e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2009
or
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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 Number: 000-50767
CORNERSTONE THERAPEUTICS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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04-3523569
(I.R.S. Employer
Identification No.) |
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1255 Crescent Green Drive, Suite 250
Cary, North Carolina
(Address of Principal Executive Offices)
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27518
(Zip Code) |
(919) 678-6611
(Registrants Telephone Number, Including Area Code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by 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):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of August 7, 2009, the registrant had 24,800,676 shares of Common Stock, $0.001 par value per
share, outstanding.
CORNERSTONE THERAPEUTICS INC.
FORM 10-Q
TABLE OF CONTENTS
PART IFINANCIAL INFORMATION
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For this
purpose, any statements contained herein, other than statements of historical fact, including
statements regarding the progress and timing of our product development programs and related
trials; our future opportunities; our strategy, future operations, financial position, future
revenues and projected costs; our managements prospects, plans and objectives; and any other
statements about managements future expectations, beliefs, goals, plans or prospects constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. We may, in some cases, use words such as anticipate, believe, could, estimate,
expect, intend, may, plan, project, should, target, will, would or other words
that convey uncertainty of future events or outcomes to identify these forward-looking statements.
Actual results may differ materially from those indicated by such forward-looking statements as a
result of various important factors, including our critical accounting estimates; our ability to
develop and maintain the necessary sales, marketing, supply chain, distribution and manufacturing
capabilities to commercialize our products, including difficulties relating to the manufacture of
ZYFLO CR® tablets; the possibility that the Food and Drug Administration, or FDA, will
take enforcement action against us or one or more of our marketed drugs that do not have
FDA-approved marketing applications; patient, physician and third-party payor acceptance of our
products as safe and effective therapeutic products; our heavy dependence on the commercial success
of a relatively small number of currently marketed products; our ability to maintain regulatory
approvals to market and sell our products that do have FDA-approved marketing applications; our
ability to enter into additional strategic licensing, collaboration or co-promotion transactions on
favorable terms, if at all; our ability to maintain compliance with NASDAQ listing requirements;
adverse side effects experienced by patients taking our products; difficulties relating to clinical
trials, including difficulties or delays in the completion of patient enrollment, data collection
or data analysis; the results of preclinical studies and clinical trials with respect to our
products under development and whether such results will be indicative of results obtained in later
clinical trials; our ability to satisfy FDA and other regulatory requirements; and our ability to
obtain, maintain and enforce patent and other intellectual property protection for our products and
product candidates. If one or more of these factors materialize, or if any underlying assumptions
prove incorrect, our actual results, performance or achievements may vary materially from any
future results, performance or achievements expressed or implied by these forward-looking
statements. These and other risks are described in greater detail in Part IItem 1A. Risk
Factors of our annual report on Form 10-K for the year ended December 31, 2008 filed with the
Securities and Exchange Commission, or SEC, on March 26, 2009. Any material changes to those
disclosed in the annual report are discussed below in Part IIItem 1A. Risk Factors. If one or
more of these factors materialize, or if any underlying assumptions prove incorrect, our actual
results, performance or achievements may vary materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. In addition, any
forward-looking statements in this quarterly report on Form 10-Q represent our views only as of the
date of this quarterly report on Form 10-Q and should not be relied upon as representing our views
as of any subsequent date. We anticipate that subsequent events and developments will cause our
views to change. However, while we may elect to update these forward-looking statements publicly at
some point in the future, we specifically disclaim any obligation to do so, whether as a result of
new information, future events or otherwise. Our forward-looking statements do not reflect the
potential impact of any acquisitions, mergers, dispositions, business development transactions,
joint ventures or investments that we may make or enter into, except that in particular
circumstances as specifically indicated we may address the potential impact of our transaction with
Chiesi Farmaceutici S.p.A., or Chiesi.
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE THERAPEUTICS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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(Note 1) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
15,459 |
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$ |
9,286 |
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Marketable securities |
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300 |
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Accounts receivable, net |
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14,136 |
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12,987 |
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Inventories, net |
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11,993 |
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11,222 |
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Prepaid and other current assets |
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3,296 |
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1,754 |
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Deferred income tax asset |
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3,512 |
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2,428 |
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Total current assets |
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48,396 |
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37,977 |
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Property and equipment, net |
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979 |
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895 |
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Product rights, net |
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16,681 |
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17,702 |
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Goodwill |
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13,231 |
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13,231 |
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Amounts due from related parties |
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38 |
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38 |
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Other assets |
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789 |
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46 |
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Total assets |
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$ |
80,114 |
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$ |
69,889 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
7,843 |
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$ |
10,288 |
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Accrued expenses |
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24,554 |
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19,052 |
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Current portion of license agreement liability |
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1,257 |
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2,543 |
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Current portion of capital lease |
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10 |
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Income taxes payable |
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2,502 |
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2,937 |
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Total current liabilities |
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36,166 |
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34,820 |
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License agreement liability, less current portion |
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2,313 |
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2,313 |
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Capital lease, less current portion |
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44 |
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Deferred income tax liability |
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2,989 |
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3,330 |
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Total liabilities |
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41,512 |
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40,463 |
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Commitments and contingencies, Note 9 |
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Stockholders equity |
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Preferred stock $0.001 par value,
5,000,000 shares authorized; no shares issued
and outstanding |
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Common stock $0.001 par value, 90,000,000
shares authorized; 12,402,509 and 12,023,747
shares issued and outstanding as of June 30,
2009 and December 31, 2008, respectively |
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12 |
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12 |
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Additional paid-in capital |
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34,642 |
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33,519 |
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Retained earnings (accumulated deficit) |
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3,948 |
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(4,105 |
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Total stockholders equity |
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38,602 |
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29,426 |
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Total liabilities and stockholders equity |
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$ |
80,114 |
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$ |
69,889 |
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The accompanying notes are an integral part of the consolidated financial statements.
2
CORNERSTONE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except share and per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net revenues |
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$ |
24,993 |
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$ |
14,067 |
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$ |
55,698 |
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$ |
23,512 |
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Costs and expenses: |
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Cost of product sales (exclusive of
amortization of product rights) |
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2,901 |
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933 |
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6,102 |
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1,498 |
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Sales and marketing |
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6,524 |
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3,626 |
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11,919 |
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7,534 |
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Royalties |
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5,651 |
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3,559 |
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11,942 |
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4,804 |
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General and administrative |
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5,127 |
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2,288 |
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8,887 |
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3,811 |
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Research and development |
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1,188 |
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507 |
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2,350 |
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605 |
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Amortization of product rights |
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510 |
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109 |
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1,021 |
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848 |
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Other charges |
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5 |
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27 |
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31 |
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27 |
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Total costs and expenses |
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21,906 |
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11,049 |
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42,252 |
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19,127 |
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Income from operations |
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3,087 |
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3,018 |
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13,446 |
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4,385 |
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Other expenses: |
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Interest expense, net |
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(42 |
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(343 |
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(114 |
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(722 |
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Total other expenses |
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(42 |
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(343 |
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(114 |
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(722 |
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Income before income taxes |
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3,045 |
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2,675 |
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13,332 |
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3,663 |
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Provision for income taxes |
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(1,307 |
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(520 |
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(5,279 |
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(839 |
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Net income |
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$ |
1,738 |
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$ |
2,155 |
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$ |
8,053 |
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$ |
2,824 |
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Net income per share, basic |
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$ |
0.14 |
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$ |
0.36 |
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$ |
0.67 |
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$ |
0.48 |
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Net income per share, diluted |
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$ |
0.13 |
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$ |
0.31 |
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$ |
0.60 |
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$ |
0.41 |
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Weighted-average common shares, basic |
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12,166,989 |
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5,934,496 |
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12,095,764 |
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5,934,496 |
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Weighted-average common shares, diluted |
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13,584,314 |
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6,864,243 |
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13,486,956 |
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6,851,107 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
CORNERSTONE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Six Months Ended June 30, |
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2009 |
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2008 |
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Cash flows from operating activities |
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Net income |
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$ |
8,053 |
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$ |
2,824 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Amortization and depreciation |
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1,131 |
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886 |
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Provision for prompt payment discounts |
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1,574 |
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491 |
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Provision for inventory obsolescence |
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568 |
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(43 |
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Stock-based compensation |
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852 |
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169 |
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Benefit for deferred income taxes |
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(1,425 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(2,723 |
) |
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(6,671 |
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Inventories |
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(1,339 |
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(618 |
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Prepaid expenses and other assets |
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(2,285 |
) |
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2,123 |
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Accounts payable |
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(2,445 |
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1,062 |
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Accrued expenses |
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4,216 |
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2,781 |
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Income taxes payable |
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(435 |
) |
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786 |
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Net cash provided by operating activities |
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5,742 |
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3,790 |
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Cash flows from investing activities |
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Advances to related parties |
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(19 |
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Proceeds from sale of marketable securities |
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300 |
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Purchase of property and equipment |
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(136 |
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(16 |
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Purchase of product rights |
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(1,750 |
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Collection of deposits |
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15 |
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Payment of deposits |
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(32 |
) |
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Net cash provided by (used in) investing activities |
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164 |
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(1,802 |
) |
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Cash flows from financing activities |
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Proceeds from exercise of common stock options |
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271 |
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Proceeds from line of credit |
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5,500 |
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Principal payments on line of credit |
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(7,250 |
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Principal payments on notes payable |
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(460 |
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Principal payments on capital lease obligation |
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(4 |
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Net cash provided by (used in) financing activities |
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267 |
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(2,210 |
) |
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Net increase (decrease) in cash and cash equivalents |
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6,173 |
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(222 |
) |
Cash and cash equivalents as of beginning of period |
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|
9,286 |
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241 |
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Cash and cash equivalents as of end of period |
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$ |
15,459 |
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$ |
19 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
CORNERSTONE THERAPEUTICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Nature of Operations
Cornerstone Therapeutics Inc., together with its subsidiaries (collectively, the Company),
is a specialty pharmaceutical company focused on acquiring, developing and commercializing
significant products primarily for the respiratory and related markets. Key elements of the
Companys strategy are to in-license or acquire rights to under-promoted, patent-protected, branded
respiratory or related pharmaceutical products, or late-stage product candidates; implement life
cycle management strategies to maximize the potential value and competitive position of the
Companys currently marketed products, newly acquired products and product candidates that are
currently in development; grow product revenue through the Companys specialty sales force which is
focused on the respiratory and related markets; and maintain and strengthen the intellectual
property position of the Companys currently marketed products, newly acquired products and product
candidates.
Principles of Consolidation
The Companys condensed consolidated financial statements include the accounts of Cornerstone
Therapeutics Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial statements. The Company
believes that it has included all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of these financial statements. The consolidated balance sheet at
December 31, 2008 has been derived from the Companys audited consolidated financial statements
included in its annual report on Form 10-K for the year ended December 31, 2008, and these
financial statements should be read in connection with those financial statements.
Operating results for the three and six-month periods ended June 30, 2009 and 2008 are not
necessarily indicative of the results for the full year.
Reclassifications
Royalties and other receivables, which were previously included in accounts receivable, net,
are included in prepaid and other current assets and other assets, respectively, in the
accompanying condensed consolidated balance sheets. Depreciation expense, which was previously
included in amortization and depreciation, is included in general and administrative expenses in
the accompanying condensed consolidated statements of income. These reclassifications had no effect
on stockholders equity or net income as previously reported.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting
period. The more significant estimates reflected in the Companys condensed consolidated financial
statements include certain judgments regarding revenue recognition, product rights, inventory
valuation, accrued expenses and stock based compensation. Actual results could differ from those
estimates or assumptions.
Concentrations of Credit Risk and Limited Suppliers
The financial instruments that potentially subject the Company to concentrations of credit
risk are cash, cash equivalents and accounts receivable. The Companys cash and cash equivalents
are maintained with one financial institution and are monitored against the Companys investment
policy, which limits concentrations of investments in individual securities and issuers.
5
The Company relies on certain materials used in its development and manufacturing processes,
some of which are procured from a single source. The Company purchases its pharmaceutical
ingredients pursuant to long-term supply agreements with a limited number of suppliers. The failure
of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the
development or commercialization process and thereby adversely affect the Companys operating
results. In addition, a disruption in the commercial supply of or a significant increase in the
cost of the active pharmaceutical ingredient (API) from these sources could have a material
adverse effect on the Companys business, financial position and results of operations.
The Company sells primarily to large national wholesalers, which in turn, may resell the
product to smaller or regional wholesalers, retail pharmacies or chain drug stores. The following
tables list all of the Companys customers that individually comprise greater than 10% of total
gross product sales and their aggregate percentage of the Companys total gross product sales for
the three and six months ended June 30, 2009 and 2008, and all customers that comprise more than
10% of trade accounts receivable and such customers aggregate percentage of the Companys trade
accounts receivable as of June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
Gross Product |
|
Gross Product |
|
Gross Product |
|
Gross Product |
|
|
Sales |
|
Sales |
|
Sales |
|
Sales |
|
|
|
|
|
Cardinal Health, Inc. |
|
|
34 |
% |
|
|
38 |
% |
|
|
35 |
% |
|
|
35 |
% |
McKesson Corporation |
|
|
36 |
% |
|
|
29 |
% |
|
|
35 |
% |
|
|
35 |
% |
AmerisourceBergen Drug Corporation |
|
|
18 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
88 |
% |
|
|
83 |
% |
|
|
87 |
% |
|
|
86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
Accounts |
|
Accounts |
|
|
Receivable |
|
Receivable |
Cardinal Health, Inc. |
|
|
20 |
% |
|
|
35 |
% |
McKesson Corporation |
|
|
37 |
% |
|
|
32 |
% |
AmerisourceBergen Drug Corporation |
|
|
19 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
76 |
% |
|
|
83 |
% |
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less
when purchased to be cash equivalents.
The Company maintains cash deposits with a federally insured bank that may at times exceed
federally insured limits. The majority of funds in excess of the federally insured limits are held
in sweep investment accounts collateralized by the securities in which the funds are invested. As
of June 30, 2009 and December 31, 2008, the Company had balances of $34,000 and $1.3 million,
respectively, in excess of federally insured limits held in non-investment accounts.
Marketable Securities
Marketable securities as of December 31, 2008 consisted of auction rate securities. The
auction rate securities were of investment-grade quality and had an original maturity date greater
than 90 days and could be sold within one year. The Company recorded its investments in marketable
securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). The classification
of marketable securities is generally determined at the date of purchase. The Companys marketable
securities are classified as available-for-sale and reported at fair value with unrealized losses
recognized net of tax in other comprehensive income (loss). Gains and losses on sales of
investments in marketable securities, which are computed based on specific identification of the
adjusted cost of each security, are included in investment income at the time of the sale.
In February 2009, the Company sold its investment in the auction rate securities for $300,000,
which was the carrying value of the securities.
Accounts Receivable
The Company typically requires customers of branded and generic products to remit payments
within 31 days and 61 days, respectively. In addition, the Company offers wholesale distributors a
prompt payment discount as an
6
incentive to remit payment within the first 30 days after the invoice
date for branded products and 60 days after the invoice date for generic products. This discount is
generally 2%, but may be higher in some instances due to product launches or customer and/or
industry expectations. Because the Companys wholesale distributors typically take the prompt
payment discount, the Company accrues 100% of the prompt payment discounts, based on the gross
amount of each invoice, at the time of sale, and the Company applies earned discounts at the time
of payment. The Company adjusts the accrual periodically to reflect actual experience.
Historically, these adjustments have not been material.
The Company performs ongoing credit evaluations and does not require collateral. As
appropriate, the Company establishes provisions for potential credit losses. In the opinion of
management, no allowance for doubtful accounts was necessary as of June 30, 2009 or December 31,
2008. The Company writes off accounts receivable when management determines they are uncollectible
and credits payments subsequently received on such receivables to bad debt expense in the period
received. There were no write offs during the three and six month periods ending June 30, 2009 and
June 30, 2008.
The following table represents accounts receivable, net, as of June 30, 2009 and December 31,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Trade accounts receivable |
|
$ |
14,461 |
|
|
$ |
13,289 |
|
Less allowance for prompt payment discounts |
|
|
(325 |
) |
|
|
(302 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
14,136 |
|
|
$ |
12,987 |
|
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost or market value with cost determined under the
first-in, first-out method and consist of raw materials, work in process and finished goods. Raw
materials include the API for a product to be manufactured, work in process includes the bulk
inventory of tablets that are in the process of being coated and/or packaged for sale and finished
goods include pharmaceutical products ready for commercial sale or distribution as samples.
On a quarterly basis, the Company analyzes its inventory levels and writes down inventory that
has become obsolete, inventory that has a cost basis in excess of the expected net realizable value
and inventory that is in excess of expected requirements based upon anticipated product revenues.
The following table represents inventories, net as of June 30, 2009 and December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Raw materials |
|
$ |
6,391 |
|
|
$ |
6,393 |
|
Work in process |
|
|
1,923 |
|
|
|
1,832 |
|
Finished goods: |
|
|
|
|
|
|
|
|
Pharmaceutical products trade |
|
|
3,621 |
|
|
|
3,182 |
|
Pharmaceutical products samples |
|
|
769 |
|
|
|
492 |
|
|
|
|
|
|
|
|
Total |
|
|
12,704 |
|
|
|
11,899 |
|
|
|
|
|
|
|
|
Inventory allowances |
|
|
(711 |
) |
|
|
(677 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
11,993 |
|
|
$ |
11,222 |
|
|
|
|
|
|
|
|
7
Revenue Recognition
The Companys consolidated net revenues represent the Companys net product sales and royalty
agreement revenues. The following table sets forth the categories of the Companys net revenues (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Gross product sales |
|
$ |
34,792 |
|
|
$ |
17,621 |
|
|
$ |
73,703 |
|
|
$ |
28,091 |
|
Sales allowances |
|
|
(9,799 |
) |
|
|
(3,896 |
) |
|
|
(18,242 |
) |
|
|
(5,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales |
|
|
24,993 |
|
|
|
13,725 |
|
|
|
55,461 |
|
|
|
22,725 |
|
Royalty agreement revenue |
|
|
|
|
|
|
342 |
|
|
|
237 |
|
|
|
787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
24,993 |
|
|
$ |
14,067 |
|
|
$ |
55,698 |
|
|
$ |
23,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Companys goodwill balance as of June 30, 2009 and December 31, 2008 was $13.2 million and
relates to the merger, whereby the Company, which was then known as Critical Therapeutics, Inc.
(Critical Therapeutics), merged (through a transitory subsidiary) with Cornerstone BioPharma
Holdings, Inc. (Cornerstone BioPharma) on October 31, 2008 (the Merger). The Merger was
accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business
Combinations. Cornerstone BioPharma was deemed to be the acquiring company for accounting purposes
and the transaction was accounted for as a reverse acquisition in accordance with GAAP. The total
purchase price of $25.2 million was allocated to acquired tangible and intangible assets and
assumed liabilities of Critical Therapeutics based on their estimated fair values as of the closing
date of the Merger. The excess of the purchase price over the estimated fair values of the assets
acquired and liabilities assumed was allocated to goodwill. No amount of the goodwill balance at
June 30, 2009 will be deductible for income tax purposes.
Product Rights
The following table represents product rights, net, as of June 30, 2009 and December 31, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Product rights |
|
$ |
26,730 |
|
|
$ |
26,730 |
|
Less accumulated amortization |
|
|
(10,049 |
) |
|
|
(9,028 |
) |
|
|
|
|
|
|
|
Product rights, net |
|
$ |
16,681 |
|
|
$ |
17,702 |
|
|
|
|
|
|
|
|
The Company amortizes the product rights related to its currently marketed products over their
estimated useful lives, which, as of June 30, 2009, ranged from seven to nine years. As of June 30,
2009, the Company had $3.1 million of product rights related to products it expects to launch in
the future. The Company expects to begin amortizing these rights upon the commercial launch of the
first product using these rights (which, if approved, is targeted to be in late 2010 or early 2011)
over an estimated useful life of approximately 14 years. The weighted-average amortization period
for the Companys product rights related to its currently marketed products is approximately eight
years.
NOTE 4: LINE OF CREDIT
In April 2005, the Company obtained financing under a bank line of credit for up to $4.0
million. Interest was due monthly with all outstanding principal and interest due on maturity. The
initial maturity of the line of credit was April 2006 and the line of credit thereafter was
successively renewed on an annual basis on each maturity date. Amounts outstanding under the line
of credit bore interest at a variable rate equal to the Wall Street Journal prime rate.
Because the Companys borrowing base under the line of credit exceeded $4.0 million as of
December 31, 2008, the full amount of the line of credit was available for borrowings and the
issuance of letters of credit on that date. As
8
of December 31, 2008, the Company had no borrowings outstanding and had issued letters of
credit totaling $68,000, resulting in $3.9 million of available borrowing capacity.
Effective May 4, 2009, the Company exercised its right to terminate its bank line of credit.
There were no penalties associated with the early termination of the line of credit.
NOTE 5: ACCRUED EXPENSES
The components of accrued expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Accrued product returns |
|
$ |
8,734 |
|
|
$ |
5,043 |
|
Accrued rebates |
|
|
1,996 |
|
|
|
884 |
|
Accrued price adjustments and chargebacks |
|
|
5,142 |
|
|
|
4,307 |
|
Accrued compensation and benefits |
|
|
2,289 |
|
|
|
2,507 |
|
Accrued royalties |
|
|
6,285 |
|
|
|
6,259 |
|
Accrued expenses, other |
|
|
108 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
24,554 |
|
|
$ |
19,052 |
|
|
|
|
|
|
|
|
NOTE 6: STOCK-BASED COMPENSATION
Stock-Based Compensation Expense
The following table shows the approximate amount of total stock-based compensation expense
recognized for employees and non-employees based on the total grant date fair value of shares
vested (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Employee |
|
$ |
576 |
|
|
$ |
83 |
|
|
$ |
828 |
|
|
$ |
164 |
|
Non-employee |
|
|
22 |
|
|
|
2 |
|
|
|
24 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
598 |
|
|
$ |
85 |
|
|
$ |
852 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount of total stock-based compensation expense recognized by
income statement classification (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
General and administrative |
|
$ |
528 |
|
|
$ |
63 |
|
|
$ |
781 |
|
|
$ |
125 |
|
Sales and marketing |
|
|
70 |
|
|
|
22 |
|
|
|
71 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
598 |
|
|
$ |
85 |
|
|
$ |
852 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The Company currently uses the Black-Scholes-Merton option pricing model to determine the fair
value of its stock options. The determination of the fair value of stock-based payment awards on
the date of grant using an option pricing model is affected by the Companys stock price, as well
as assumptions regarding a number of complex and subjective variables. These variables include the
Companys expected stock price volatility over the term of the awards, actual employee exercise
behaviors, risk-free interest rate and expected dividends.
There were 293,833 and 288,028 stock options granted and exercised, respectively, during the
six months ended June 30, 2009.
9
The following table shows the assumptions used to value stock option granted during the six
months ended June 30, 2009:
|
|
|
|
|
|
|
Six Months |
|
|
Ended June 30, |
|
|
2009 |
Estimated dividend yield |
|
|
0.0 |
% |
Expected stock price volatility |
|
|
75 |
% |
Risk-free interest rate |
|
|
2.46-2.85 |
% |
Expected life of option (in years) |
|
|
4.84 |
|
Weighted-average fair value per share |
|
$ |
4.33 |
|
The Company has not paid and does not anticipate paying cash dividends; therefore, the
expected dividend rate is assumed to be 0%. The expected stock price volatility for the stock
options is based on the Companys historical volatility from July 1, 2004 through the month of
grant, and on the historical volatility of a representative peer group of comparable companies
selected using publicly available industry and market capitalization data. The risk-free rate was
based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the
expected life assumption. The expected life of the stock options granted was estimated based on the
historical exercise patterns over the option lives while considering employee exercise strategy and
cancellation behavior.
As of June 30, 2009, the aggregate intrinsic value of options outstanding and exercisable was
$16.5 million and $8.9 million, respectively.
As of June 30, 2009, there was $2.1 million of total unrecognized compensation cost related to
unvested stock options, which is expected to be recognized over a weighted-average period of 2.51
years. On July 28, 2009, the Company completed its strategic transaction with Chiesi Farmaceutici
S.p.A. (Chiesi) (see Note 10). As a result, certain unvested stock options will accelerate, which
is expected to impact the weighted-average period of compensation cost recognition.
Restricted Stock
During the six months ended June 30, 2009, 120,000 and 90,734 shares of restricted stock were
issued and vested, respectively. As of June 30, 2009, there were 445,133 restricted common shares
outstanding and approximately $1.8 million of total unrecognized compensation cost related to
unvested restricted stock, which is expected to be recognized over a weighted-average period of
3.38 years. On July 28, 2009, the Company completed its strategic transaction with Chiesi (see Note
10). As a result, certain unvested restricted stock will accelerate, which is expected to impact
the weighted-average period of compensation cost recognition.
NOTE 7: INCOME TAXES
The Company computes an estimated annual effective tax rate for interim financial reporting
purposes in accordance with the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 18, Accounting for Income Taxes in Interim Periods, an interpretation of APB
Opinion No. 28. The Companys effective tax rate for the three and six months ended June 30, 2009
is 42.9% and 39.6%, respectively. The Companys effective tax rate for the three and six months
ended June 30, 2008 was 19.4% and 22.9%, respectively. The increase in the effective tax rate when
comparing the three and six months ended June 30, 2009 to the three and six months ended June 30,
2008 is due primarily to the release of the valuation allowance against the Companys deferred tax
assets during the first quarter of 2008. Upon release of the valuation allowance, the Company fully
utilized its net operating losses carryforwards, thereby reducing total income tax expense for the
three and six month periods ending June 30, 2008.
The estimated annual effective tax rate for the year ending December 31, 2009 includes a
benefit of approximately 2% related to a reduction in the valuation allowance offsetting deferred
tax assets. As of the date of the Merger, Critical Therapeutics had approximately $64.0 million in
deferred tax assets, primarily relating to net operating loss (NOL) carryforwards and tax
credits. The Company determined that utilization of these deferred tax assets was limited due to
the requirements of Section 382 of the Internal Revenue Code. Therefore, the deferred tax assets
resulting from these NOLs and tax credits were offset by a full valuation allowance. The reversal
of the valuation allowance that relates to the Companys use of these deferred tax assets in 2009 is
approximately $277,000 and has been recorded as a reduction to tax expense. The Company has not
established any other valuation allowances.
10
The Company implemented FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes, effective January
1, 2007. As of June 30, 2009, the Company has no unrecognized tax benefits, including those that
would affect the effective tax rate. There were no changes in unrecognized tax positions for the
three or six months ended June 30, 2009. The Company does not reasonably expect any change to the
amount of unrecognized tax benefits within the next twelve months.
The Company recognizes annual interest and penalties related to uncertain tax positions as
operating expenses in its statements of income. For the three and six months ended June 30, 2009,
the Company recognized no interest or penalties related to uncertain tax positions in the
statements of income.
The 2005 through 2008 tax years of the Company are open to examination by federal tax and
state tax authorities. The Company has not been informed by any tax authorities for any
jurisdiction that any of its tax years is under examination as of June 30, 2009.
NOTE 8: NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during each period. Diluted net income per share is computed by
dividing net income by the sum of the weighted-average number of common shares and dilutive common
share equivalents outstanding during the period. Dilutive common share equivalents consist of the
incremental common shares issuable upon the exercise of stock options and warrants and the impact
of non-vested restricted stock grants.
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,738 |
|
|
$ |
2,155 |
|
|
$ |
8,053 |
|
|
$ |
2,824 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, basic |
|
|
12,166,989 |
|
|
|
5,934,496 |
|
|
|
12,095,764 |
|
|
|
5,934,496 |
|
Dilutive effect of stock options,
warrants and restricted stock |
|
|
1,417,325 |
|
|
|
929,747 |
|
|
|
1,391,192 |
|
|
|
916,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, diluted |
|
|
13,584,314 |
|
|
|
6,864,243 |
|
|
|
13,486,956 |
|
|
|
6,851,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic |
|
$ |
0.14 |
|
|
$ |
0.36 |
|
|
$ |
0.67 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted |
|
$ |
0.13 |
|
|
$ |
0.31 |
|
|
$ |
0.60 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive weighted-average shares |
|
|
911,574 |
|
|
|
|
|
|
|
1,060,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 28, 2009, the Company completed its strategic transaction with Chiesi, which would
have materially changed the number of common shares and potential common shares outstanding as of
June 30, 2009 had it occurred on or before June 30, 2009 (see Note 10).
NOTE 9: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities, certain equipment and automobiles under non-cancelable
operating leases expiring at various dates through 2016. The Company recognizes rent expense on a
straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the
lease is reasonably assured. Rent expense was approximately $226,000 and $120,000 for the three
months ended June 30, 2009 and 2008, respectively, and $434,000 and $249,000 for the six monthly
ended June 30, 2009 and 2008, respectively.
Royalties
The Company has contractual obligations to pay royalties to the former owners of certain
product rights that have been acquired by or licensed to the Company, some of which are described
in Note 15 to the Companys consolidated financial statements included in the Companys annual
report on Form 10-K for the year ended December 31, 2008. These royalties are based on a percentage
of net sales of the particular licensed product.
11
In August 2006, the Company entered into an agreement with Pharmaceutical Innovations, LLC
(Pharmaceutical Innovations) for an exclusive license to a U.S. patent and know-how to
manufacture, package, market and distribute various day-night products. In exchange for these
rights, the Company was required to pay Pharmaceutical Innovations a special royalty of 8.5% of
initial net sales of day-night products up to a total of $250,000. The Company paid this special
royalty in the years ended December 31, 2006 and 2007. In addition, the Company is obligated to pay
royalties based on a percentage of the products annual net sales. The royalty rate increases as
the annual net sales increase. Minimum annual royalties are $300,000 per year under this agreement
during the life of the licensed patent based on the products currently marketed by the Company. The
Company exceeded the minimum annual royalty during the years ended December 31, 2007 and 2008.
On July 1, 2001, the Company acquired from The Feinstein Institute for Medical Research
(formerly known as The North Shore-Long Island Jewish Research Institute) (The Feinstein
Institute), an exclusive worldwide license, under patent rights and know-how controlled by The
Feinstein Institute relating to a cytokine called HMGB1, to make, use and sell products covered by
the licensed patent rights and know-how. As partial consideration for the license, among other
things, the Company agreed to make payments to The Feinstein Institute ranging from $50,000 to
$275,000 for each additional distinguishable product depending on whether it was covered by the
licensed patent rights or by the licensed know-how, in each case upon the achievement of specified
development and regulatory milestones for the applicable licensed product. As of December 31, 2008,
none of these milestones had been achieved. In addition, the Company is obligated to pay royalties
to The Feinstein Institute based on product sales. In the event of no product sales, the Company
will be required to pay minimum annual royalties of $15,000 in years 2009 through 2011 and $75,000
in years 2012 through the expiration of the patent in 2023.
The Company also has entered into two sponsored research and license agreements with The
Feinstein Institute, one agreement in July 2001 related to identifying inhibitors and antagonists
of HMGB1 and related proteins and a second agreement in January 2003 in the field of cholinergic
anti-inflammatory technology, including alpha-7. Under the terms of these agreements, the Company
acquired an exclusive worldwide license to make, use and sell products covered by the patent rights
and know-how arising from the sponsored research. In connection with the July 2001 sponsored
research and license agreement, the Company agreed to make payments to The Feinstein Institute
ranging from $50,000 to $200,000 for each additional distinguishable product depending on whether
it was covered by the licensed patent rights or by the licensed know-how. In connection with the
January 2003 sponsored research and license agreement, the Company agreed to pay additional amounts
in connection with the filing of any U.S. patent application or issuance of a U.S. patent relating
to the field of cholinergic anti-inflammatory technology. The Company also agreed to make aggregate
milestone payments to The Feinstein Institute of up to $1.5 million in both cash and shares of the
Companys common stock upon the achievement of specified development and regulatory approval
milestones with respect to any licensed product. As of June 30, 2009, none of these milestones had
been achieved. In addition, the Company is obligated to pay royalties to The Feinstein Institute
based on product sales. Under the January 2003 sponsored research and license agreement, the
Company agreed to pay minimum annual royalties beginning in 2008 to The Feinstein Institute,
regardless of whether the Company sells any licensed products, of $100,000 in 2008, which minimum
annual royalties amount will increase by $50,000 annually to a maximum of $400,000 in 2014, with a
minimum annual royalty payment of $400,000 thereafter payable through the expiration of the patent
in 2023.
Supply Agreements
Concentrations
The Company purchases inventory from pharmaceutical manufacturers. During the three and six
months ended June 30, 2009, two vendors accounted for 51% and 42% of the Companys inventory
purchases, respectively. During the three and six months ended June 30, 2008, two vendors accounted
for 56% and 44% of the Companys inventory purchases, respectively. Three inventory vendors
accounted for 29% and 25% of the Companys accounts payable as of June 30, 2009 and December 31,
2008, respectively. As of June 30, 2009 and December 31, 2008, the
Company had outstanding purchase orders related to inventory totaling approximately $8.0
million and $4.3 million, respectively.
12
Vintage
The Company has entered into an agreement with Vintage Pharmaceuticals, LLC (Vintage) to
exclusively manufacture
BALACET® 325, as well as our generic formulations of propoxyphene
napsylate and acetaminophen, APAP 325 and APAP 500, for prices established by the agreement,
subject to renegotiation at each anniversary date. The agreement expires in July 2010 and may be
renewed for subsequent one-year terms.
Meiji
In connection with the license agreement with Meiji Seika Kaisha, Ltd. (Meiji) dated October
12, 2006, as described in Note 15 to the Companys consolidated financial statements included in
the Companys annual report on Form 10-K for the year ended December 31, 2008, Meiji is the
Companys exclusive supplier of cefditoren pivoxil and, through October 2018, of
SPECTRACEF® 400 mg so long as Meiji is able to supply 100% of the Companys requirements
for SPECTRACEF 400 mg. Additionally, Meiji will be a non-exclusive supplier of SPECTRACEF 200 mg
through October 2018. The Company is required to purchase from Meiji combined amounts of the API
cefditoren pivoxil, SPECTRACEF 200 mg, SPECTRACEF 400 mg and sample packs of SPECTRACEF 400 mg
exceeding $15.0 million for the first year beginning October 2008, $20.0 million for year two,
$25.0 million for year three, $30.0 million for year four and $35.0 million for year five. If the
Company does not meet its minimum purchase requirement in a given year, the Company must pay Meiji
an amount equal to 50% of the shortfall in that year. The Company expects to exceed the minimum
purchase requirements. These minimum purchase requirements cease to apply if a generic cefditoren
product is launched in the United States prior to October 12, 2011.
Shasun
Shasun Pharma Solutions (Shasun) manufactures all of the Companys commercial supplies of
the zileuton API pursuant to an agreement dated February 8, 2005. The Company has committed to
purchase zileuton API from Shasun in the amounts of $5.8 million in 2009 and $1.6 million in 2010,
respectively, which are in excess of the Companys minimum purchase requirements. The agreement
will expire on the earlier of the date on which the Company has purchased a specified amount of the
API for zileuton or December 31, 2010. The agreement will automatically extend for successive
one-year periods after December 31, 2010, unless Shasun provides the Company with 18-months prior
written notice of cancellation.
Jagotec
Jagotec AG (Jagotec) manufactures all of the Companys bulk, uncoated tablets
of ZYFLO CR®
pursuant to a manufacturing and supply agreement dated August 20, 2007. The Company has agreed to
purchase from Jagotec a minimum of 20.0 million ZYFLO CR tablet cores in each of the four 12-month
periods starting May 30, 2008. The agreements initial term extends to May 22, 2012, and will
automatically continue thereafter, unless the Company provides Jagotec with 24-months prior
written notice of termination or Jagotec provides the Company with 36-months prior written notice
of termination.
On June 12, 2009, the Company entered into a letter amendment with Jagotec, which amends the
manufacturing and supply agreement dated August 20, 2007. The letter amendment adjusts the pricing
terms the Company is obligated to pay Jagotec for the delivery of ZYFLO CR. All other terms of the
manufacturing and supply agreement remain in full force and effect.
Patheon
Patheon Pharmaceuticals, Inc. (Patheon) coats, conducts quality control, quality assurance
and stability testing and packages commercial supplies of ZYFLO CR for the Company using uncoated
ZYFLO CR tablets the Company supplies to Patheon. The Company has agreed to purchase from Patheon
at least 50% of the Companys requirements for such manufacturing services for ZYFLO CR for sale in
the United States each year during the term of this agreement. The agreements initial term extends
to May 9, 2010, and will automatically continue for
successive one-year periods thereafter, unless the Company provides Patheon with 12-months
prior written notice of termination or Patheon provides the Company with 18-months prior written
notice of termination.
Patheon also manufactures all of the Companys ZYFLO® immediate release tablets
pursuant to a commercial manufacturing agreement. The Company has agreed to purchase from Patheon
at least 50% of the Companys commercial supplies of ZYFLO immediate-release tablets for sale in
the United States each year for the term of the
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agreement. The agreements current term extends to
September 15, 2009, and automatically continues for successive one-year periods thereafter, unless
the Company provides Patheon with 12-months prior written notice of termination or Patheon
provides the Company with 18-months prior written notice of termination.
Sovereign
Sovereign Pharmaceuticals, Ltd. (Sovereign) manufactures all of the Companys requirements
of three HYOMAX® products pursuant to an exclusive supply and marketing
agreement that the Company entered into in May 2008. Additionally, the Company purchases all of its
requirements for HYOMAX DT tablets pursuant to purchase orders it places from time to time with
Sovereign, which manufactures and supplies the HYOMAX DT tablets to the Company pursuant to an
agreement between Sovereign and Capellon Pharmaceuticals, Ltd. to which the Company is not a party.
The Company pays Sovereign its costs to manufacture the HYOMAX products exclusively for the
Company, as well as a royalty based on a share of the net profits realized from the sale of the
products. The term of the agreement expires in April 2011 and will be automatically renewed for
successive one-year terms unless either party provides written notice of termination at least 90
days prior to the end of the then current term.
Chiesi
Chiesi will manufacture all of the Companys requirements of CUROSURF®
pursuant to a license and distribution agreement that the Company entered into on May 6,
2009. Under the license and distribution agreement, Chiesi will license and grant to the Company
the exclusive distribution rights to Chiesis CUROSURF treatment in the United States for a
ten-year term. The Company will pay Chiesi the greater of a percentage of net sales price for
CUROSURF or the applicable floor price as set forth in the license and distribution agreement. The
agreement has a ten-year term and will be renewed for successive one-year terms unless specified
prior written notice is given.
DEY Co-Promotion and Marketing Services Agreement
On March 13, 2007, the Company entered into an agreement with Dey, L.P. (DEY), a wholly
owned subsidiary of Mylan Inc., under which the Company and DEY agreed to jointly promote ZYFLO CR
and ZYFLO. Under the co-promotion and marketing services agreement, the Company granted DEY an
exclusive right to promote and detail ZYFLO CR and ZYFLO in the United States, together with the
Company.
Under the co-promotion agreement, DEY paid the Company $12.0 million in non-refundable
aggregate payments in 2007 and the Company committed to fund at least $3 million in promotional
expenses in 2007. In addition, the Company and DEY each agreed to contribute 50% of approved
out-of-pocket promotional expenses during 2008 for ZYFLO CR that are approved by the parties joint
commercial committee. From January 1, 2009 through the expiration or termination of the
co-promotion agreement, DEY is responsible for the costs associated with its sales representatives
and the product samples distributed by its sales representatives, and the Company is responsible
for all other promotional expenses related to the products.
Prior to January 1, 2009, the Company paid DEY a co-promotion fee equal to thirty five percent
(35%) of quarterly net sales of ZYFLO CR and ZYFLO, after third-party royalties, in excess of $1.95
million. Beginning January 1, 2009 through December 31, 2013, the Company has agreed to pay DEY a
co-promotion fee equal to the ratio of total prescriptions written by certain pulmonary specialists
to total prescriptions during the applicable period multiplied by a percentage of quarterly net
sales of ZYFLO CR and ZYFLO, after third-party royalties. The co-promotion agreement expires on
December 31, 2013 and may be extended upon mutual agreement by the parties.
Atley Co-Promotion Agreement
In April 2007, the Company entered into a co-promotion agreement, as amended, with Atley
Pharmaceuticals, Inc. (Atley Pharmaceuticals) to co-promote a prescription pain product beginning
July 1, 2007. Under the agreement, the Company pays Atley Pharmaceuticals fees based on a
percentage of the net profits from sales of the product (as well as an authorized generic
equivalent of the product marketed by the Company) above a specified baseline within assigned sales
territories. The Companys co-promotion agreement with Atley Pharmaceuticals is
14
subject to sunset fees that require the Company to pay additional fees for up to one year in the event of certain
defined terminations of the agreement.
Product and Development Agreements
In August 2006, the Company loaned Neos Therapeutics, L.P. (Neos) $500,000 under a secured
subordinated promissory note agreement. In December 2006, the Company entered into a product
development agreement with Neos providing the Company with an exclusive license to certain products
under development utilizing Neoss patent-pending time release suspension technology. Under the
terms of the agreement, the note with Neos was forgiven. The Company has recorded the $500,000
consideration as product rights related to the time release suspension technology. The agreement,
as amended and restated in August 2008, requires Neos to develop the first product at its own
expense up to a defined milestone. After that milestone is achieved, the Company is required to
reimburse Neos 110% of all direct costs incurred and pay $150 per hour for personnel time incurred
in the development of the products. The Company will also make milestone payments up to $1.0
million for each product based on specific events. As of June 30, 2009, the Company had not made
any milestone payments. Upon commercialization, the Company would also pay Neos royalties based on
a percentage of net sales.
In December 2008, the Company entered into an additional development, license and services
agreement with Neos to license certain Neos patent-pending technology. Under the agreement, Neos
will perform development work on a new product candidate. The Company is required to pay hourly
fees for the development work in addition to up to an aggregate of $400,000 in fees.
On July 13, 2009, the Company entered into an asset purchase agreement with Oscient
Pharmaceuticals Corporation (Oscient) to purchase, in an auction sale supervised by a bankruptcy
court, the license rights to FACTIVE®, a quinolone antibiotic for the treatment of
certain respiratory infections. The Companys offer is subject to its being the winning bidder
and approval of the court supervising Oscients bankruptcy proceedings. If the sale to the Company
is approved, the Company will pay to Oscient $5.0 million (or such higher amount as the Company may
bid at the auction sale) for the products license rights plus an amount for purchased inventory to
be mutually determined prior to closing, and pay a royalty for 5 years based on a percentage of net
sales.
As of June 30, 2009, the Company had outstanding commitments related to ongoing research and
development contracts totaling approximately $1.5 million.
Legal Proceedings
In 2007, the U.S. Patent and Trademark Office (USPTO) ordered a re-examination of a patent
licensed to the Company that covers one or more of the Companys day-night products. Subsequently,
in October 2007, the Company filed suit against a pharmaceutical company in the U.S. District Court
for the Eastern District of North Carolina alleging infringement of the patent. In November 2007,
before a response to the Companys claims was due, the defendant moved to stay the litigation
pending the re-examination of the Companys patent. The court granted defendants motion and stayed
the litigation pending the re-examination of the patent in February 2008. In cooperation with its
licensor, the Company intends to vigorously pursue its claims and to vigorously defend against any
counterclaims that might be asserted. Additionally, in June 2008, the defendant requested that the
USPTO re-examine a related second patent licensed to the Company by an affiliate of the licensor of
the first patent. The USPTO granted this request and ordered a re-examination of the second patent
in August 2008. The Companys intellectual property counsel believes that valid arguments exist for
distinguishing the claims of the Companys patents over the references cited in the requests for
re-examination.
NOTE 10: SUBSEQUENT EVENTS
Effective this quarter, the Company adopted SFAS No. 165, Subsequent Events (SFAS 165). SFAS
165 establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not
impact the Companys financial position or results of operations. The Company evaluated all events
or transactions that occurred after June 30, 2009 through August 11, 2009, the date the Company
issued these financial statements. During this period, the Company did not have any material
recognizable subsequent events. However, the Company did have a nonrecognizable subsequent event
discussed below.
15
On May 6, 2009, the Company entered into a series of agreements for a strategic transaction,
subject to approval by the Companys stockholders, with Chiesi, whereby the Company agreed to issue
Chiesi approximately 12.2 million shares of common stock in exchange for $15.5 million in cash, an
exclusive license for the U.S. commercial rights to Chiesis CUROSURF product and a two-year right
of first offer on all drugs Chiesi intends to market in the United States. The Companys license
agreement with Chiesi is for a ten-year initial term and thereafter will be automatically renewed
for successive one-year renewal terms, unless earlier terminated by either party upon six months
prior written notice. As part of this transaction, the Companys president and chief executive
officer and its executive vice president of manufacturing and trade agreed to sell to Chiesi an
aggregate of 1.6 million shares of their common stock in the Company and enter into lockup, right
of first refusal and option agreements with respect to their remaining shares. In addition, certain
of the Companys other executive officers entered into lockup and right of first refusal agreements
with Chiesi with respect to their shares of common stock in the Company and are entitled to receive
certain equity incentives from the Company. On July 27, 2009, the Companys stockholders approved
the Companys issuance of the shares at a special stockholders meeting, and the transaction closed
on July 28, 2009. The transaction is considered a change of control as defined in certain
employment arrangements between the Company and various employees, which causes the acceleration of
vesting of certain stock options and restricted stock held by these employees. The Company has not
yet completed its evaluation of the estimated impact of the accelerated vesting on its operating
results.
NOTE 11: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
(SFAS 168), to establish the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by nongovernmental
entities in preparation of financial statements in conformity with generally accepted accounting
principles in the United States. SFAS 168 is effective for interim and annual periods ending after
September 15, 2009. The Company does not expect the adoption of this standard to have an impact on
its financial position or results of operations.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial condition and results of
operations together with our unaudited condensed consolidated financial statements and the related
notes included in Part IItem 1. Financial Statements of this quarterly report on Form 10-Q and
the consolidated financial statements and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our annual report on Form 10-K for the
year ended December 31, 2008. In addition to historical information, the following discussion
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual
results could differ materially from those anticipated by the forward-looking statements due to
important factors including, but not limited to, those set forth under Part IIItem 1A. Risk
Factors of this quarterly report on Form 10-Q.
Background
Cornerstone Therapeutics Inc. (Cornerstone, we, our, or us) is a specialty
pharmaceutical company focused on acquiring, developing and commercializing significant products
primarily for the respiratory and related markets. Our commercial strategy is to in-license or
acquire rights to underpromoted, patent-protected, branded respiratory or related pharmaceutical
products or late-stage product candidates; implement life cycle management strategies to maximize
the potential value and competitive position of our currently marketed products, newly acquired
products and product candidates that are currently in development; grow product revenue through our
specialty sales force, which is focused on the respiratory and related markets; and maintain and
strengthen the intellectual property position of our currently marketed products, newly
acquired products and product candidates We currently market our products only in the United
States.
16
On October 31, 2008, Critical Therapeutics, Inc., or Critical Therapeutics, and Cornerstone
BioPharma Holdings, Inc., or Cornerstone BioPharma, completed their previously announced merger.
Cornerstone BioPharmas reasons for the merger included, among other things, the opportunity to
expand Cornerstone BioPharmas respiratory product portfolio, the potential for enhanced future
growth and value and the ability to access additional capital. Because former Cornerstone BioPharma
stockholders owned, immediately following the merger, approximately 70% of the combined company on
a fully diluted basis and as a result of certain other factors, Cornerstone BioPharma was deemed to
be the acquiring company for accounting purposes and the transaction was treated as a reverse
acquisition in accordance with accounting principles generally accepted in the United States, or
GAAP. Accordingly, for all purposes, our financial statements for periods prior to the merger
reflect the historical results of Cornerstone BioPharma, and not Critical Therapeutics, and our
financial statements for all subsequent periods reflect the results of the combined company. In
addition, unless specifically noted otherwise, discussions of our financial results throughout this
document do not include the historical financial results of Critical Therapeutics (including sales
of ZYFLO CR and ZYFLO®) prior to the completion of the merger.
On May 6, 2009, we entered into a series of agreements for a strategic transaction, subject to
approval by our stockholders, with Chiesi, whereby we agreed to issue Chiesi approximately 12.2
million shares of common stock in exchange for $15.5 million in cash, an exclusive license for the
U.S. commercial rights to Chiesis CUROSURF® product and a two-year right of first offer on all
drugs Chiesi intends to market in the United States. Our license agreement with Chiesi is for a
ten-year initial term and thereafter will be automatically renewed for successive one-year renewal
terms, unless earlier terminated by either party upon six months prior written notice. As part of
this transaction, our president and chief executive officer and our executive vice president of
manufacturing and trade agreed to sell to Chiesi an aggregate of
1.6 million of their shares of our common
stock and enter into lockup, right of first refusal and option agreements with
respect to their remaining shares. In addition, certain of our other executive officers entered
into lockup and right of first refusal agreements with Chiesi with
respect to their shares of our
common stock and are entitled to receive certain equity incentives from us. On July
27, 2009, our stockholders approved our issuance of the shares at a special stockholders meeting,
and the transaction closed on July 28, 2009. The transaction is considered a change of control as
defined in certain employment arrangements between us and various employees, which causes the
acceleration of vesting of certain stock options and restricted stock held by these employees. We
have not yet completed our evaluation of the estimated impact of the accelerated vesting on our
operating results.
CUROSURF is a natural lung surfactant and a world-leading treatment approved by the FDA
for Respiratory Distress Syndrome in premature infants. CUROSURF is currently available
in over 60 countries, including the United States and most of Europe, and has been
administered to over one million infants since 1992. Respiratory Distress Syndrome
affects approximately ten of every 100 premature infants in the United States, or
approximately 40,000 babies, each year. Respiratory Distress Syndrome can lead to
serious complications and is one of the most common causes of neonatal mortality.
We expect to begin marketing, promoting, and earning revenues from CUROSURF in the third
quarter of 2009. There is no assurance that we will achieve the sales level for CUROSURF
that was achieved by Chiesis prior licensee of the U.S. rights to this product.
Current Marketed Products
We currently promote SPECTRACEF®, ZYFLO CR and the ALLERX® Dose Pack
family of products. In addition, we have a co-promotion agreement with Dey, L.P., or DEY, for the
exclusive co-promotion along with us of ZYFLO CR and ZYFLO. Under the DEY co-promotion agreement,
we pay DEY a co-promotion fee equal to the ratio of total prescriptions written by certain
pulmonary specialists to total prescriptions during the applicable period multiplied by a
percentage of quarterly net sales of ZYFLO CR and ZYFLO, after third-party royalties. We currently
generate revenues from product sales and royalties from the sale of other products that we do not
actively promote. Of these, HYOMAX®, BALACET® 325, APAP 500, one of our
generic propoxyphene/acetaminophen products, and DECONSAL® have generated the most net
revenues to date for us. Of our marketed products that we do not promote, only BALACET 325 and APAP
325, our generic equivalent of BALACET 325, are currently promoted by a third party.
The HYOMAX line of products consists of generic formulations of four antispasmodic medications
containing the active pharmaceutical ingredient, or API, hyoscyamine sulfate, an anticholinergic,
which may be prescribed for various gastrointestinal disorders. We launched our first HYOMAX
product in May 2008. We pay Sovereign Pharmaceuticals, Ltd., or Sovereign, its costs to manufacture
the HYOMAX products exclusively for us, as well as a royalty based on a share of the net profits
realized from the sale of the products. Although our HYOMAX line of products consists of generic
formulations without patent protection, until the second quarter of 2009, this product line
experienced limited generic competition. However, we are now experiencing increased market
competition with respect to a number of our HYOMAX products, and we may experience additional
competition in the future. As competition for our HYOMAX line of products increases, we expect that
our market share and the price of our HYOMAX products will decline. The extent of any decline will
depend on several factors, including, among others, the number of competitors and the pricing
strategy of the new competitors.
In September 2005, we entered into a supply and marketing agreement with Pliva Inc., or Pliva,
relating to APAP 500. Under this agreement, which we terminated effective December 31, 2008, Pliva
sold APAP 500 that was
17
supplied to it by Vintage Pharmaceuticals, LLC, or Vintage, and paid us royalties based on the
quarterly net sales of APAP 500.
Financial Operations Overview
Net Revenues
Our net revenues are comprised of net product sales and royalty agreement revenues. We
recognize product sales net of estimated allowances for product returns; estimated rebates in
connection with contracts relating to managed care, Medicaid and Medicare; estimated chargebacks;
price adjustments; product vouchers; co-pay vouchers; and prompt payment and other discounts. The
primary factors that affect our net product sales are the level of demand for our products, unit
sales prices and the amount of sales adjustments that we recognize. Royalty agreement revenues
consist of royalties we receive under license agreements with third parties that sell products to
which we have rights. The primary factors that affect royalty agreement revenues are the demand and
sales prices for such products and the royalty rates that we receive on the sales of such products
by third parties.
From time to time, we implement price increases on our branded products. Our branded and
generic products are subject to rebates, chargebacks and other sales allowances that have the
effect of decreasing the net revenues that we ultimately realize from product sales. Our generic
products may also be subject to substantial price competition from equivalent generic products
introduced by other pharmaceutical companies. Such competition may also decrease our net revenues
from the sale of our generic products.
Cost of Product Sales
Our cost of product sales is primarily comprised of the costs of manufacturing and
distributing our pharmaceutical products. In particular, cost of product sales includes third-party
manufacturing and distribution costs, the cost of API, freight and shipping, reserves for excess or
obsolete inventory and labor, benefits and related employee expenses for personnel involved with
overseeing the activities of our third-party manufacturers. Cost of product sales excludes
amortization of product rights.
We contract with third parties to manufacture all of our products and product candidates.
Changes in the price of raw materials and manufacturing costs could adversely affect our gross
margins on the sale of our products. Changes in our mix of products sold also will result in
variations in our cost of product sales. Accordingly, our management expects gross margins will
change as our product mix is altered by changes in demand for our existing products or the launch
of new products.
Sales and Marketing Expenses
Our sales and marketing expenses consist of labor, benefits and related employee expenses for
personnel in our sales, marketing and sales operations functions; advertising and promotion costs,
including the costs of samples; and the fees we pay under our co-promotion agreements to third
parties to promote our products, which are based on a percentage of net profits from product sales,
determined in accordance with the particular agreement. The most significant component of our sales
and marketing expenses is labor, benefits and related employee expenses. We expect that our sales
and marketing expenses will increase as we expand our sales and marketing infrastructure to support
additional products and product lines and as a result of increased co-promotion fees due to greater
product sales.
Royalty Expenses
Royalty expenses include the contractual amounts we are required to pay the licensors from
which we have acquired the rights to our marketed products or third-parties to whom we pay
royalties under settlement agreements relating to our products. Royalties are generally based on a
percentage of the products net sales. With respect to the HYOMAX line of products, royalties are
based on a percentage of the net profits earned by us on the sale of the products. Although product
mix affects our royalties, we generally expect that our royalty expenses will increase as total net
product sales increase.
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General and Administrative Expenses
General and administrative expenses primarily include labor, benefits and related employee
expenses for personnel in executive, finance, accounting, business development, information
technology, regulatory/medical affairs and human resource functions. Other costs include facility
costs not otherwise included in sales and marketing or research and development expenses and
professional fees for legal and accounting services. General and administrative expenses also
consist of the costs of maintaining and overseeing our intellectual property portfolio, which
include the cost of external legal counsel and the mandatory fees of the U.S. Patent and Trademark
Office, or USPTO, and foreign patent and trademark offices. General and administrative expense also
includes depreciation expense for our property and equipment, which we depreciate over the
estimated useful lives of the assets using the straight-line method. We expect that general and
administrative expenses will increase as we continue to build the infrastructure necessary to
support our commercialization and product development activities and to meet our compliance
obligations as a public company. In addition, during the six months ended June 30, 2009, we have
continued to incur additional legal, accounting and related costs relating to our October 2008
merger and our strategic transaction with Chiesi.
Research and Development Expenses
Research and development expenses consist of product development expenses incurred in
identifying, developing and testing our product candidates and the write-off of in-process research
and development expenses related to the alpha-7 program acquired from Critical Therapeutics in
connection with our merger. Product development expenses consist primarily of labor, benefits and
related employee expenses for personnel directly involved in product development activities; fees
paid to professional service providers for monitoring and analyzing clinical trials; expenses
incurred under joint development agreements; regulatory costs; costs of contract research and
manufacturing; and the cost of facilities used by our product development personnel. We expense
product development costs as incurred. We believe that significant investment in product
development is important to our competitive position and plan to increase our expenditures for
product development to realize the potential of the product candidates that we are developing or
may develop.
Our product development expenses reflect costs directly attributable to product candidates in
development during the applicable period and to product candidates for which we have discontinued
development. Additionally, product development expenses include our costs of qualifying new current
Good Manufacturing Practice, or cGMP, third-party manufacturers for our products, including
expenses associated with any related technology transfer. We do not allocate indirect costs (such
as salaries, benefits or other costs related to our accounting, legal, human resources, purchasing,
information technology and other general corporate functions) to the research and development
expenses associated with individual product candidates. Rather, we include these costs in general
and administrative expenses.
Amortization of Product Rights
We capitalize our costs to license product rights from third parties as such costs are
incurred and amortize these amounts on a straight-line basis over the estimated useful life of the
product or the remaining trademark or patent life. We re-evaluate the useful life of our products
on an annual basis to determine whether the value of our product rights assets have been impaired
and appropriately adjust amortization to account for such impairment. Amortization of product
rights is expected to increase in the future as we begin amortizing product rights related to new
products.
Other Charges
Other charges include expenses related to settlements of litigation.
Critical Accounting Estimates
Managements discussion and analysis of financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been prepared in accordance
with GAAP. For information regarding our critical accounting policies and estimates please refer to
Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical
Accounting Policies and Estimates contained in our Annual Report on Form 10-K for the year ended
December 31, 2008 and Note 2 to our condensed consolidated
19
financial statements contained therein. There have been no material changes to the critical
accounting policies previously disclosed in that report.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2009 and 2008
Net Revenues
The following table sets forth a summary of our net revenues and the presentation of the
change from period-to-period (in thousands, except percentages):
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
|
|
June 30, |
|
|
June 30, |
|
|
vs. June 30, 2008 |
|
|
vs. June 30, 2008 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
Net product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLERX 10 Dose
Pack/ALLERX 30 Dose
Pack |
|
$ |
7,879 |
|
|
$ |
3,111 |
|
|
$ |
14,591 |
|
|
$ |
6,377 |
|
|
$ |
4,768 |
|
|
|
153 |
% |
|
$ |
8,214 |
|
|
|
129 |
% |
ALLERX Dose Pack
DF/ALLERX Dose Pack DF
30 |
|
|
1,161 |
|
|
|
1,387 |
|
|
|
3,131 |
|
|
|
2,554 |
|
|
|
(226 |
) |
|
|
(16 |
) |
|
|
577 |
|
|
|
23 |
|
ALLERX Dose Pack
PE/ALLERX Dose Pack PE
30 |
|
|
(488 |
) |
|
|
1,836 |
|
|
|
1,722 |
|
|
|
3,935 |
|
|
|
(2,324 |
) |
|
|
(127 |
) |
|
|
(2,213 |
) |
|
|
(56 |
) |
SPECTRACEF |
|
|
1,625 |
|
|
|
1,614 |
|
|
|
5,342 |
|
|
|
1,795 |
|
|
|
11 |
|
|
|
1 |
|
|
|
3,547 |
|
|
|
198 |
|
BALACET 325 |
|
|
875 |
|
|
|
958 |
|
|
|
1,804 |
|
|
|
3,103 |
|
|
|
(83 |
) |
|
|
(9 |
) |
|
|
(1,299 |
) |
|
|
(42 |
) |
HYOMAX |
|
|
8,841 |
|
|
|
4,473 |
|
|
|
17,401 |
|
|
|
4,473 |
|
|
|
4,368 |
|
|
|
98 |
|
|
|
12,928 |
|
|
|
289 |
|
ZYFLO CR and ZYFLO (1) |
|
|
3,490 |
|
|
|
|
|
|
|
8,803 |
|
|
|
|
|
|
|
3,490 |
|
|
|
100 |
|
|
|
8,803 |
|
|
|
100 |
|
Other currently
marketed products |
|
|
1,610 |
|
|
|
346 |
|
|
|
2,667 |
|
|
|
488 |
|
|
|
1,264 |
|
|
|
365 |
|
|
|
2,179 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net product sales |
|
|
24,993 |
|
|
|
13,725 |
|
|
|
55,461 |
|
|
|
22,725 |
|
|
|
11,268 |
|
|
|
82 |
|
|
|
32,736 |
|
|
|
144 |
|
Royalty agreement revenues |
|
|
|
|
|
|
342 |
|
|
|
237 |
|
|
|
787 |
|
|
|
(342 |
) |
|
|
(100 |
) |
|
|
(550 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
24,993 |
|
|
$ |
14,067 |
|
|
$ |
55,698 |
|
|
$ |
23,512 |
|
|
$ |
10,926 |
|
|
|
78 |
% |
|
$ |
32,186 |
|
|
|
137 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include the historical sales of ZYFLO CR and ZYFLO made by Critical Therapeutics. |
Net Product Sales. Net product sales were $25.0 million for the three months ended June 30,
2009, compared to $13.7 million for the three months ended June 30, 2008, an increase of
approximately $11.3 million, or 82%. For the six months ended June 30, 2009, net product sales
were $55.5 million compared to $22.7 million for the six months ended June 30, 2008, an increase of
approximately $32.7 million or 144%.
ALLERX Dose Pack family of products net product sales for the three months ended June 30, 2009
increased by $2.2 million, or 35%, compared to the three months ended June 30, 2008. For the six
months ended June 30, 2009, net product sales increased by $6.6 million or 51% compared to the six
months ended in June 30, 2008. The growth in product sales was due primarily to a price increase
on the entire product family, offset by decreased volume of the ALLERX PE and the ALLERX DF
formulations as a result of generic competition.
SPECTRACEF net product sales increased for the three and six months ended June 30, 2009
compared to the three and six months ended June 30, 2008, primarily due to the launch of the
SPECTRACEF 400 mg Dose Packs in late 2008.
BALACET 325 net product sales decreased for the three and six months ended June 30, 2009
compared to the three and six months ended June 30, 2008, primarily due to our launch of APAP 325
in July 2008. Net product sales for APAP 325 were $930,000 and $1.6 million for the three and six
months ended June 30, 2009, respectively, and are included in net product sales from other
currently marketed products.
20
HYOMAX net product sales increased for the three and six months ended June 30, 2009 compared
to the three and six months ended June 30, 2008, primarily due to timing of the launches of the
HYOMAX products during 2008. The first HYOMAX product was launched in May 2008, the second and
third in June 2008 and the fourth in July 2008.
ZYFLO CR and ZYFLO net product sales were $3.5 million and $8.8 million for the three and six
months ended June 30, 2009, respectively. As noted above, our historical financial results for the
three and six months ended June 30, 2008 do not include sales of ZYFLO CR and ZYFLO by Critical
Therapeutics prior to the completion of our October 31, 2008 merger.
Royalty Agreement Revenues. Royalty agreement revenues decreased for the three and six months
ended June 30, 2009 compared to the three and six months ended June 30, 2008, primarily due the
expiration of the supply and marketing agreement for APAP 500 in December 2008. Subsequent to the
expiration of the supply and marketing agreement, we began marketing APAP 500. Net product sales
for APAP 500 were $425,000 for the three and six months ended June 30, 2009, and are included in
other currently marketed products.
Costs and Expenses
Cost of Product Sales. Cost of product sales (exclusive of amortization of product rights of
$510,000 and $109,000 for the three months ended June 30, 2009 and 2008, respectively) was $2.9
million for the three months ended June 30, 2009, compared to $933,000 for the three months ended
June 30, 2008, an increase of approximately $2.0 million, or 211%. Cost of product sales (exclusive
of amortization of product rights of $1.0 million and $848,000 for the six months ended June 30,
2009 and 2008, respectively) was $6.1 million for the six months ended June 30, 2009, compared to
$1.5 million for the six months ended June 30, 2008, an increase of approximately $4.6 million, or
307%. Cost of product sales consisted primarily of the expenses associated with manufacturing and
distributing products, including shipping and handling costs, and reserves established for excess
or obsolete inventory.
Gross margin (exclusive of royalty agreement revenues and amortization of product rights) was
88% and 93% for the three months ended June 30, 2009 and 2008, respectively. Gross margin
(exclusive of royalty agreement revenues and amortization of product rights) was 89% and 93% for
the six months ended June 30, 2009 and 2008, respectively. The decrease in gross margin was
primarily due to the increased sales contribution of the ZYFLO product family, the SPECTRACEF
product family and HYOMAX, which have lower gross margins than our other products. We recorded
inventory write-offs of $483,000 and $534,000 for the three and six months ended June 30, 2009,
respectively, and $37,000 and $61,000 for the three and six months ended June 30, 2008,
respectively. These adjustments were necessary to adequately state reserves related to excess or
obsolete inventory that, due to its expiration dating, would not be sold.
Sales and Marketing Expenses. Sales and marketing expenses were $6.5 million for the three
months ended June 30, 2009, compared to $3.6 million for the three months ended June 30, 2008, an
increase of $2.9 million, or 80%. Sales and marketing expenses were $11.9 million for the six
months ended June 30, 2009, compared to $7.5 million for the six months ended June 30, 2008, an
increase of $4.4 million, or 58%. These increases were primarily due to increases in labor and
benefits-related costs as a result of the growth of our sales force and management team;
advertising and promotional spending relating to the marketing launch of ZYFLO CR in 2009 and
SPECTRACEF 400 mg; co-promotion expenses relating to ZYFLO CR; travel-related expenses due to the
increased number of sales representatives; and consulting expenses relating to increased market
research.
Royalty Expenses. Royalty expenses were $5.7 million for the three months ended June 30, 2009,
compared to $3.6 million for the three months ended June 30, 2008, an increase of approximately
$2.1 million, or 59%. Royalty expenses for the six months ended June 30, 2009 were $11.9 million
compared to $4.8 million for the six months ended June 30, 2008 an increase of $7.1 million or
149%. These increases were primarily due to the launches of our four HYOMAX products, the first of
which occurred in May 2008; increased net product sales of the ALLERX family of products; and
royalties relating to ZYFLO CR and ZYFLO, which were acquired in our October 31, 2008 merger.
21
General and Administrative Expenses. General and administrative expenses were $5.1 million for
the three months ended June 30, 2009, compared to $2.3 million for the three months ended June 30,
2008, an increase of $2.8 million, or 122%. General and administrative expenses were $8.9 million
for the six months ended June 30, 2009, compared to $3.8 million for the six months ended June 30,
2008, an increase of $5.1 million, or 134%. These increases were primarily due increases in labor
and benefits-related employee expenses and travel-related expenses due to expansion of our
workforce; legal and accounting costs, most of which relate to increased regulatory requirements as
a result of our becoming a public company and costs associated with the Chiesi transaction (see
Note 10 to our condensed consolidated financial statements); FDA regulatory-related fees; and
product liability and other insurance related costs.
Research and Development Expenses. Research and development expenses were $1.2 million for the
three months ended June 30, 2009, compared to $507,000 for the three months ended June 30, 2008, an
increase of approximately $681,000, or 134%. For the six months ended June 30, 2009, research and
development expenses were $2.4 million compared to $605,000 for the six months ended June 30, 2008,
an increase of $1.7 million or 288%. These increases were primarily due to the manufacturing of
and studies conducted on a product candidate, as well as stability studies for existing products.
Our product development expenses for particular product candidates vary significantly from
period to period depending on the product development stage and the nature and extent of the
activities undertaken to advance the product candidates development in a given reporting period.
Amortization of Product Rights. Amortization of product rights was $510,000 for the three
months ended June 30, 2009, compared to $109,000 for the three months ended June 30, 2008, an
increase of approximately $401,000, or 368%. Amortization of product rights in the six months ended
June 30, 2009 was $1.0 million compared to $848,000 for the six months ended June 30, 2008, an
increase of $173,000 or 20%. These increases were primarily due to the amortization of ZYFLO CR
product rights, offset by the BALACET product rights that became fully amortized as of March 31,
2008. ZYFLO CR was added to our product portfolio as a result of our October 31, 2008 merger.
Other Expenses
Interest Expense, Net. Net interest expense was $42,000 and $114,000 for the three and six
months ended June 30, 2009, respectively, compared to $343,000 and $722,000 for the three and six
months ended June 30, 2008, respectively. The decrease of approximately $301,000 and $608,000 when
comparing current periods to prior periods was primarily due to the conversion of our promissory
note with Carolina Pharmaceuticals Ltd., or the Carolina Note, into common stock on October 31,
2008 in connection with our merger.
Provision for Income Taxes
The provision for income taxes was $1.3 million and $5.3 million for the three and six months
ended June 30, 2009, respectively, compared to $520,000 and $839,000 for the three and six months
ended June 30, 2008, respectively. Our effective tax rate for the three and six months ended June
30, 2009 is 42.9% and 39.6%, respectively. Our effective tax rate for the three and six months
ended June 30, 2008 was 19.4% and 22.9%, respectively. The increase in the effective tax rate when
comparing the three and six months ended June 30, 2009 to the three and six months ended June 30,
2008 is due primarily to the release of the valuation allowance against our deferred tax assets
during the first quarter of 2008. Upon release of the valuation allowance, we fully utilized our
net operating loss carryforwards, thereby reducing total income tax expense for the three and six
month periods ending June 30, 2008.
Liquidity and Capital Resources
Sources of Liquidity
We require cash to meet our operating expenses and for working capital, capital expenditures,
acquisitions and in-licenses of rights to products and principal and interest payments on any debt
we may have outstanding. To date, we have funded our operations primarily from product sales,
royalty agreement revenues and borrowings under the Carolina Note and our line of credit with
Paragon Commercial Bank, or Paragon. We borrowed $13.0 million under
22
the Carolina Note in April 2004. In connection with the closing of our merger, all of the
outstanding principal amount of the Carolina Note of approximately $9.0 million was exchanged for
6,064,731 shares of Cornerstone BioPharmas common stock (which was exchanged for 1,443,913 shares
of our common stock in the merger). As of June 30, 2009, we had $15.5 million in cash and cash
equivalents. There were no borrowings on the Paragon line of credit during the three or six months
ended June 30, 2009. Effective May 4, 2009, we exercised our right to terminate the Paragon line of
credit. In July 2009, in connection with the consummation of our strategic transaction with Chiesi,
among other consideration, we received approximately $15.5 million in cash.
Cash Flows
The following table provides information regarding our cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
5,742 |
|
|
$ |
3,790 |
|
Investing activities |
|
|
164 |
|
|
|
(1,802 |
) |
Financing activities |
|
|
267 |
|
|
|
(2,210 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
6,173 |
|
|
$ |
(222 |
) |
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities
Our primary sources of operating cash flows are product sales and royalty agreement revenues.
Our primary uses of cash in our operations are for inventories and other costs of product sales,
sales and marketing expenses, royalties, general and administrative expenses and interest.
Net cash provided by operating activities for the six months ended June 30, 2009 reflected our
net income of $8.1 million, adjusted by non-cash expenses totaling $2.7 million and changes in
accounts receivable, inventories, income taxes payable, accrued expenses and other operating assets
and liabilities totaling $5.0 million. Non-cash items included amortization and depreciation of
$1.1 million, change in allowances for prompt payment discounts and inventory obsolescence of $2.1
million, stock-based compensation of $852,000 and changes in deferred income tax of $1.4 million.
Accounts receivable increased by $1.2 million from December 31, 2008 to June 30, 2009, primarily
due to increased net product sales. Inventories increased by $805,000 from December 31, 2008 to
June 30, 2009, primarily due to the purchase of ZYFLO CR, HYOMAX and ALLERX finished goods
inventory and HYOMAX API, offset by decreased purchases of raw materials (other than HYOMAX API).
Prepaid expenses and other assets increased by $2.3 million, primarily due to voucher programs and
prepayments on purchases of API not yet received into inventory. Accounts payable decreased by $2.5
million from December 31, 2008 to June 30, 2009, primarily due to decreased payables related to the
2008 merger, manufacturing, product development and marketing expenses. Accrued expenses increased
by $4.2 million from December 31, 2008 to June 30, 2009, primarily due to increased returns,
royalties, rebates and chargebacks resulting from increased product sales, offset, in part, by a
decrease in accrued bonus. Income taxes payable (exclusive of income taxes payable assumed in the
merger) decreased by $435,000 from December 31, 2008 to June 30, 2009.
Net cash provided by operating activities for the six months ended June 30, 2008 reflected our
net income of $2.8 million, adjusted by non-cash expenses totaling $1.5 million and changes in
accounts receivable, inventories, accrued expenses and other operating assets and liabilities
totaling $537,000. Non-cash items included amortization and depreciation of $886,000, change in
allowances for prompt payment discounts and inventory obsolescence of $448,000 and stock-based
compensation of $169,000.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2009 primarily
reflected the purchase of property and equipment for $136,000, offset by net proceeds from the sale
of marketable securities of $300,000.
23
Net cash used in investing activities for the six months ended June 30, 2008 primarily
reflected net advances to related parties of $19,000, the purchase of product rights for $1.8
million, the purchase of property and equipment of $16,000 and net payments for deposits of
$17,000.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2009 reflected
proceeds from common stock option exercises of $271,000.
Net cash used in financing activities for the six months ended June 30, 2008 reflected net
payments on the Paragon line of credit and the Carolina Note of $1.8 million and $460,000,
respectively.
Funding Requirements
We expect to continue to incur significant development and commercialization expenses as we
seek FDA approval for CRTX 068 and CRTX 062; advance the development of our other product
candidates, including CRTX 058 and CRTX 069; seek regulatory approvals for our product candidates
that successfully complete clinical testing, such as CRTX 067; and expand our sales team and
marketing capabilities to prepare for the commercial launch of future products, subject to FDA
approval. We also expect to incur additional expenses to add operational, financial and management
information systems and personnel, including personnel to support our product development efforts.
Accordingly, we will need to increase our revenues to be able to sustain and increase our
profitability on an annual and quarterly basis. There is no assurance that we will be able to do
so. Our failure to achieve consistent profitability could impair our ability to raise capital,
expand our business, diversify our product offerings and continue our operations.
Our future capital requirements will depend on many factors, including:
|
|
|
the level of product sales of our currently marketed products and any additional
products that we may market in the future; |
|
|
|
|
the scope, progress, results and costs of development activities for our current
product candidates; |
|
|
|
|
the costs, timing and outcome of regulatory review of our product candidates; |
|
|
|
|
the number of, and development requirements for, additional product candidates that we
pursue; |
|
|
|
|
the costs of commercialization activities, including product marketing, sales and
distribution; |
|
|
|
|
the costs and timing of establishing manufacturing and supply arrangements for clinical
and commercial supplies of our product candidates and products; |
|
|
|
|
the extent to which we acquire or invest in products, businesses and technologies; |
|
|
|
|
the extent to which we choose to establish collaboration, co-promotion, distribution or
other similar arrangements for our marketed products and product candidates; and |
|
|
|
|
the costs of preparing, filing and prosecuting patent applications and maintaining,
enforcing and defending claims related to intellectual property owned by or licensed to us. |
To the extent that our capital resources are insufficient to meet our future capital
requirements, we will need to finance our cash needs through public or private equity offerings,
debt financings, corporate collaboration and licensing arrangements or other financing
alternatives, which may not be available on acceptable terms, if at all.
As of June 30, 2009, we had approximately $15.5 million of cash and cash equivalents on hand.
Effective May 4, 2009, we exercised our right to terminate our line of credit with Paragon. There
were no penalties associated with the early termination of the line of credit. In July 2009, in
connection with the consummation of our strategic
24
transaction with Chiesi, we received approximately $15.5 million in cash, an exclusive license
for the U.S. commercial rights to Chiesis CUROSURF product and a two-year right of first offer on
all drugs Chiesi intends to market in the United States.
In July 2009, we also entered into an asset purchase agreement with Oscient Pharmaceuticals
Corporation, or Oscient, to purchase, in an auction sale supervised by a bankruptcy court, the
license rights to FACTIVE®, a quinolone antibiotic for the treatment of certain
respiratory infections. If we are the winning bidder and our offer is approved by the bankruptcy
court, we will be required to pay Oscient $5.0 million (or such higher amount as we may bid at the
auction sale) for the products license rights plus an amount for purchased inventory to be
mutually determined prior to closing.
Based on our current operating plans, we believe that our existing cash and cash equivalents
and revenues from product sales are sufficient to continue to fund our existing level of operating
expenses and capital expenditure requirements for the foreseeable future.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet arrangements, including
structured finance, special purpose entities or variable interest entities.
Effects of Inflation
We do not believe that inflation has had a significant impact on our revenues or results of
operations since inception. We expect our cost of product sales and other operating expenses will
change in the future in line with periodic inflationary changes in price levels. Because we intend
to retain and continue to use our property and equipment, we believe that the incremental inflation
related to the replacement costs of such items will not materially affect our operations. However,
the rate of inflation affects our expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the rate at which we use our resources.
While our management generally believes that we will be able to offset the effect of cost inflation
by adjusting our product prices and implementing operating efficiencies, any material unfavorable
changes in price levels could have a material adverse affect on our financial condition, results of
operations and cash flows.
Recent Accounting Pronouncements
See Note 11: Recent Accounting Pronouncements in Part IItem 1. Financial Statements of
this quarterly report on Form 10-Q for a description of recent accounting pronouncements, including
the expected dates of adoption and estimated effects, if any, on our consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act, means controls and other
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procedures of a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives, and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 2009, our chief executive officer and chief financial
officer concluded that, as of such date, our disclosure controls and procedures were not effective
at the reasonable assurance level as we have not conducted necessary testing to confirm the
material weakness in our internal control over financial reporting described in our annual report
on Form 10-K for the year ended December 31, 2008 has been effectively remediated.
Changes in Internal Control Over Financial Reporting
As discussed in our annual report on Form 10-K for the year ended December 31, 2008, our
management initiated a comprehensive assessment of our internal control over financial reporting.
As of March 31, 2009, management identified a material weakness related to our lack of a sufficient
number of personnel in our accounting and finance department with appropriate accounting knowledge
and experience to record our financial results in conformity with GAAP, which prevents us from
being able to timely and effectively close our books at the end of each interim and annual period.
While we believe that we have taken the appropriate actions to remediate the material weakness as
of June 30, 2009, with the expansion of our accounting and finance department and remediation of
related disclosure controls, we have not conducted necessary testing to confirm that the material
weakness has been effectively remediated. Additionally, our assessment of our internal control over
financial reporting is not complete; accordingly, our management may identify additional material
weaknesses as part of its assessment. We expect the assessment process to be completed during the
third quarter of 2009.
Chenyqua M. Baldwin, our Vice President, Finance, Chief Accounting Officer and Controller,
resigned effective May 7, 2009. As part of the expansion of our accounting and finance department,
Ms. Baldwins duties and responsibilities were reassigned among our Chief Financial Officer and
other existing and newly hired personnel in our finance and accounting department.
Except as noted above, there was no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June
30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Prior to March 2008, we used a different formulation for ALLERX 10 Dose Pack and ALLERX 30
Dose Pack that we believe was protected under claims in U.S. patent number 6,270,796, or the 796
Patent. In 2007, the USPTO ordered a re-examination of the 796 Patent as a result of a third-party
request for ex parte re-examination. We and J-Med Pharmaceuticals, Inc., or J-Med, the licensor of
the 796 Patent, have asserted infringements of the 796 Patent in litigation with each of Everton
Pharmaceuticals, LLC, or Everton, Breckenridge Pharmaceutical, Inc., or Breckenridge, and Vision
Pharma, LLC, or Vision, and manufacturers and related parties of each, alleging that those parties
had infringed the 796 Patent by making, using, selling, offering for sale or importing into the
United States pharmaceutical products intended as generic equivalents to the former formulation of
ALLERX 10 Dose Pack and ALLERX 30 Dose Pack protected under claims in the 796 Patent. Everton and
Breckenridge entered into settlement agreements in January 2007 and July 2007, respectively, and
agreed to cease selling the infringing products. In October 2007, we and J-Med filed an action in
the U.S. District Court for the Eastern District of North Carolina against Vision and Nexgen
Pharma, Inc. captioned Cornerstone BioPharma, Inc. and J-Med Pharmaceuticals, Inc. v. Vision
Pharma, LLC and Nexgen Pharma, Inc., No. 5:07-CV-00389-F. In this action, we and J-Med alleged that
the product known as VisRx infringes the 796 Patent. On November 19, 2007, we and J-Med
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filed an amended complaint asserting claims against Visions principals, Sander Busman,
Thomas DeStefano and Michael McAloose. On November 30, 2007, defendants moved to stay the
litigation pending the re-examination of the 796 Patent. The Court granted defendants motion and
stayed the litigation pending the re-examination of the 796 Patent on February 15, 2008.
In proceedings before a re-examination examiner in the USPTO, the examiner rejected claims of
the 796 Patent as failing to satisfy the novelty and non-obviousness criteria for U.S. patent
claims. J-Med appealed to the USPTO Board of Patent Appeals and Interferences, or Board of Patent
Appeals, on June 13, 2008, seeking reversal of the examiners rejections. On the same date, J-Med
filed additional documents with the USPTO for review by the examiner. The examiner responded with
an advisory action, withdrawing several of the rejections, but maintaining other rejections. An
appeal brief was filed on August 18, 2008, and a supplemental appeal brief was filed on May 7,
2009. If the examiner does not reverse his prior rejections, then the Board of Patent Appeals will
act on the case and can take various actions, including affirming or reversing the examiners
rejections in whole or part, or introducing new grounds of rejection of the 796 Patent claims. If
the Board of Patent Appeals thereafter affirms the examiners rejections, J-Med can take various
further actions, including requesting reconsideration by the Board of Patent Appeals, filing a
further appeal to the U.S. Court of Appeals for the Federal Circuit or instituting a reissue of the
796 Patent with narrowed claims. The further proceedings involving the 796 Patent therefore may
be lengthy in duration, and may result in invalidation of some or all of the claims of the 796
Patent.
On June 13, 2008, counsel for Vision filed in the USPTO a request for re-examination of
certain claims under U.S. patent number 6,843,372, or the 372 Patent, which we believe covers
ALLERX 10 Dose Pack, ALLERX 30 Dose Pack, ALLERX Dose Pack PE and ALLERX Dose Pack PE 30. Our
counsel reviewed the request for re-examination and the patents and publications cited by counsel
for Vision, and our counsel have concluded that valid arguments exist for distinguishing the claims
of the 372 Patent over the references cited in the request for re-examination. On June 18, 2009,
the USPTO examiner issued an office action, rejecting claims of the 372 Patent as failing to
satisfy the novelty and non-obviousness criteria for U.S. patent claims, in view of the patents and
publications cited by Vision. We anticipate having the opportunity, in coordination with the patent
owner, Pharmaceutical Innovations, LLC, or Pharmaceutical Innovations, to present substantive
arguments supporting the patentability of the claims issued in the 372 Patent in a response to the
office action. If the USPTO re-examination examiner maintains one or more of the USPTO rejections
of the claims of the 372 Patent, Pharmaceutical Innovations may appeal to the Board of Patent
Appeals to seek reversal of the examiners rejections. If the Board of Patent Appeals thereafter
affirms the examiners rejections, Pharmaceutical Innovations could take various further actions,
including requesting reconsideration by the Board of Patent Appeals, filing a further appeal to the
U.S. Court of Appeals for the Federal Circuit or instituting a reissue of the 372 Patent with
narrowed claims. The further proceedings involving the 372 Patent therefore may be lengthy in
duration, and may result in invalidation of some or all of the claims of the 372 Patent.
In February 2008, we filed a notice of opposition before the Trademark Trial and Appeal Board,
or TTAB, in relation to Application No. 77/226,994 filed in the USPTO by Vision, seeking
registration of the mark VisRx. The opposition proceeding is captioned Cornerstone BioPharma, Inc.
v. Vision Pharma, LLC, Opposition No. 91182604. In April 2008, Vision filed an Answer to Notice of
Opposition and Counterclaims in which it requested cancellation of U.S. Registrations No. 3,384,232
and 2,448,112 for the mark ALLERX owned by us. Vision did not request monetary relief. We responded
to Visions counterclaims on May 16, 2008. Discovery is ongoing in this proceeding with respect to
Visions counterclaims. We intend to defend our interests vigorously against the counterclaims
asserted by Vision.
On May 15, 2008, the TTAB issued written notice to us indicating that Bausch & Lomb,
Incorporated, or Bausch & Lomb, had initiated a cancellation proceeding (Cancellation No. 92049358)
against the ALLERX trademark registration (U.S. Reg. No. 3,384,232). The petition for cancellation
filed in this proceeding alleges that the ALLERX registration dilutes the distinctive quality of
Bausch & Lombs Alrex® trademark, that the ALLERX mark so resembles Bausch & Lombs
Alrex® mark as to cause confusion as to the source of goods sold under ALLERX mark and
that Bausch & Lomb is likely to be damaged by the ALLERX registration. We timely filed an answer to
Bausch & Lombs petition for cancellation, disputing claims made in such petition and raising
various defenses. Discovery requests were issued to Bausch & Lomb in January 2009, but
cancellation proceedings were suspended by the TTAB on February 10, 2009 for six months and on July
29, 2009 for an additional three months upon indication that the parties were engaged in settlement
negotiations. The suspension of cancellation proceedings will
27
expire on November 10, 2009. We are currently engaged in settlement discussions with Bausch & Lomb
to resolve the dispute on favorable terms. We have agreed with Bausch & Lomb to request a further
suspension of cancellation proceedings if settlement is not concluded before November 10, 2009. If
settlement is not reached, then proceedings will resume, and a final decision by the TTAB could
take several years.
On November 10, 2008, we were named as a defendant in an action filed by Breckenridge in the
United States District Court for the District of Maryland captioned Breckenridge Pharmaceutical,
Inc. v. Cornerstone BioPharma, Inc., J-Med Pharmaceuticals, Inc. and Allan M. Weinstein, No.
8:08-CV-02999-DKC. Breckenridge sought a declaratory judgment that the 372 Patent and U.S. Patent
No. 6,651,816, or the 816 patent, are invalid. The 372 Patent is licensed to us by Pharmaceutical
Innovations, an affiliate of J-Med. We do not have an interest in the 816 Patent. Breckenridge
also sought a declaratory judgment that its Allergy DN II and Allergy DN PE products do not
infringe the 372 and 816 Patents. Breckenridge also sought a declaratory judgment that our
claimed copyrights in the product informational inserts for ALLERX DF and ALLERX PE are invalid
and/or not infringed by the product informational inserts for Allergy DN II and Allergy DN PE.
Breckenridge did not request monetary relief. Breckenridge voluntarily dismissed the action without
prejudice on May 11, 2009.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks. The following
discussion highlights some of these risks and others are discussed elsewhere in this report. These
and other risks could materially and adversely affect our business, financial condition, prospects,
operating results or cash flows. For a detailed discussion of the risk factors that should be
understood by any investor contemplating investment in our stock, please refer to Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on
March 26, 2009.
There have been no material changes from the risk factors previously disclosed in that Annual
Report on Form 10-K, except as follows:
Concerns regarding the safety profile of ZYFLO CR and ZYFLO may limit the market acceptance of
ZYFLO CR.
Market perceptions about the safety of ZYFLO CR and ZYFLO may limit the market acceptance of
ZYFLO CR. In the clinical trials that were reviewed by the FDA prior to its approval of ZYFLO, 3.2%
of the approximately 5,000 patients who received ZYFLO experienced increased levels of alanine
transaminase, or ALT, of over three times the levels normally seen in the bloodstream. In these
trials, one patient developed symptomatic hepatitis with jaundice, which resolved upon
discontinuation of therapy, and three patients developed mild elevations in bilirubin. In clinical
trials for ZYFLO CR, 1.94% of the patients taking ZYFLO CR in a three-month efficacy trial and 2.6%
of the patients taking ZYFLO CR in a six-month safety trial experienced ALT levels greater than or
equal to three times the level normally seen in the bloodstream. Because ZYFLO CR can elevate liver
enzyme levels, its product labeling, which was approved by the FDA in May 2007, contains the
recommendation that periodic liver function tests be performed on patients taking ZYFLO CR. Some
physicians and patients may perceive liver function tests as inconvenient or indicative of safety
issues, which could make them reluctant to prescribe or accept ZYFLO CR and any other zileuton
product candidates that we successfully develop and commercialize, which could limit their
commercial acceptance.
In March 2008, the FDA issued an early communication regarding an ongoing safety review of the
leukotriene montelukast relating to suicide and other behavior-related adverse events. In that
communication, the FDA stated that it was also reviewing the safety of other leukotriene
medications. On May 27, 2008, we received a request from the FDA that we gather and provide to the
FDA data from the clinical trial database to evaluate behavior-related adverse events for ZYFLO and
ZYFLO CR. On January 13, 2009, the FDA announced that the company studies it reviewed do not show
any association between these drugs that act through the leukotriene pathway (for example,
montelukast, zafirlukast and zileuton) and suicide, although the FDA noted that these studies were
not designed to detect those events. The FDA also reviewed clinical trial data to assess other
mood-related and behavior-related adverse events related to such drugs. On April 23, 2009, the FDA
requested that we add wording to the precaution section of the ZYFLO CR and ZYFLO labeling to
include post-marketing reports of sleep disorders and neuropsychiatric events. It is our
understanding that other leukotriene modulator manufacturers were asked to make
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similar changes. There is a risk that this labeling change may cause physicians and other
members of the health care community to prefer competing products without such labeling over ZYFLO
CR and ZYFLO, which would cause sales of these products to suffer.
Concerns regarding the potential toxicity and addictiveness of propoxyphene and the known liver
toxicity of acetaminophen may limit market acceptance of our propoxyphene/acetaminophen products
or cause the FDA to remove these products from the market.
Periodically, there is negative publicity related to the potential toxicity and addictiveness
of propoxyphene. Propoxyphene is one of two APIs, together with acetaminophen, in BALACET 325, APAP
325 and APAP 500. For example, the consumer advocacy organization Public Citizen filed suit in June
2008 against the FDA based on the FDAs failure to act on Public Citizens February 2006 citizen
petition that had requested that the FDA immediately begin the phased removal of all drugs
containing propoxyphene from the marketplace based on propoxyphenes toxicity relative to its
efficacy and its tendency to induce psychological and physical dependence. The FDA denied the
citizen petition on July 7, 2009 stating that despite serious concerns about propoxyphene, the
benefits of using the medication for pain relief outweighed its safety risks. However, the FDA is
also requiring our propoxyphene/acetaminophen products, along with other propoxyphene products, to
include additional labeling in the boxed warning to address the risk of overdose and to develop an
FDA-approved medication guide that must be given to all patients who take our
propoxyphene/acetaminophen products. There is a risk that this labeling change may cause
physicians and other members of the health care community to prefer competing products without such
labeling over the propoxyphene/acetaminophen products, which would cause sales of these products to
suffer.
In December 2006, the FDA recognized concerns about the known liver toxicity of
over-the-counter pain relievers, including acetaminophen, which is found in BALACET 325, APAP 325
and APAP 500. The FDA convened a public advisory committee meeting to discuss acetaminophen risk
management in June 2009. The FDA could act on these concerns by changing its policies with respect
to acetaminophen as a single ingredient and in combination with opioid products. While the docket
for this meeting will remain open for comment until September 30, 2009, the FDA at any time could
change policy which could adversely affect our ability to market our propoxyphene/acetaminophen
products.
Our limited experience in obtaining regulatory approvals could delay, limit or prevent such
approvals for our product candidates.
We have only limited experience in preparing and submitting the applications necessary to gain
regulatory approvals and expect to rely on third-party contract research organizations to assist us
in this process. We acquired the rights to most of our currently marketed products and product
candidates through four licensing transactions, two related to ZYFLO CR and ZYFLO in 2003 and 2004,
respectively; one for the ALLERX Dose Pack products in February 2005; and one for SPECTRACEF in
October 2006. In connection with our strategic transaction with Chiesi, Chiesi granted us the
exclusive U.S. rights to distribute CUROSURF. Personnel who are no longer employed by
us obtained approval to market ZYFLO and ZYFLO CR in the United States from the FDA in September
2005 and May 2007, respectively. The FDA approved our supplemental new drug application for
SPECTRACEF 400 mg in July 2008, and we launched this product in October 2008. In July 2009, we
filed a regulatory submission with the FDA for CRTX 067, an antitussive product. We do not have
other experience gaining FDA approval of product candidates.
Our limited experience in this regard could delay or limit approval of our product candidates
if we are unable to effectively manage the applicable regulatory process with either the FDA or
foreign regulatory authorities. In addition, significant errors or ineffective management of the
regulatory process could prevent approval of a product candidate, especially given the substantial
discretion that the FDA and foreign regulatory authorities have in this process.
If we fail to comply with regulatory requirements for our products or if we experience
unanticipated problems with them, the FDA may take regulatory actions detrimental to our business,
resulting in temporary or permanent interruption of distribution, withdrawal of products from the
market or other penalties.
We and our products are subject to comprehensive regulation by the FDA. These requirements
include submissions of safety and other post-marketing information; record-keeping and reporting;
annual registration of
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manufacturing facilities and listing of products with the FDA; ongoing compliance with cGMP
regulations; and requirements regarding advertising, promotion and the distribution of samples to
physicians and related recordkeeping. For example, we received a warning letter from the FDAs
Division of Drug Marketing, Advertising and Communications, or DDMAC, on May 4, 2009 relating to
two sales aids that we formerly used to promote SPECTRACEF. The FDA asserted that the sales aids
were misleading because they broadened the approved indication for SPECTRACEF, omitted risks
related to its use, made unsubstantiated superiority claims, overstated the efficacy of SPECTRACEF
and made misleading dosing claims. While we no longer use the sales aids reviewed by the FDA, in
response to the warning letter, we initiated a review of all of our current SPECTRACEF promotional
materials for deficiencies similar to those identified by the FDA in the warning letter to ensure
that we take effective action to immediately cease and avoid the future dissemination of such
deficient promotional materials. As requested by the FDA, we provided written responses to the FDA
on May 18, 2009 and July 8, 2009. As part of our responses, we provided a description of our plan
to disseminate corrective messages to the recipients of the deficient promotional materials. We
plan to incorporate appropriate revisions into new SPECTRACEF promotional materials and to work
with FDAs DDMAC to address their stated concerns. If we were to receive any additional warning
letters, we could be subject to additional regulatory actions by the FDA, including product
seizure, injunctions and other penalties, and our reputation in the market could be harmed.
The manufacturer and the manufacturing facilities used to make our products and product
candidates are also subject to comprehensive regulatory requirements. The FDA periodically inspects
sponsors, marketers and manufacturers for compliance with these requirements. Additional,
potentially costly, requirements may apply to specific products as a condition of FDA approval or
subsequent regulatory developments. For example, as part of the approval of the new drug
application for ZYFLO CR in May 2007, the FDA required us to conduct a pediatric clinical trial of
ZYFLO CR as a post-approval commitment and report the results to the FDA by June 2010. A waiver
from this obligation was requested from the FDA on January 7, 2008, for which no response has been
received. If we do not successfully begin and complete this clinical trial in the time required by
the FDA, our ability to market and sell ZYFLO CR may be hindered, and our business may be harmed as
a result.
On April 28, 2009, the FDA issued us a Notice of Inspectional Observations, or Form 483, in
connection with an inspection of our ZYFLO CR regulatory procedures it conducted during April 2009.
The Form 483 stated that our processes related to ZYFLO CR for review of batch specific
documentation, analytical information, deviations and investigations prior to releasing finished
product for distribution; our staffing levels relating to quality assurance and controls; and our
late filing of a ZYFLO CR Field Alert Report are areas of possible non-compliance with FDA
regulations. We responded to the FDA on May 7, 2009 and intend to take appropriate action to
effectively address each of the observations identified by the FDA in the Form 483 as quickly as
practicable.
If the FDA makes additional inspectional observations, or if the FDA is not satisfied with the
corrective actions we take in response to the Form 483, we could be subject to further FDA action,
including sanctions. We may also be subject to sanctions as a result of discovery of previously
unknown problems with our products, manufacturers or manufacturing processes, or failure to comply
with applicable regulatory requirements. Possible sanctions include:
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withdrawal of the products from the market; |
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restrictions on the marketing or distribution of such products; |
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restrictions on the manufacturers or manufacturing processes; |
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warning letters; |
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refusal to approve pending applications or supplements to approved applications that we
submit; |
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recalls; |
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fines; |
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suspension or withdrawal of regulatory approvals; |
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refusal to permit the import or export of our products; |
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product seizures; or |
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injunctions or the imposition of civil or criminal penalties. |
Any of these actions could have a material adverse effect on our business, financial condition
and results of operations.
If we fail to manage successfully our product acquisitions, our ability to develop our product
candidates and expand our product pipeline may be harmed.
Our failure to address adequately the financial, operational or legal risks of our product
acquisitions or in-license arrangements could harm our business. These risks include:
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the overuse of cash resources; |
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higher than anticipated acquisition costs and expenses; |
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potentially dilutive issuances of equity securities; |
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the incurrence of debt and contingent liabilities, impairment losses and/or
restructuring charges; |
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the assumption of or exposure to unknown liabilities; |
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the development and integration of new products that could disrupt our business and
occupy our managements time and attention; |
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the inability to preserve key suppliers or distributors of any acquired products; and |
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the acquisition of products that could substantially increase our amortization
expenses. |
If we are unable to successfully manage our product acquisitions, our ability to develop new
products and expand our product pipeline may be limited, and we could suffer significant harm to
our financial condition, results of operations and prospects.
For example, we have entered into a ten-year license and distribution agreement with Chiesi for CUROSURF.
Even though CUROSURF is currently marketed in the United States, there can be no assurance that
that our pre-acquisition due diligence identified all possible issues that may arise with respect
to this product. In addition, Chiesi may face difficulties in transferring the product rights and
product inventory to us from the current U.S. licensee.
There is no assurance that the net sales of CUROSURF will
be sufficient to offset the net income per share impact of increased amortization expense and
the dilutive effect of the shares issued to Chiesi in the strategic transaction that closed
on July 28, 2009.
If we are unable to attract, hire and retain qualified sales and marketing personnel, the
commercial opportunity for our products and product candidates may be diminished.
We have built a commercial organization,
consisting of our sales department, which includes our sales force and our sales management, sales logistics and sales administration
personnel, as well as our marketing department. As of July 31, 2009, our sales force consists of 81 sales representatives.
As part of our acquisition of the U.S. distribution rights for CUROSURF, we anticipate adding sales representatives and
support staff dedicated to marketing and promoting the product. We may not be able to attract, hire, train and retain
qualified sales and marketing personnel to augment our existing capabilities in the manner or on the timeframe that we
plan. If we are unsuccessful in our efforts to expand our sales force and marketing capabilities, our ability to
independently market and promote our products and any product candidates that we successfully bring to market will
be impaired. In such an event, we would likely need to establish a collaboration, co-promotion, distribution or
other similar arrangement to market and sell our products and product candidates. However, we might not
be able to enter into such an arrangement on favorable terms, if at all. Even if we are able to effectively
expand our sales force and marketing capabilities, our sales force and marketing teams may not be successful
in commercializing and promoting our products.
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The commercial success of our currently marketed products and any additional products that we
successfully develop or bring to market depends on the degree of market acceptance by physicians, patients, health
care payors and others in the medical community.
Any products that we bring to the market may not gain market acceptance by physicians,
patients, health care payors and others in the medical community. If our products do not achieve an
adequate level of acceptance, we may not generate significant product revenue and may not be able
to sustain or increase our profitability. The degree of market acceptance of our products,
including our product candidates, if approved for commercial sale, will depend on a number of
factors, including:
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the prevalence and severity of the products side effects; |
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the efficacy and potential advantages of the products over alternative treatments; |
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the ability to offer the products for sale at competitive prices, including in relation
to any generic or re-imported products or competing treatments; |
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the relative convenience and ease of administration of the products; |
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the willingness of the target patient population to try new therapies and of physicians
to prescribe these therapies; |
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the perception by physicians and other members of the health care community of the
safety and efficacy of the products and competing products; |
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the availability and level of third-party reimbursement for sales of the products; |
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the continued availability of adequate supplies of the products to meet demand; |
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the strength of marketing and distribution support; |
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any unfavorable publicity concerning us, our products or the markets for these
products, such as information concerning product contamination or other safety issues in
the markets for our products, whether or not directly involving our products; |
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regulatory developments related to our marketing and promotional practices or the
manufacture or continued use of our products; and |
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changes in intellectual property protection available for the products or competing
treatments. |
We rely on third parties to market and promote some products, and these third parties may not
successfully commercialize these products.
We may seek to enter into co-promotion arrangements to enhance our promotional efforts and,
therefore, sales of our products. By entering into agreements with pharmaceutical companies that
have experienced sales forces with strong management support, we can reach health care providers in
areas where we have limited or no sales force representation, thus expanding the reach of our sales
and marketing programs.
We also seek to enter into co-promotion arrangements for the marketing of products that are
not aligned with our respiratory focus and, therefore, are not promoted by our sales force. For
example, in July 2007, Atley Pharmaceuticals began marketing and promoting BALACET 325 to pain
specialists and other high prescribers of pain products through a co-promotion agreement. We rely
on MedImmune, Inc., or MedImmune, a subsidiary of AstraZeneca PLC, for the commercialization of any
of monoclonal antibodies directed toward a cytokine called HMGB1, which we believe may be an
important target for the development of products to treat diseases mediated by the bodys
inflammatory response, and we plan to rely on Beckman Coulter, Inc., or Beckman Coulter, for the
commercialization of any diagnostic assay for HMGB1. We may not be successful in entering into
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marketing arrangements in the future and, even if successful, we may not be able to enter into
these arrangements on terms that are favorable to us. In addition, we may have limited or no
control over the sales, marketing and distribution activities of these third parties. If these
third parties are not successful in commercializing the products covered by these arrangements, our
future revenues may suffer. We rely on DEY to jointly promote and market ZYFLO CR. DEY initiated
promotional detailing activities for ZYFLO CR in October 2007. Both DEY and we may terminate the
co-promotion agreement on or after October 1, 2012 with six months prior written notice. DEY also
has the right to terminate the co-promotion agreement upon two months prior written notice to us
if in any two consecutive calendar quarters we are unable to deliver to DEY at least 75% of the
ZYFLO CR samples forecast by DEY for such quarters, or if at any time commercial supplies of ZYFLO
CR remain on back order for more than one calendar quarter. In addition, DEY has the right to
terminate the co-promotion agreement after January 1, 2010 with two- months prior written notice
if ZYFLO CR cumulative net sales for any four consecutive calendar quarters beginning on or after
January 1, 2009 are less than $20.0 million. Both parties have agreed to use diligent efforts to
promote the applicable products in the United States during the term of the co-promotion agreement.
In particular, both parties have agreed to provide a minimum number of details per month for ZYFLO
CR.
If DEY were to terminate or breach the co-promotion agreement, and we were unable to enter
into a similar co-promotion agreement with another qualified party in a timely manner or devote
sufficient financial resources or capabilities to independently promote and market ZYFLO CR, then
our sales of ZYFLO CR would be limited and we would not be able to generate significant revenues
from product sales. In addition, DEY may choose not to devote time, effort or resources to the
promotion and marketing of ZYFLO CR beyond the minimum required by the terms of the co-promotion
agreement. DEY is a subsidiary of Mylan Inc., or Mylan. Mylan acquired DEY in October 2007 as part
of its acquisition of Merck KGaAs generic business, of which DEY was a part. We cannot predict
what impact Mylans acquisition of DEY may have on our co-promotion arrangement. Any decision by
DEY or Mylan not to devote sufficient resources to the co-promotion arrangement or any future
reduction in efforts under the co-promotion arrangement, including as a result of the sale or
potential sale of DEY by Mylan, would limit our ability to generate significant revenues from
product sales. Furthermore, if DEY does not have sufficient sales capabilities, then DEY may not be
able to meet its minimum detailing obligations under the co-promotion agreement.
We identified a material weakness in our internal control over financial reporting as of
December 31, 2008, and we have not conducted the necessary testing to confirm that the measures
we have taken have effectively remediated the material weakness. If we fail to achieve and
maintain effective internal control over financial reporting and disclosure controls and
procedures, we could face difficulties in preparing timely and accurate financial statements and
periodic reports, which could result in a loss of investor confidence in the information that we
report and a decline in our stock price, and could impair our ability to raise additional funds
to the extent needed to meet our future capital requirements.
In connection with the preparation of our financial statements as of and for the year ended
December 31, 2008, we identified a material weakness in our internal control over financial
reporting as discussed in Item 9A(T), Controls and Procedures, of our annual report on Form 10-K
for the year ended December 31, 2008. As discussed in Item 9A(T) of our annual report on Form 10-K
for the year ended December 31, 2008 and Part IItem 4A(T). Controls and Procedures of our
quarterly report on Form 10-Q for the three months ended March 31, 2009, as a result of this
material weakness, our chief executive officer and chief financial officer concluded that, as of
December 31, 2008 and March 31, 2009, respectively, our disclosure controls and procedures were not
effective. As discussed above in Part IItem 4A(T). Controls and Procedures, we took actions
during the three months ended June 30, 2009 that we believe are appropriate to remediate this
material weakness but we have not conducted the necessary testing to confirm the material weakness
has been effectively remediated. We or our independent registered public accounting firm may
identify additional material weaknesses in our internal control over financial reporting in the
future, including in connection with our managements ongoing assessment of our internal control
over financial reporting, which is discussed in Item 9A(T) of our annual report on Form 10-K for
the year ended December 31, 2008 and Part IItem 4A(T). Controls and Procedures of this
quarterly report on Form 10-Q. Accordingly, our chief executive officer and chief financial
officer concluded that, as of June 30, 2009, our disclosure controls and procedures were not
effective.
Any failure or difficulties in promptly and effectively remediating our presently identified
material weakness, or any material weaknesses that we or our independent registered public
accounting firm may identify in the future,
33
could result in our inability to prevent or detect material misstatements in our financial
statements and cause us to fail to meet our periodic reporting obligations. As a result, our
management may not be able to provide an unqualified assessment of our internal control over
financial reporting as of December 31, 2009 or beyond, and our chief executive officer and chief
financial officer may not be able to conclude, on a quarterly basis, that our disclosure controls
and procedures are effective. In addition, our independent registered public accounting firm may
not be able to provide an unqualified opinion on the effectiveness of our internal control over
financial reporting as of December 31, 2009 or beyond. Any material weakness, or any remediation
thereof that is ultimately unsuccessful, could also cause investors to lose confidence in the
accuracy and completeness of our financial statements and periodic reports, which in turn could
harm our business, lead to a decline in our stock price and impair our ability to raise additional
funds to the extent needed to meet our future capital requirements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities; Uses of Proceeds From Registered Securities
On May 6, 2009, we entered into a series of agreements for a strategic transaction, subject to
approval by our stockholders, with Chiesi, whereby we agreed to issue Chiesi approximately 12.2
million shares of our common stock, par value $0.001 per share, in exchange for $15.5 million in
cash, an exclusive license for the U.S. commercial rights to CUROSURF and a two-year right of first
offer on all drugs Chiesi intends to market in the United States. Our license agreement with
Chiesi is for a ten-year initial term and thereafter will be automatically renewed for successive
one-year renewal terms, unless earlier terminated by either party upon six months prior written
notice.
On July 27, 2009, our stockholders approved our issuance of the shares at a special
stockholders meeting, and the transaction closed on July 28, 2009. We believe that the offer and
sale of the shares by us to Chiesi is exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, as a transaction by an issuer not involving a public offering. Chiesi is a
knowledgeable, sophisticated investor and had access to comprehensive information about us during
an extensive due diligence process. In addition, Chiesi agreed to hold the shares for a minimum of
24 months, with certain exceptions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of our stockholders at our 2009 Annual Meeting
of Stockholders held on May 28, 2009 and approved by the requisite vote of stockholders as follows:
|
1. |
|
To elect Christopher Codeanne and Michael Enright to our board of directors to
serve as Class II directors, each for a term of three years. |
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
Nominee |
|
For |
|
Withheld |
Christopher Codeanne |
|
|
5,070,978 |
|
|
|
35,867 |
|
Michael Enright |
|
|
4,973,415 |
|
|
|
133,430 |
|
|
2. |
|
To approve our 2004 Stock Incentive Plan, as amended and restated, to, among
other things, increase the number of shares authorized for issuance under the 2004 Stock
Incentive Plan, and increase the number of shares that may be granted to a participant in
a calendar year. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
For |
|
Against |
|
Abstain |
|
Broker Non-Vote |
2,581,612
|
|
|
547,543 |
|
|
|
1,347 |
|
|
|
1,976,343 |
|
|
3. |
|
To ratify our Audit Committees selection of Grant Thornton LLP as our
independent registered public accounting firm for the fiscal year ending December 31,
2009. |
34
|
|
|
|
|
|
|
|
|
Number of Shares |
For |
|
Against |
|
Abstain |
5,095,042
|
|
|
4,528 |
|
|
|
7,275 |
|
The number of shares of common stock eligible to vote as of the record date of March 30, 2009
was 6,823,935 shares.
ITEM 6. EXHIBITS
The exhibits listed in the accompanying exhibit index are filed as part of this quarterly report on
Form 10-Q, and such exhibit index is incorporated by reference herein.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CORNERSTONE THERAPEUTICS INC.
|
|
Date: August 11, 2009 |
/s/ Craig Collard
|
|
|
Craig Collard |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 11, 2009 |
/s/ David Price
|
|
|
David Price |
|
|
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer) |
|
36
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Fourth Amended and Restated Bylaws of the Registrant dated July 28, 2009
(incorporated by reference to Exhibit 3.1 to the Registrants Current Report
on Form 8-K dated July 27, 2009). |
|
|
|
10.1
|
|
Stock Purchase Agreement between Chiesi Farmaceutici S.p.A. and the
Registrant dated May 6, 2009 (incorporated by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated May 6, 2009; Exhibits A, B,
C, D and E thereto incorporated by reference to Exhibits 10.9-10.14, 10.4,
10.3, 10.5 and 10.6, respectively, to the Registrants Current Report on Form
8-K dated May 6, 2009; and Exhibit H thereto incorporated by reference to
Exhibit 10.2 to the Registrants Amendment No. 1 on Form 8-K/A to Current
Report on Form 8-K dated May 6, 2009). |
|
|
|
10.2+
|
|
License and Distribution Agreement between Chiesi Farmaceutici S.p.A. and the
Registrant dated May 6, 2009 (incorporated by reference to Exhibit 10.2 to
the Registrants Amendment No. 1 on Form 8-K/A to Current Report on Form 8-K
dated May 6, 2009). |
|
|
|
10.3
|
|
Governance Agreement among the Registrant, Chiesi Farmaceutici S.p.A. and,
solely with respect to the sections identified therein, Cornerstone Biopharma
Holdings, Ltd., Carolina Pharmaceuticals Ltd. and Lutz Family Limited
Partnership dated May 6, 2009 (incorporated by reference to Exhibit 10.3 to
the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.4
|
|
Stockholders Agreement among the Registrant, Chiesi Farmaceutici S.p.A.,
Craig A. Collard, Steven M. Lutz, Cornerstone Biopharma Holdings, Ltd.,
Carolina Pharmaceuticals Ltd. and Lutz Family Limited Partnership dated May
6, 2009 (incorporated by reference to Exhibit 10.4 to the Registrants
Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.5
|
|
Amendment, dated June 26, 2009, to Stockholders Agreement among the
Registrant, Chiesi Farmaceutici S.p.A., Craig A. Collard, Steven M. Lutz,
Cornerstone Biopharma Holdings, Ltd., Carolina Pharmaceuticals Ltd. and Lutz
Family Limited Partnership dated May 6, 2009 (incorporated by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K dated June 26,
2009). |
|
|
|
10.6
|
|
Registration Rights Agreement between the Registrant and Chiesi Farmaceutici
S.p.A. dated May 6, 2009 (incorporated by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.7
|
|
Registration Rights Agreement among the Registrant, Craig A. Collard, Steven
M. Lutz, Cornerstone Biopharma Holdings, Ltd., Carolina Pharmaceuticals Ltd.
and Lutz Family Limited Partnership dated May 6, 2009 (incorporated by
reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K
dated May 6, 2009). |
|
|
|
10.8
|
|
Voting Agreement between the Registrant and Chiesi Farmaceutici S.p.A. dated
May 6, 2009 (incorporated by reference to Exhibit 10.7 to the Registrants
Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.9
|
|
Voting Agreement among Chiesi Farmaceutici S.p.A., Craig A. Collard, Steven
M. Lutz, Cornerstone Biopharma Holdings, Ltd., Carolina Pharmaceuticals Ltd.,
Lutz Family Limited Partnership, Brian Dickson, M.D., Joshua Franklin, David
Price, Alan Roberts and, solely with respect to Section 2(b) thereof, the
Registrant dated May 6, 2009 (incorporated by reference to Exhibit 10.8 to
the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.10+
|
|
Letter Amendment, dated June 12, 2009, to Manufacturing and Supply Agreement
among the Registrant, Jagotec AG and SkyePharma PLC dated August 20, 2007
(incorporated by reference to Exhibit 10.1 to the Registrants Current Report
on Form 8-K dated June 12, 2009). |
|
|
|
10.11+
|
|
Amendment No. 1, dated June 16, 2009, to Development and Manufacturing
Agreement among Neos Therapeutics, L.P., Coating Place, Inc. and Cornerstone
BioPharma, Inc. dated February 27, 2008 (incorporated by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K dated June 16, 2009). |
|
|
|
10.12+
|
|
Amendment No. 2, dated May 4, 2009, to Co-Promotion and Marketing Services
Agreement between the Registrant and DEY, L.P. dated March 13, 2007
(incorporated by reference to Exhibit 10.1 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009). |
|
|
|
10.13
|
|
2004 Stock Incentive Plan of the Registrant (as Amended and Restated May 28,
2009) (incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K dated May 28, 2009). |
37
|
|
|
Exhibit No. |
|
Description |
|
|
|
10.14
|
|
First Amendment, dated June 18, 2009, to Executive Retention Agreement
between Cornerstone BioPharma, Inc. and Craig A. Collard dated February 8,
2006 (incorporated by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K dated June 12, 2009). |
|
|
|
10.15
|
|
Amended and Restated Executive Employment Agreement between the Registrant
and Craig A. Collard dated May 6, 2009 (incorporated by reference to Exhibit
10.9 to the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.16
|
|
Severance Agreement and General Release between the Registrant and Chenyqua
Baldwin dated May 7, 2009. |
|
|
|
10.17
|
|
First Amendment, dated June 12, 2009, to Executive Employment Agreement
between Cornerstone BioPharma, Inc. and Brian Dickson dated March 1, 2006
(incorporated by reference to Exhibit 10.3 to the Registrants Current Report
on Form 8-K dated June 12, 2009). |
|
|
|
10.18
|
|
Amended and Restated Executive Employment Agreement between the Registrant
and Brian Dickson dated May 6, 2009 (incorporated by reference to Exhibit
10.12 to the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.19
|
|
Amended and Restated Executive Employment Agreement between the Registrant
and Joshua B. Franklin dated May 6, 2009 (incorporated by reference to
Exhibit 10.13 to the Registrants Current Report on Form 8-K dated May 6,
2009). |
|
|
|
10.20
|
|
First Amendment, dated June 12, 2009, to Executive Employment Agreement
between Cornerstone BioPharma, Inc. and Steven M. Lutz dated March 1, 2006
(incorporated by reference to Exhibit 10.4 to the Registrants Current Report
on Form 8-K dated June 12, 2009). |
|
|
|
10.21
|
|
Amended and Restated Executive Employment Agreement between the Registrant
and Steven M. Lutz dated May 6, 2009 (incorporated by reference to Exhibit
10.10 to the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.22
|
|
Amended and Restated Executive Employment Agreement between the Registrant
and David Price dated May 6, 2009 (incorporated by reference to Exhibit 10.11
to the Registrants Current Report on Form 8-K dated May 6, 2009). |
|
|
|
10.23
|
|
Amendment No. 1 to Amended and Restated Executive Employment Agreement, dated
June 26, 2009, between the Registrant and David Price (incorporated by
reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K
dated June 26, 2009). |
|
|
|
10.24
|
|
First Amendment, dated June 12, 2009, to Amended and Restated Restricted
Stock Agreement between Cornerstone BioPharma Holdings, Inc. and David Price
dated October 31, 2008 (incorporated by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K dated June 12, 2009). |
|
|
|
10.25
|
|
Separation Letter Agreement and General Release between the Registrant and
Scott B. Townsend dated June 5, 2009. |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
+ |
|
Portions of the exhibit have been omitted pursuant to a request for confidential treatment,
which portions have been separately filed with the Securities and Exchange Commission. |
38