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| MDCO > SEC Filings for MDCO > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Distribution and Sales
We distribute Angiomax and Cleviprex in the United States through a sole
source distribution model. Under this model, we sell Angiomax and Cleviprex to
our sole source distributor, Integrated Commercialization Solutions, Inc., or
ICS, which then sells Angiomax and Cleviprex to a limited number of national
medical and pharmaceutical wholesalers with distribution centers located
throughout the United States and, in certain cases, directly to hospitals. Our
agreement with ICS, which we initially entered into in February 2007, provides
that ICS will be our exclusive distributor of Angiomax and Cleviprex in the
United States. Under the terms of this fee for service agreement, ICS assumes
all credit and inventory risks, is subject to our standard returns policy,
places order with us for sufficient quantities of Angiomax and Cleviprex to
maintain an appropriate level of inventory based on its customers' historical
purchase volumes and has sole responsibility for determining the prices at which
it sells Angiomax and Cleviprex, subject to specified limitations in the
agreement. The agreement terminates on February 28, 2010, but will automatically
renew for additional one-year periods unless either party gives notice at least
120 days prior to the automatic extension. We may also terminate the agreement
at any time and for any reason upon prior written notice to ICS and payment of a
termination fee. Outside the United States, we sell Angiomax either directly to
hospitals or to wholesalers or international distributors, which then sell
Angiomax to hospitals.
The reacquisition of all development, commercial and distribution rights for
Angiox from Nycomed in 2007 was our first step directly into international
markets and gives us a direct presence in European markets. In July 2007, we
entered into a series of agreements with Nycomed pursuant to which we terminated
the prior distribution agreement with Nycomed and re-acquired all development,
commercial and distribution rights for Angiox in the European Union (excluding
Spain, Portugal and Greece) and the former Soviet republics, which we refer to
as the Nycomed territory. Prior to entering into the 2007 Nycomed agreements,
Nycomed served as the exclusive distributor of Angiox in the Nycomed territory
pursuant to a sales, marketing and distribution agreement, dated March 25, 2002,
as amended. Pursuant to the 2007 Nycomed agreements, we and Nycomed agreed to
transition the Angiox rights held by Nycomed to us. Under these arrangements,
including a transitional distribution agreement, we assumed control of the
marketing of Angiox immediately and Nycomed provided, on a transitional basis,
sales operations services, until December 31, 2007 and product distribution
services until the second half of 2008. We assumed control of the distribution
of Angiox in the Nycomed territory during the second half of 2008.
Under the terms of the transitional distribution agreement with Nycomed, upon
the sale by Nycomed to third parties of vials of Angiox purchased by Nycomed
from us prior to July 1, 2007, which we refer to as existing inventory, Nycomed
agreed to pay us a specified percentage of Nycomed's net sales of Angiox, less
the amount previously paid by Nycomed to us for the existing inventory. Under
the transitional distribution agreement, upon the termination of the agreement,
Nycomed had the right to return any existing inventory for the price paid by
Nycomed to us for such inventory. We recorded a reserve of $3.0 million in the
fourth quarter of 2007 for the existing inventory at Nycomed which we did not
believe would be sold prior to the termination of the transitional distribution
agreement and would be subject to purchase in accordance with the agreement.
During 2008, we reduced the reserve by $2.2 million as Nycomed sold a portion of
its existing inventory during the year. Included within our accrual for product
return is a reserve of $0.8 million at June 30, 2009 and December 31, 2008 for
existing inventory at Nycomed that Nycomed has the right to return at any time.
In July 2009, we reimbursed Nycomed $0.8 million for the final amount of
inventory held by Nycomed at December 31, 2008. The transitional distribution
agreement terminated on December 31, 2008.
We incurred total costs of $45.7 million in connection with the reacquisition
of the rights to develop, distribute and market Angiox in the Nycomed territory.
This total costs amount includes transaction fees of approximately $0.7 million
and agreed upon milestone payments of $20.0 million paid to Nycomed on July 2,
2007, $15.0 million paid to Nycomed on January 15, 2008 and $5.0 million paid to
Nycomed on July 8, 2008, as well as an additional $5.0 million paid to Nycomed
on July 8, 2008 in connection with our obtaining European Commission approval to
market Angiox for ACS in January 2008.
During the third quarter of 2007, we allocated $30.8 million of these costs
as expense attributable to the termination of the prior distribution agreement
with Nycomed and $14.9 million to intangible assets. The $30.8 million expense
was offset in part by the write-off of approximately $2.7 million of deferred
revenue, which amount represented the unamortized portion of deferred revenue
related to milestone payments received from Nycomed in 2004 and 2002. We
included such amounts in selling, general and administrative expense on the
consolidated statements of operations for the year ended December 31, 2007. We
allocated approximately $14.9 million of the costs associated with the
reacquisition of the rights to develop, distribute and market Angiox in the
European Union to intangible assets. We are amortizing these intangible assets
over the remaining patent life of Angiox, which expires in 2015. The period in
which amortization expense will be recorded reflects the pattern in which we
expect the economic benefits of the intangible assets to be consumed.
To support the marketing, sales and distribution efforts of Angiomax, we are
taking the necessary steps to develop our business infrastructure outside the
United States. We initiated research to understand the PCI market, as well as
the hypertension market, on a global basis, including profiling hospitals and
identifying key opinion leaders. Since reacquiring these rights, we have formed
subsidiaries in the Netherlands, Switzerland, Germany, France, Italy, Sweden and
Poland, in addition to our pre-existing subsidiary in the United Kingdom, in
connection with the development of a business infrastructure to conduct the
international sales and marketing of Angiox. We also obtained all the licenses
and authorizations necessary to distribute the product in the various countries
in Europe, hired new personnel and entered into third-party arrangements to
provide services, such as importation, packaging, quality control and
distribution. We believe that by establishing operations in Europe for Angiox,
we will be positioned to commercialize our pipeline of critical care product
candidates, including Cleviprex, cangrelor, oritavancin and CU2010, if and when
they are approved.
Targanta Acquisition
In February 2009, we acquired Targanta Therapeutics Corporation, or Targanta.
Under the terms of our agreement with Targanta, we paid Targanta shareholders
$2.00 in cash at closing for each common share of Targanta common stock
tendered, or approximately $42.0 million in aggregate, and agreed to pay
contingent cash payments up to an additional $4.55 per share as described below:
• If we or a MDCO Affiliated Party (meaning an affiliate of ours, a
successor or assigns of ours, or a licensee or collaborator of ours)
obtain approval from the European Agency for the Evaluation of Medical
Products, or EMEA for a MAA for oritavancin for the treatment of cSSSI on
or before December 31, 2013, then former Targanta shareholders will be
entitled to receive a cash payment equal to (1) $1.00 per share if such
approval is granted on or before December 31, 2009, (2) $0.75 per share if
such approval is granted between January 1, 2010 and June 30, 2010, or (3)
$0.50 per share if such approval is granted between July 1, 2010 and
December 31, 2013, a payment of approximately $21.0 million in the
aggregate, approximately $15.8 million in the aggregate, or approximately
$10.5 million in the aggregate, respectively.
• If we or a MDCO Affiliated Party obtain final approval from the FDA for a NDA for oritavancin for the treatment of cSSSI (1) within 40 months after the date the first patient is enrolled in a Phase III clinical trial of cSSSI that is initiated by us or a MDCO Affiliated Party after the date of our merger agreement with Targanta and (2) on or before December 31, 2013, then former Targanta shareholders will be entitled to receive a cash payment equal to $0.50 per share, or approximately $10.5 million in the aggregate.
• If we obtain final FDA approval for an NDA for the use of oritavancin for
the treatment of cSSSI administered by a single dose intravenous infusion
(1) within 40 months after the date the first patient is enrolled in a
Phase III clinical trial of cSSSI that is initiated by us or a MDCO
Affiliated Party after the date of our merger agreement with Targanta and
(2) on or before December 31, 2013, then former Targanta shareholders will
be entitled to receive a cash payment equal to $0.70 per share, or
approximately $14.7 million in the aggregate. This payment may become
payable simultaneously with the payment described in the previous bullet
above.
• If aggregate net sales of oritavancin in four consecutive calendar quarters ending on or before December 31, 2021 reach or exceed $400 million, then former Targanta shareholders will be entitled to receive a cash payment equal to $2.35 per share, or approximately $49.4 million in the aggregate.
We accounted for this transaction in accordance with SFAS No. 141(R)
"Business Combinations", or SFAS No. 141(R), and expect to complete the
allocation of the purchase price within one year from the date of the
acquisition.
As a result of our acquisition of Targanta, we are a party to an asset
purchase agreement with InterMune, Inc., or InterMune. Under the agreement, we
are obligated to use commercially reasonable efforts to develop oritavancin and
to make a $5.0 million cash payment to InterMune if and when we receive from the
FDA all approvals necessary for the commercial launch of oritavancin. We have no
other milestone or royalty obligations to InterMune in connection with
Targanta's December 2005 acquisition of the worldwide rights to oritavancin from
InterMune.
Curacyte Acquisition
In August 2008, we acquired Curacyte Discovery GmbH, or Curacyte Discovery, a
wholly owned subsidiary of Curacyte AG. Curacyte Discovery was primarily engaged
in the discovery and development of small molecule serine protease inhibitors
including CU2010. In connection with the acquisition, we paid Curacyte AG an
initial payment of €14.5 million (approximately $22.9 million) and agreed to pay
a contingent milestone payment of €10.5 million if we elect to proceed with
clinical development of CU2010 at the
earlier of four months after enrollment and follow-up of the last subject of a
Phase I clinical program or October 31, 2009. In addition, our agreement with
Curacyte AG provides for possible future sales royalty payments and a commercial
milestone payment.
The total cost of the acquisition was approximately $23.7 million, which
consisted of a purchase price of approximately $22.9 million and direct
acquisition costs of $0.8 million. Since the acquisition date, we have included
results of Curacyte Discovery's operations in our consolidated financial
statements. We allocated the purchase price to the estimated fair value of
assets acquired and liabilities assumed based on a third-party valuation and
management estimates. We allocated approximately $21.4 million of the purchase
price to in-process research and development, which we expensed upon completion
of the acquisition. We recorded this amount as research and development expenses
in our consolidated statements of operations for the three months ended
September 30, 2008. We allocated the remaining portion of the purchase price to
net tangible assets.
Application of Critical Accounting Estimates
The discussion and analysis of our financial condition and results of
operations is based on our unaudited condensed consolidated financial
statements, which have been prepared in accordance with GAAP for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required by GAAP for complete
financial statements. The preparation of these financial statements requires us
to make estimates and judgments that affect our reported assets and liabilities,
revenues and expenses, and other financial information. Actual results may
differ significantly from these estimates under different assumptions and
conditions. In addition, our reported financial condition and results of
operations could vary due to a change in the application of a particular
accounting standard.
We regard an accounting estimate or assumption underlying our financial
statements as a "critical accounting estimate" where:
• the nature of the estimate or assumption is material due to the level of
subjectivity and judgment necessary to account for highly uncertain matters
or the susceptibility of such matters to change; and
• the impact of the estimates and assumptions on financial condition or operating performance is material.
Our significant accounting policies are more fully described in note 2 of our
unaudited condensed consolidated financial statements in this quarterly report
and note 2 of our consolidated financial statements in our annual report on Form
10-K for the year ended December 31, 2008. Not all of these significant
accounting policies, however, require that we make estimates and assumptions
that we believe are "critical accounting estimates." We have discussed our
accounting policies with the audit committee of our board of directors, and we
believe that our estimates relating to revenue recognition, inventory, income
taxes and stock-based compensation described under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Application of Critical Accounting Estimates" in our annual report
on Form 10-K for the year ended December 31, 2008 are "critical accounting
estimates."
Results of Operations
Three Months Ended June 30, 2009 and 2008
Net Revenue. Net revenue increased 20% to $104.2 million for the three months
ended June 30, 2009 as compared to $86.7 million for the three months ended
June 30, 2008. The following table reflects the components of net revenue for
the three months ended June 30, 2009 and 2008:
Net Revenue
Three Months Ended June 30,
% of Total % of Total
2009 Revenue 2008 Revenue
(in thousands) (in thousands)
Net Revenue
Angiomax and Cleviprex
U.S net revenue $ 99,716 96 % $ 84,454 97 %
Angiomax
International net revenue 4,459 4 % 876 1 %
Revenue from collaborations, net - 1,401 2 %
Total net revenue $ 104,175 100 % $ 86,731 100 %
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Net revenue for the three months ended June 30, 2009 increased compared to
the three months ended June 30, 2008 primarily due to an increase in U.S. sales
of Angiomax and an increase in European sales of Angiox. Sales of Angiomax in
the United States increased $14.3 million, or 17%, primarily due to increased
demand by existing hospital customers, the addition of new hospital customers
and the price increase we implemented in May 2009. Of the 17% increase in the
U.S. sales in the second quarter of 2009 compared to the second quarter of 2008,
approximately 13.5% was related to hospital demand by existing and new customers
and approximately 3.5% was attributable to the price increase. The increase in
U.S. sales in the second quarter of 2009 also included $0.9 million of net
revenue from Cleviprex sales.
International net revenue increased $3.6 million, or 52%, during the three
months ended June 30, 2009 compared to the three months ended June 30, 2008
primarily as a result of the direct sales we made after assuming control of the
distribution of Angiox in the Nycomed territory during the second half of 2008.
During the three months ended June 30, 2008, we recognized as revenue from
collaborations approximately $1.4 million of net revenue from sales made by
Nycomed of approximately $3.1 million under our transitional distribution
agreement with Nycomed. Under the terms of this transitional distribution
agreement, upon the sale by Nycomed to third parties of vials of Angiox, Nycomed
paid us a specified percentage of Nycomed's net sales of Angiox, less the amount
previously paid by Nycomed to us for the existing inventory.
Cost of Revenue. As shown in the table below, cost of revenue during the
three months ended June 30, 2009 was $30.4 million, or 29% of net revenue,
compared to $21.9 million, or 25% of net revenue, for the three months ended
June 30, 2008. The increase in cost of revenues as a percentage of net revenue
is driven by a higher projected effective royalty rate for sales of Angiomax
under our license agreement with Biogen Idec. Cost of revenue consisted of
expenses in connection with the manufacture of Angiomax and Cleviprex sold,
royalty expenses under our agreements with Biogen Idec, Health Research Inc. and
AstraZeneca and the logistics costs of selling Angiomax and Cleviprex, such as
distribution, storage, and handling. Cost of revenue increased $8.4 million
during the three months ended June 30, 2009 compared to the three months ended
June 30, 2008, primarily related to higher Angiomax sales and an increase in
royalty expense due to a higher projected effective royalty rate for sales of
Angiomax under our agreement with Biogen Idec.
Cost of Revenue
Three Months Ended June 30,
% of Total % of Total
2009 Cost 2008 Cost
(in thousands) (in thousands)
Cost of Revenue
Manufacturing $ 6,650 22 % $ 5,284 24 %
Royalty 20,430 67 % 13,434 61 %
Logistics 3,273 11 % 3,221 15 %
Total Cost of Revenue $ 30,353 100 % $ 21,939 100 %
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Research and Development Expenses. Research and development expenses
increased by 10% to $21.8 million for the three months ended June 30, 2009, from
$19.8 million for the three months ended June 30, 2008. The increase in research
and development expenses resulted primarily from increased expenditures in
connection with the continued development efforts for Cleviprex and the products
acquired in the Curacyte Discovery and Targanta acquisitions in August 2008 and
February 2009, respectively. The results of operations of Curacyte Discovery and
Targanta are included within our consolidated financial statements as of the
dates of acquisition.
The following table identifies, for each of our major research and
development projects, our spending for the three months ended June 30, 2009 and
2008. Spending for past periods is not necessarily indicative of spending in
future periods.
Research and Development Spending
Three Months Ended June 30,
% of % of
2009 Total R&D 2008 Total R&D
(in thousands) (in thousands)
Research and Development
Angiomax
Clinical trials $ 1,073 5 % $ 1,859 9 %
Manufacturing development 1,270 6 % 1,405 7 %
Administrative and headcount costs 1,546 7 % 889 5 %
Total Angiomax 3,889 18 % 4,153 21 %
Cleviprex
Clinical trials 1,873 9 % 114 1 %
Manufacturing development 330 2 % 605 3 %
Administrative and headcount costs 1,123 5 % 1,622 8 %
Total Cleviprex 3,326 16 % 2,341 12 %
Cangrelor
Clinical trials 8,007 37 % 8,568 43 %
Manufacturing development 737 3 % 193 1 %
Administrative and headcount costs 1,087 5 % 1,343 7 %
Total Cangrelor 9,831 45 % 10,104 51 %
CU2010
Clinical trials - 0 % - 0 %
Manufacturing development - 0 % - 0 %
Administrative and headcount 860 4 % - 0 %
Total CU2010 860 4 % - 0 %
. . .
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