Results of Operations
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Gross Sales
We recognized gross sales from the sale of Zanaflex Capsules and Zanaflex
tablets of $26.5 million for the year ended December 31, 2006, as compared to
$5.9 million for the year ended December 31, 2005, an increase of approximately
$20.6 million, or 349.2%. The increase was due to 12 months of Zanaflex Capsule
sales in 2006 versus 7 months in 2005 in addition to an increase in Zanaflex
Capsule prescriptions primarily attributable to our increased sales force. We
recognize product sales using a deferred revenue recognition model meaning that
shipments to wholesalers are recorded as deferred revenue and only recognized as
revenue when end-user prescriptions of the product are reported.
Gross sales in the year ended December 31, 2005 consisted of Zanaflex tablet
revenue recognized based on gross prescription data that we began receiving in
March 2005, which is when we began receiving prescription data for tablets
containing a code that identified these prescriptions as having been filled with
product we sold. We did not recognize revenue from Zanaflex Capsules
prescription data until after our launch of the product in April 2005.
As part of the Zanaflex acquisition, the Company purchased certain tablet
inventory from Elan that expired within one year. The majority of this product
was sold by the Company during July 2004 through March 2005. The Company
deferred revenue for this product due to the uncertainty of future returns. The
Company received returns of the product sold by Elan through June 2006, at which
point the right of return expired and the Company recognized the remaining $2.2
million deferred revenue as gross sales.
Discounts and Allowances
We recorded negative discounts and allowances of $396,000 for the year ended
December 31, 2006 as compared to an expense $1.1 million for the year ended
December 31, 2005, a decrease of approximately $1.5 million, or 135.5%. As part
of the Zanaflex acquisition in 2004, we agreed to accept any returns of Zanaflex
tablets that were returned subsequent to January 17, 2005, including returns of
product that was originally sold by Elan. Product returns prior to that date
were the responsibility of Elan. As a result of this agreement, in December 2004
we recorded a return liability of $4.1 million which was our best estimate of
the Zanaflex tablet returns for which we could potentially become liable. Our
obligation to continue to accept these returns ended in June 2006. As a result
of the returns we accepted since 2004, the net balance remaining on this
liability was approximately $1.8 million in June 2006. We reversed this
liability in June 2006, which resulted in a reduction in discounts
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and allowances of $1.8 million and a corresponding reduction of the product
return liability on our balance sheet.
Discounts and allowances are recorded when Zanaflex Capsules and Zanaflex
tablets are shipped to wholesalers. Discounts and allowances for the year ended
December 31, 2006 consisted of a negative $1.8 million due to the Elan product
return liability reversal described above, $664,000 in cash discounts and
$742,000 in allowances for chargebacks and rebates. Discounts and allowances for
the year ended December 31, 2005, consisted of $710,000 in cash discounts and
allowances of $404,000 for chargebacks and rebates.
Grant Revenue
Grant revenue for the year ended December 31, 2006 was $407,000 compared to
$336,000 for the year ended December 31, 2005, an increase of approximately
$71,000, or 21.1%. Grant revenue is recognized when the related research
expenses are incurred and our performance obligations under the terms of the
respective contract are satisfied.
Cost of Sales
We recorded cost of sales of $7.1 million for the year ended December 31, 2006
as compared to $5.1 million for the year ended December 31, 2005, an increase of
approximately $2.0 million, or 39.2%. Cost of sales for the year ended
December 31, 2006 consisted of $2.9 million in royalty fees, $2.6 million in
inventory costs, $775,000 in amortization of intangible assets, $676,000 in
charges for excess inventory and $215,000 in costs related to packaging, freight
and stability testing. The charges for excess inventory were taken due to lower
than anticipated primary care sales of Zanaflex Capsules. Cost of sales for the
year ended December 31, 2005 consisted of $1.6 in royalty fees, $434,000 in
amortization of intangible assets, $1.0 million in inventory costs, $1.8 million
in charges for excess inventory and $333,000 in costs related to packaging,
freight, and stability testing. The charges for excess inventory were taken due
to lower than anticipated primary sales of Zanaflex Capsules and because the
current Zanaflex Capsules inventory has 36 month dating.
Research and Development
Research and development expenses for the year ended December 31, 2006 were
$12.1 million as compared to $12.9 million for the year ended December 31, 2005,
a decrease of approximately $800,000, or 6.2%. The decrease in research and
development expenses was primarily due to a decrease in expenses related to the
termination of our former valrocemide collaboration agreement with Teva
Phamaceutical Industries, Ltd. in June 2005. Our MS clinical development program
expense increased from $4.0 million for the year ended December 31, 2005 to
$6.0 million for the year ended December 31, 2006, an increase of $2.0 million
or 50%, due to the continuation of increased activity in our Phase 3 clinical
trial program.
Other contract expenses decreased to $751,000 in the year ended December 31,
2006, from $4.0 million in the year ended December 31, 2005, a decrease of $3.2
million or 81.2%. This decrease was primarily due to a decrease in expenses
related to the termination of the valrocemide collaboration agreement in
June 2005.
Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2006 were $19.1
million compared to $13.1 million for the year ended December 31, 2005, an
increase of approximately $6.0 million, or 45.8%. This increase was primarily
attributable to an increase of $3.0 million in salaries and benefits related to
the expansion of our Zanaflex Capsules specialist sales force, an increase of
$1.7 million in other selling related expenses resulting from the expansion of
our Zanaflex Capsules specialist sales force and an increase of $1.3 million for
marketing and distribution and sales administration expense related to the
distribution of Zanaflex Capsules and Zanaflex tablets.
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General and Administrative
General and administrative expenses for the year ended December 31, 2006 were
$12.6 million compared to $8.4 million for the year ended December 31, 2005, an
increase of approximately $4.2 million, or 50.0%. The increase was attributable
to the addition of a medical affairs department with $1.7 million of related
expenses, $1.4 million due to increased general and administrative staff and
salary costs related to being a public company and $875,000 related to increases
in insurance expenses.
Other Income (Expense)
Other income (expense) was a loss of $1.0 million for the year ended
December 31, 2006 compared to a loss of $1.1 million for the year ended
December 31, 2005, a decrease of approximately $100,000, or 9.1%. Interest
expense increased by $1.0 million principally due to interest expense related to
the Paul Royalty Fund revenue interest agreement, partially offset by a $1.1
million increase in interest income due to an increase in cash balances
resulting from the completion of our initial public offering of common stock in
February 2006 and a private placement of our common stock in October 2006 and a
$75,000 increase in other income primarily due to a New York State tax refund.
Cumulative effect of change in accounting principle
On January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R),
which requires that the costs resulting from all share-based payment
transactions be recognized in the financial statements at their fair values. We
adopted SFAS No. 123R using the modified prospective application method under
which the provisions of SFAS No. 123R apply to new awards and to awards
modified, repurchased, or cancelled after the adoption date. Additionally,
compensation cost for the portion of the awards for which the requisite service
has not been rendered that are outstanding as of the adoption date is recognized
in the consolidated statement of operations over the remaining service period
after the adoption date based on the award's original estimate of fair value.
Results for prior periods have not been restated. In connection with the
adoption of SFAS No. 123R, the Company changed its method of recognizing the
number of outstanding instruments for which the requisite service is not
expected to be rendered from an actual basis to an estimate. This change
resulted in the recognition of a cumulative effect of change in accounting
principle as of January 1, 2006 of $454,000 compared to none for the year ended
December 31, 2005. The cumulative effect adjustment represents the difference
between compensation cost recognized through the date of adoption using actual
forfeitures and the cost that would have been recognized to date using estimated
forfeitures.
Beneficial Conversion Feature, Accretion of Issuance Costs, Preferred Dividends
and Fair Value of Warrants Issued to Convertible Preferred Stockholders
Charges related to preferred stock increased to $36.0 million for the year ended
December 31, 2006, from $18.6 million for the year ended December 31, 2005, an
increase of approximately $17.4 million, or 93.6%, due to the recognition of the
remaining unamortized portion of beneficial conversion charges of $48.5 million
and issuance costs of $271,000 upon our completion of our initial public
offering of our common stock in February 2006. These charges primarily comprised
accretion of issuance costs on Series E, Series I and Series J mandatorily
redeemable convertible preferred stock, accrual of preferred dividends of
Series J and Series K mandatorily redeemable convertible preferred stock,
accretion of beneficial conversion feature on Series A through Series I
preferred stock for reset in conversion price, accretion of beneficial
conversion feature on Series J preferred stock (see Note 3 to our consolidated
financial statements). These charges were partially offset by the reversal of
the cumulative preferred dividends of $12.7 million on Series J and Series K
mandatorily redeemable convertible preferred stock during the year ended
December 31, 2006, as they have been forfeited through completion of the initial
public offering.
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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Gross Sales
We recognized revenue from the sale of Zanaflex Capsules and Zanaflex tablets of
$5.9 million for the year ended December 31, 2005, as compared to $0 for the
year ended December 31, 2004. We recognize product sales using a deferred
revenue recognition model meaning that shipments to wholesalers are recorded as
deferred revenue and only recognized as revenue when end-user prescriptions of
the product are reported. Product sales in the year ended December 31, 2005,
consist of Zanaflex tablet sales beginning in March 2005, which is when we began
receiving prescription data for tablets containing a code clearly identifying
these prescriptions as having been filled with product we sold, and Zanaflex
Capsules prescription data beginning after our launch of the product in
April 2005.
Deferred revenue from Zanaflex Capsules was $5.2 million as of December 31,
2005, as compared to $0 as of December 31, 2004. The increase in deferred
revenue of Zanaflex Capsules was a result of our launch of the product in
April 2005. We expect deferred revenue from Zanaflex Capsules to increase in the
future as our sales and marketing efforts ramp up, and prescription data
continues to lag wholesaler shipments made in anticipation of demand.
Deferred revenue from Zanaflex tablets was $11.5 million as of December 31,
2005, an increase of $4.8 million since December 31, 2004, as compared to
$6.7 million as of December 31, 2004. The increase in deferred revenue of
Zanaflex tablets resulted from increased shipment levels. Approximately
$2.3 million of the deferred revenue at December 31, 2005 relates to product
that we acquired from Elan that had an expiration date of less than 12 months at
the time we sold it during 2004. We believe there is a high likelihood that this
product will be returned, which would result in our inability to recognize the
deferred revenue related to that shipped product. We expect deferred revenue
from Zanaflex tablets to decline over time as we attempt to convert Zanaflex
tablet sales to Zanaflex Capsules sales.
Discounts and Allowances
We recorded discounts and allowances of $1.1 million for the year ended
December 31, 2005 as compared to $4.4 million for the year ended December 31,
2004. Discounts and allowances are recorded when Zanaflex Capsules and Zanaflex
tablets are shipped to wholesalers. Discounts and allowances for the year ended
December 31, 2005 consisted of $710,000 in cash discounts and $403,000 in
allowances for chargebacks and rebates. Discounts and allowances for the year
ended December 31, 2004, consisted of $128,000 in cash discounts and allowances
of $207,000 for chargebacks and rebates. Additionally, in the year ended
December 31, 2004, we took a $4.1 million charge to establish a reserve for
expected returns of Zanaflex tablets sold by Elan prior to our acquisition of
Zanaflex. As part of the acquisition of Zanaflex, we agreed to accept any
returns of Zanaflex tablets that were returned subsequent to January 17, 2005,
including returns of product that was originally sold by Elan. As part of our
April 2005 launch of Zanaflex Capsules, in April, May and June 2005 we extended
a 6% promotional cash discount over and above the standard 2% discount provided
to drug wholesalers and a 4% rebate on products resold by the wholesalers to
pharmacies, hospitals and other third parties. We expect cash discounts to
decrease in future periods as a percentage of sales.
Grant Revenue
Grant revenue for the year ended December 31, 2005 was $336,000 compared to
$479,000 for the year ended December 31, 2004. Grant revenue is recognized when
the related research expenses are incurred and our performance obligations under
the terms of the respective contract are satisfied.
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Cost of Sales
We recorded cost of sales of $5.1 million for the year ended December 31, 2005
as compared to $885,000 for the year ended December 31, 2004. Cost of sales for
the year ended December 31, 2005 consisted of $1.6 million in royalty fees,
$434,000 in milestone amortization of intangible assets, $1.0 million in
inventory costs, $1.8 million in charges for excess inventory and $333,000 in
costs related to packaging, freight, and stability testing. The charges for
excess inventory were taken due to lower than anticipated primary care sales of
Zanaflex Capsules and because the initial Zanaflex Capsules launch inventory was
purchased with only 24 month dating. The remaining Zanaflex Capsule inventory
was purchased with 36 month dating. Cost of sales for the year ended
December 31, 2004 consisted of $519,000 in royalty fees, $114,000 in milestone
amortization of intangible assets and $252,000 in inventory costs related to the
sale of Zanaflex tablets. We began incurring cost of sales upon the acquisition
of Zanaflex in July 2004.
Research and Development
Research and development expenses for the year ended December 31, 2005, were
$12.9 million as compared to $22.0 million for the year ended December 31, 2004,
a decrease of approximately $9.1 million, or 41.4%. The decrease in research and
development expenses was primarily attributable to completion of two Phase 3
clinical trials of Fampridine-SR in SCI, and one Phase 2 clinical trial of
Fampridine-SR in MS, during the first quarter of 2004. The SCI clinical
development program expense decreased from $5.9 million for the year ended
December 31, 2004 to $32,000 for the year ended December 31, 2005, due to our
decision to put the program on hold. The MS clinical development program expense
increased from $2.9 million for the year ended December 31, 2004 to $4.0 million
for the year ended December 31, 2005, an increase of 37.9%, due to the launch of
our Phase 3 clinical trial.
Other contract expenses decreased to $4.0 million in the year ended December 31,
2005, from $4.9 million in the year ended December 31, 2004, a decrease of
18.4%. This decrease is primarily due to a $1.7 million decrease in expenses for
the manufacture of clinical supplies from the period ended December 31, 2004,
offset by an increase in expenses related to the valrocemide collaboration,
primarily due to termination expense of $3.1 million.
Operating expenses for clinical development and preclinical research and
development decreased to $4.7 million in the year ended December 31, 2005, from
$7.6 million in the year ended December 31, 2004, a decrease of $2.9 million, or
38.2%. This decrease was primarily due to a decrease in non-cash stock-based
compensation expense of $1.2 million, to $625,000 for the year ended
December 31, 2005 from $1.8 million for the year ended December 31, 2004. In
addition, salaries and benefits decreased by $914,000 due to a staff reduction
in early 2005.
Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2005, were
$13.1 million compared to $4.7 million for the year ended December 31, 2004, an
increase of approximately $8.4 million or 178.7%. This increase was primarily
attributable to $4.0 million for marketing and distribution and sales
administration expense related to the launch of Zanaflex Capsules and the
distribution of Zanaflex tablets and $3.2 million in salaries and benefits
related to our Zanaflex Capsules specialist sales force.
General and Administrative
General and administrative expenses for the year ended December 31, 2005, were
$8.4 million compared to $13.3 million for the year ended December 31, 2004, a
decrease of approximately $4.9 million, or 36.8%. Total general and
administrative expenses include non-cash stock based compensation expense of
$2.4 million for the year ended December 31, 2005, as compared to $6.5 million
for the year ended December 31, 2004, primarily attributable to the repricing in
the first
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quarter of 2004 of options granted prior to 2004. In addition, the year ended
December 31, 2004 included approximately $1.2 million in outside NDA preparation
services related to our Phase 3 trials of Fampridine-SR in SCI.
Other Income (Expense)
Other income (expense) was a loss of $1.1 million for the year ended
December 31, 2005, versus a gain of $26,000 in the year ended December 31, 2004,
a difference of $1.1 million. Interest expense for the year ended December 31,
2005 increased by $1.1 million primarily related to the $6.0 million secured
term loan with GE Capital entered into in January 2005 as well as from interest
costs related to the agreement with PRF entered into in December 2005.
Beneficial Conversion Feature, Accretion of Issuance Costs, Preferred Dividends
and Fair Value of Warrants Issued to Convertible Preferred Stockholders
Charges related to preferred stock remained relatively flat at $24.8 million for
the year ended December 31, 2005, and $24.8 million for the year ended
December 31, 2004. These charges primarily comprised accretion of issuance costs
on Series E, Series I and Series J mandatorily redeemable convertible preferred
stock, accrual of preferred dividend on Series J and Series K mandatorily
redeemable convertible preferred stock, accretion of beneficial conversion
feature on Series A through Series I preferred stock for reset in conversion
price and accretion of beneficial conversion feature on Series J preferred stock
(see Notes 3, 8 and 11 to our consolidated financial statements).
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