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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