eastern District of Michigan against Caraco for patent
infringement.
Sales of Namenda, our N-methyl-D-aspartate (or NMDA) receptor
antagonist for the treatment of moderate to severe Alzheimer's
disease grew 26%, an increase of
$169,362
to $829,657 in fiscal 2008 as compared
with fiscal 2007, of which $134,804 was due to volume and $34,558
was due to price. In fiscal 2007, sales of Namenda grew 30.0%, an
increase of $152,252 to $660,295 as compared to $508,043 in fiscal
2006, of which $143,174 was due to volume and $9,078 was due to
price. Namenda achieved a 33.8% share of total prescriptions in the
Alzheimer's market as of March 31, 2008. We anticipate Namenda
continuing positive growth. During the third quarter of fiscal
2008, we received notification from several companies that they
filed ANDAs 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 (or
Merz) filed lawsuits in the U.S. District Court 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.
Bystolic, our recently approved novel beta blocker for the
treatment of hypertension, was launched in January 2008, and
achieved sales of $11,070, primarily initial wholesaler stocking,
in fiscal 2008. Sales of Campral®, our treatment for
maintenance of abstinence from alcohol in patients with alcohol
dependence who are abstinent at treatment initiation, amounted to
$30,921 in fiscal 2008, $29,649 in fiscal 2007 and $22,868 in
fiscal 2006. The remainder of the net sales change for the periods
presented was due principally to volume fluctuations of our older
and non-promoted product lines.
Contract revenue for fiscal year 2008 was $216,500 compared to
$176,943 in fiscal year 2007 and $118,170 in fiscal year 2006,
primarily due to co-promotion income from our co-marketing
agreement with Daiichi Sankyo for Benicar. Forest has been
co-promoting Benicar, indicated for the treatment of hypertension,
since May 2002. Under the agreement, we are entitled to a share of
the product profits (as defined) from the point the product became
cumulatively profitable in fiscal year 2005. Fiscal 2008 was the
final year of our active co-promotion activities and we will
receive a reduced share of product profits over the remaining
six-year term of the agreement, as defined.
Interest income increased in fiscal 2008 primarily due to
interest received on higher levels of invested funds offset by
lower average rates of return. Fiscal 2007 interest income
increased primarily due to higher interest income received on funds
available for investment resulting from more favorable rates of
return.
Cost of sales as a percentage of net sales was 23% in fiscal
2008, unchanged from fiscal years 2007 and 2006.
Selling, general and administrative expense increased to
$1,154,845 in fiscal 2008 from $1,046,336 in fiscal 2007 and
$1,031,451 in fiscal 2006. 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 to $670,973 in fiscal
2008 from $941,003 in fiscal 2007, but increased from $410,431 in
fiscal 2006. Fiscal 2007 included a one-time charge of $476,000 for
in-process research and development (or IPR&D) related to the
acquisition of Cerexa. During the fiscal 2007 year, we also paid
$20,000 in connection with a development milestone. Fiscal 2008
included a $70,000 licensing charge in connection with the
collaboration agreement with Ironwood 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. Also during the current year, we made an upfront
license payment of approximately $110,000 to Novexel for the
development, manufacture and commercialization of Novexel’s
novel intravenous beta lactamase inhibitor, NXL104, in combination
with Forest’s ceftaroline. The increase in research and
development expense in fiscal 2007 as compared with fiscal 2006 was
due to the Cerexa acquisition and upfront and milestone payments in
connection with licensing agreements.
Research and development expense also reflects the
following:
·
In May 2008, we
announced results from a Phase III study of Lexapro in the
treatment of adolescents, aged 12-17, with Major Depressive
Disorder. These results indicate that patients treated with Lexapro
experienced statistically significant improvement in symptoms of
depression. Based on the results of this study, we filed for an
adolescent depression indication in May 2008.
·
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. On February 27, 2008, we amended the agreement with
Mylan to terminate Mylan’s further commercial rights for
Bystolic in the United States and Canada and to reduce future
payment obligations to Mylan. In connection with this modified
agreement, we made a one-time cash payment of $370,000 to Mylan.
Following such payment, we remain obligated to pay Mylan
contractual royalties through calendar 2010, after which our
royalty rate will be reduced. Regarding a new indication for
congestive heart failure, following input we have received from the
FDA, we plan to file a New Drug Application (or NDA) in early
calendar 2009 for that indication based on a previously completed
Phase III study. The U.S. composition of matter patent covering
nebivolol hydrochloride is licensed from Mylan and expires in 2020.
(We have submitted a patent term extension application to extend
this patent until 2021.) On January 26, 2007, Janssen Pharmaceutica
N.V., the owner of the patent, filed a request with the U.S. Patent
and Trademark Office (or the Office) for re-examination of the
patent covering nebivolol hydrochloride. While the timing for
resolution of the re-examination cannot be predicted, we expect
that the Office will again certify that the claims of the patent
are valid.
·
In May 2007, we
announced that top-line results of a Phase III study demonstrated
significantly therapeutic effects of milnacipran, as a treatment of
fibromyalgia syndrome (or FMS). In December 2007, we submitted an
NDA to the FDA including data from this study and an earlier Phase
III study. We expect FDA action with respect to this NDA by the end
of October 2008. We also expect results from a third randomized
pivotal Phase III study in late 2008 or early 2009.
·
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 (or cSSSI) have
completed enrollment and two Phase III studies in patients with
community acquired pneumonia (or CAP) have begun enrollment. We
anticipate the cSSSI results in mid 2008 and the CAP results in
2009. Based on positive results, we anticipate submitting an NDA to
the FDA by the end of calendar 2009.
·
In April 2006, we
entered into a collaboration agreement with Laboratorios Almirall,
S.A. (or Almirall) for the U.S. rights to aclidinium, a novel
long-acting muscarinic antagonist which is being developed as an
inhaled therapy for the treatment of chronic obstructive pulmonary
disease (or COPD). An international Phase III program is currently
being conducted by us and Almirall. Enrollment has been completed
and we expect top-line results to be available 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 II testing.
·
During the September
2007 quarter, we entered into a 50/50 partnership with Ironwood to
co-develop and co-market the compound linaclotide. Linaclotide is
currently being investigated for the treatment of
constipation-predominant irritable bowel syndrome, chronic
constipation and other gastrointestinal disorders. In March 2008,
we and Ironwood announced positive top-line results from two Phase
II(b) randomized, double-blind, placebo-controlled studies
assessing the safety, therapeutic effect and dose response of four
different once-daily doses of linaclotide. Linaclotide was well
tolerated at all doses. Based on this data we anticipate initiating
Phase III studies in both indications in the second half of
calendar 2008.
·
In February 2008, we
received preliminary results of a Phase III study of memantine HCl
in 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 intend to prepare and file an NDA for this new once-daily
formulation.
·
During the third
quarter of fiscal 2005, Forest entered into a collaboration
agreement with Gedeon Richter Ltd. for the North American rights to
RGH-188, and related compounds, being developed as an atypical
antipsychotic 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 a
low-dose arm and a numerical improvement compared to placebo in a
high-dose arm that did not reach nominal statistical significance.
Based on the review of the results, we will be initiating a second
Phase II dose-ranging study in schizophrenia patients in the first
half of fiscal 2009. An additional Phase II study of RGH-188 for
the treatment of bipolar mania was commenced in April 2007 and we
expect results in calendar 2008.
·
During the second
quarter of fiscal 2005, Forest entered into a collaboration
agreement with Glenmark Pharmaceuticals Ltd. (or Glenmark) for the
North American development and marketing of GRC 3886, a PDE4
inhibitor for the treatment of asthma and COPD. We have commenced a
Phase II study of this compound for the COPD indication with
results expected in the second half of calendar 2009.
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 series of
novel compounds that target group 1 metabotropic glutamate
receptors (mGLUR1/5); and ME1036, an injectable antibiotic which
has demonstrated 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.
The effective tax rate decreased to 20% in fiscal 2008 as
compared to 21% (excluding the one-time Cerexa IPR&D charge)
and 19% in fiscal 2007 and 2006 respectively. The effective tax
rate for fiscal 2008 was lower compared to fiscal 2007 due
primarily to a higher proportion of earnings generated in lower
taxed foreign jurisdictions as compared with the United States.
Effective tax rates can be affected by ongoing tax audits. See Note
14 to the Consolidated Financial Statements.
We expect to continue our profitability into fiscal 2009 with
continued sales 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".
Stock-Based Compensation
On April 1, 2006, we adopted SFAS 123R "Share-Based Payment"
under the modified prospective method. Since we had previously
accounted for stock options under Accounting Principles Board No.
25, "Accounting for Stock Issued to Employees" we recorded stock
option and restricted stock expense in fiscal 2008 and 2007 while
no expense was recorded in fiscal 2006.
Also under SFAS 123R, actual tax benefits recognized in excess
of tax benefits previously established upon grant are reported as
financing on the consolidated statements of cash flows. Prior to
adoption, such tax benefits were reported as an increase to
operating activities. The adoption of SFAS 123R did not have a
significant impact on our financial position or results of
operations.
We account for our employee stock option and restricted stock
expense at the date of grant. All stock option and restricted stock
grants have an exercise price equal to the fair market value of our
common stock at the date of grant and generally have a 5 to 10 year
term. The fair value of stock option and restricted stock grants
are amortized to expense on an even basis over the vesting
period.
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 expenses. 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 $31,756 at March 31, 2008 and $30,606 at March 31, 2007.
Commercial discounts and other rebate accruals were $141,949 at
March 31, 2008 and $115,893 at March 31, 2007. 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 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
|
March 31, 2008
$208,063
440,975
2,500
(
412,852
)
30,623
30,804
(
28,273
)
2,531
346,496
( 7,700)
(
350,332
)
( 11,536)
$229,681
=======
|
March 31, 2007
$158,277
369,473
3,301
(
324,695
)
48,079
27,398
( 1,264)
(
21,925
)
4,209
378,809
( 7,053)
(
374,258
)
( 2,502)
$208,063
=======
|
|
|
|
|
Deductions for chargebacks (primarily discounts to group
purchasing organizations and federal government agencies) closely
approximate actual as these deductions are settled generally within
2-3 weeks of incurring the liability.
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 historically 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 Annual Report
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,
2008.
Quantitative and Qualitative Disclosures about Market
Risk
In the normal course of business, operations may be exposed to
fluctuations in currency values and interest rates. These
fluctuations can vary the costs of financing, investing and
operating transactions. Because we had no debt and only minimal
foreign currency transactions, there was no material impact on
earnings due to fluctuations in interest and currency exchange
rates.
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