ptx_8k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): March 9, 2010
PERNIX
THERAPEUTICS HOLDINGS, INC. |
(Exact
name of registrant as specified in its
charter) |
Maryland
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001-14494
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33-0724736
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(State
or other jurisdiction of
incorporation) |
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(Commission
File Number) |
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(IRS
Employer Identification
No.) |
33219
Forest West Street
Magnolia,
TX
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77354
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (832) 934-1825
Golf
Trust of America, Inc.
10
N. Adger’s Wharf
Charleston,
SC 29401
(Former
name or former address, if changed since last report.)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
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Page |
ITEM
2.01 |
COMPLETION OF
ACQUISITION OR DISPOSITION OF ASSETS 1 |
1 |
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ITEM
2.02 |
RESULTS OF
OPERATIONS AND FINANCIAL CONDITION |
71 |
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ITEM
3.02 |
UNREGISTERED SALES
OF EQUITY SECURITIES |
71 |
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ITEM
5.01 |
CHANGES IN CONTROL
OF REGISTRANT |
71 |
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ITEM
5.02
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DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
CERTAIN OFFICERS;COMPENSATORY ARRANGEMENTS OF CERTAIN
OFFICERS |
71 |
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ITEM
5.03 |
AMENDMENT TO
ARTICLES OF INCORPORATION OR BYLAWS; CHANGE
IN FISCAL YEAR |
71 |
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ITEM
5.06 |
CHANGE IN SHELL
COMPANY STATUS |
72 |
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ITEM
9.01 |
FINANCIAL STATEMENTS
AND EXHIBITS |
72 |
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Signatures |
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74 |
Cautionary
Statement Regarding Forward-Looking Statements
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the statement. The Registrant desires to take advantage of these
“safe harbor” provisions with regard to the forward-looking statements in this
Form 8-K and in the documents that are incorporated herein by reference. These
forward-looking statements reflect our current views with respect to future
events and financial performance. Specifically, forward-looking statements may
include:
·
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projections
of revenues, expenses, income, income per share, net interest margins,
asset growth, loan production, asset quality, deposit growth and other
performance measures;
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·
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statements
regarding expansion of operations, including entrance into new markets and
development of products; and
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·
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statements
preceded by, followed by or that include the words “estimate,” “plan,”
“project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,”
“seek,” “target” or similar
expressions.
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These
forward-looking statements express our best judgment based on currently
available information and we believe that the expectations reflected in our
forward-looking statements are reasonable.
By their
nature, however, forward-looking statements often involve assumptions about the
future. Such assumptions are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. As such, we cannot guarantee you that the expectations reflected in
our forward-looking statements actually will be achieved. Actual results may
differ materially from those in the forward-looking statements due to, among
other things, the following factors:
·
|
changes
in general business, economic and market
conditions;
|
·
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volatility
in the securities markets generally or in the market price of the
Registrant’s stock specifically;
and
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·
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the
risks outlined below in the section entitled “Risk
Factors.”
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We
caution you not to place undue reliance on any forward-looking statements, which
speak only as of the date of this Form 8-K. Except as required by law, the
Registrant does not undertake any obligation to publicly update or release any
revisions to these forward-looking statements to reflect any events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM
2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
Overview
Effective
March 9, 2010, pursuant to an Agreement and Plan of Merger dated October 6, 2009
(the “Merger Agreement”), by and among Golf Trust of America, Inc. (currently
known as Pernix Therapeutics Holdings, Inc.), a Maryland corporation
(“Registrant”), GTA Acquisition, LLC, a Louisiana limited liability company
(“Transitory Subsidiary”) and Pernix Therapeutics, Inc., a Louisiana corporation
(“Pernix”), Pernix merged with and into Transitory Subsidiary, with Transitory
Subsidiary surviving the merger, and became a wholly-owned subsidiary of the
Registrant (the “Merger”). The acquisition of Pernix is treated as a
reverse acquisition for accounting purposes, and the business of Pernix became
the business of the Registrant as a result thereof.
On March
8, 2010, the Registrant announced that its board of directors unanimously
approved a reverse split of its common stock at a ratio of one share for each
two shares outstanding immediately prior to the reverse split. At the
closing of the Merger and after giving effect to the reverse split, each
outstanding share of Pernix common stock was converted into 104,500 shares of
the Registrant’s common stock. Upon consummation of the Merger, the
stockholders of Pernix received an aggregate of 20,900,000 shares of the
Registrant’s common stock, representing approximately 84% of the aggregate
common stock of the Registrant outstanding.
Effective
at the closing of the Merger, and as approved by the Registrant’s stockholders
at a special meeting held on March 8, 2010 (the “Special Meeting”), the
Registrant’s name was changed to Pernix Therapeutics Holdings,
Inc. Trading of the combined companies’ common stock commenced on the
NYSE Amex under the symbol “PTX” on March 10, 2010.
Pursuant
to the Merger Agreement, Jonathan Couchman, Jay Gottlieb and William Vlahos
submitted their resignation as directors of the Registrant, and James Smith,
Cooper Collins and Anthem Blanchard were appointed to serve as members of the
Registrant’s board of directions, effective with the close of the Merger on
March 9, 2010. Accordingly, at the closing of the Merger, the
Registrant’s board consists of Messrs. Smith, Cooper and Blanchard, and Michael
C. Pearce and Jan Loeb. Mr. Pearce continues to serve as Chairman of
the Registrant’s board, and resigned as President and Chief Executive Officer of
the Registrant effective with the close of the Merger. At that time,
Mr. Collins was appointed President and Chief Executive Officer, and Mike
Venters was appointed Executive Vice President of Operations. Tracy
Clifford continues to serve as the Registrant’s Chief Financial
Officer.
On March
10, 2010, the Board of Directors appointed the following members to the
Registrant’s corporate governance committees: (i) Audit-Jan Loeb
(Chair) and James Smith; Nominations-James Smith (Chair), Jan Loeb and Anthem
Blanchard; and (iii) Compensation-James Smith (Chair), Jan Loeb and Anthem
Blanchard.
The
issuance of shares of the Registrant’s common stock in the Merger was made in an
unregistered offering, in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, which exempts transactions by an
issuer not involving a public offering. These securities may not be
offered or sold in the United States absent registration or an applicable
exemption from registration. Reliance on Section 4(2) was based
primarily on the following factors:
i)
|
the
offer was limited to the five former stockholders of Pernix, all of whom
served as officers or directors of
Pernix;
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ii)
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each
of Pernix’s former stockholders are sophisticated investors and had
available to them all information necessary to make an informed investment
decision regarding the Merger;
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iii)
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each
of Pernix’s former stockholders was an active participant in considering
the merits and risks of the Merger;
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iv)
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the
Merger was a negotiated transaction, as opposed to a widespread
offering;
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v)
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there
was no public solicitation; and
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vi)
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the
substantial contractual restrictions on resale by the former stockholders
of Pernix ensure they will not be deemed to be
underwriters. For a description of these contractual
restrictions, see the section of the Registrant’s Definitive Proxy
Statement filed with the SEC on February 8, 2010 titled “The Merger-
Agreements with Pernix Stockholders and GTA Officers and Directors,” which
is incorporated herein by
reference.
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The remaining information in response
to this Item 2.01 is keyed to the Item numbers of Form 10. Except as
otherwise indicated by the context, references to “the
Company”, “we”, “us” or “our” hereinafter in this Form 8-K are to the
consolidated business of Pernix, except that references to “our common stock”,
“our shares of common stock” or “our capital stock” or similar terms shall refer
to the common stock of the Registrant.
ITEM
1. DESCRIPTION OF BUSINESS
Introduction
Pernix
Therapeutics, Inc. is a growing and profitable specialty pharmaceutical company
focused on developing and commercializing branded pharmaceutical products to
meet unmet medical needs primarily in pediatrics. Our goal is to build a broad
portfolio of products through a combination of internal development, acquisition
and in-licensing activities, and to utilize our sales force to promote our
products in our target markets.
We
utilize unique formulations and drug delivery technologies for existing drug
compounds to improve patient care by increasing patient compliance and reducing
adverse side effects relative to existing therapies. Additionally, we focus our
product development strategy on placing solid intellectual property around our
products to protect our investment. We have acquired substantially all of the
intellectual property associated with our products through license
agreements.
Since our
inception in 1999, we have assembled a product portfolio that currently includes
six marketed product lines consisting of 14 products. Our ALDEX product line
currently includes ALDEX AN, ALDEX CT, ALDEX D and ALDEX DM, which are oral
antihistamine/decongestant/antitussive (cough suppressant) combinations
indicated for the treatment of allergies and symptoms of the common cold.
PEDIATEX TD is also an oral antihistamine/decongestant combination indicated for
the treatment of respiratory allergies. Z-COF 8DM is an oral
decongestant/expectorant/ cough suppressant indicated for the treatment of
allergies and symptoms of the common cold. The BROVEX line currently includes
BROVEX PEB, BROVEX PEB DM, BROVEX PSB, BROVEX PSB DM, BROVEX PSE and BROVEX PSE
DM, which are oral antihistamine/decongestant/antitussive (cough suppressant)
combinations indicated for the treatment of allergies and symptoms of the common
cold. In February 2009, we introduced our first medical food product,
REZYST IM. REZYST IM is a chewable tablet probiotic indicated to replace active
cultures that are destroyed by diet and antibiotics and to reduce symptoms
associated with irritable bowel syndrome and various gastrointestinal issues.
Our second medical food product, QUINZYME, was launched in July 2009.
QUINZYME is a 90 mg ubiquinone smooth dissolve tablet for patients with depleted
ubiquinone levels and for patients on statin therapy. In addition to our own
product portfolio, we have entered into co-promotion agreements with various
parties to market certain of their products in return for commissions
or percentages of revenue on the sales we generate. As of March 9, 2010, we
marketed three products under co-promotion agreements. These co-promotion
agreements did not contribute to a material part of our net sales for fiscal
year 2009 but may in the future.
Some of
our products are marketed without an FDA-approved marketing application because
we consider them to be identical, related or similar to products that have
existed in the market without an FDA-approved marketing application, and which
were thought not to require pre-market approval, or which were approved only on
the basis of safety, at the time they entered the marketplace, subject to FDA
enforcement policies established with the FDA’s Drug Efficacy Study
Implementation, or DESI, program. For a more complete discussion regarding FDA
drug approval requirements, please see Item 2 - “Risks Related to Pernix- Some
of Pernix’s specialty pharmaceutical products are now being marketed without FDA
approvals.”
Our sales
force, which consists of 32 full-time sales representatives and 2 regional sales
directors as of March 9, 2010, promotes our products in approximately 30 states
in the U.S. Our sales force is supported by six senior managers and six
administrative staff. Our sales management team consists of pharmaceutical
industry veterans experienced in management, business development, and sales and
marketing, and has an average of nine years of sales management
experience.
For the
fiscal years ended December 31, 2008 and 2009, our net sales were $20.7
million and $27.9 million, respectively, and our income before income taxes and
non-controlling interest was $7.6 million and $9.2 million,
respectively.
Products
and Product Candidates
Products
We
promote our products through our own direct sales force. The table below
provides information on our product portfolio as of December 31,
2009:
Marketed Products
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Active Pharmaceutical Ingredient
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Gross
Sales Year Ended 12/31/2009
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Gross
Sales Year Ended 12/31/2008
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ALDEX
AN
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Doxylamine
Succinate
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Oral
Tablet
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|
Allergies
and
Congestion
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|
$ 640,833
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|
$ 939,431
|
|
|
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ALDEX
CT
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|
Diphenhydramine
HCI
and
Phenylephrine
HCI
|
|
Oral
Tablet
|
|
Allergies
and
Congestion
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|
3,665,890
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|
2,569,395
|
|
|
|
|
|
|
|
|
|
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ALDEX
D
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Pyrilamine
Maleate and Phenylephrine HCI
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|
Liquid
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Allergies
and
Congestion
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7,596,143
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4,129,828
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ALDEX
DM
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Pyrilamine
Maleate Phenylephrine HCI, Dextromethorphan
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Liquid
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Allergies,
Congestion and Cough
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6,487,126
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10,003,313
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PEDIATEX
TD
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Triprolidine
and Pseudoephedrine
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Liquid
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Allergies
and Congestion
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5,699,099
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1,465,768
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Z
COF 8 DM
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Dextromethorphan,
Pseudoephedrine and Guaifenesin
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Liquid
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Nasal
Congestion, Chest Congestion and Cough
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7,756,320
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6,742,855
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BROVEX
PEB
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Phenylephrine
HCI and Brompheniramine Maleate
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Liquid
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Congestion
and Allergies
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429,072
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-----
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BROVEX
PEB DM
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Phenylephrine,
Brompheniramine Maleate and Dextromethorphan
|
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Liquid
|
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Congestion,
Allergies and Cough
|
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2,601,823
|
|
-----
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BROVEX
PSB
|
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Pseudoephedrine
and Brompheniramine Maleate
|
|
Liquid
|
|
Congestion
and Allergies
|
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413,341
|
|
-----
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|
|
|
|
|
|
|
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|
BROVEX
PSB DM
|
|
Pseudoephedrine
HCI, Brompheniramine Maleate and Dextromethorphan
|
|
Liquid
|
|
Congestion,
Allergies and Cough
|
|
1,599,615
|
|
-----
|
|
|
|
|
|
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BROVEX
PSE
|
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Pseudoephedrine
HCI and Brompheniramine Maleate
|
|
Oral
Tablet
|
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Congestion
and Allergies
|
|
143,564
|
|
-----
|
|
|
|
|
|
|
|
|
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BROVEX
PSE DM
|
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Pseudoephedrine
HCI, Brompheniramine Maleate and Dextromethorphan
|
|
Oral
Tablet
|
|
Congestion,
Allergies and Cough
|
|
601,665
|
|
-----
|
|
|
|
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REZYST
IM
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Lactobacillus
and Bifidobacterium
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Oral
Table
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Immune
and GI Health
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284,880
|
|
-----
|
|
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QUINZYME
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Ubiquinone
58b
|
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Oral
Tablet
|
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Ubiquininone
Levels
|
|
55,077
|
|
-----
|
ALDEX
Line. ALDEX is a line of prescription antihistamines, decongestants and
cough suppressants that are indicated for the temporary relief of respiratory
allergies, allergic rhinitis and symptoms of the common cold. We also market and
promote other lines of antihistamines, decongestants and cough suppressants
under the PEDIATEX, Z-COF and BROVEX brands. We launched our ALDEX product line
in the third quarter of 2006. Our gross sales of ALDEX products were
approximately $17.6 million in 2008 and $18.4 million in 2009,
representing approximately 67% and 48% of our gross sales for those periods
respectively.
Product Description. We sell
the following ALDEX products.
·
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Aldex AN. ALDEX AN is
an antihistamine/decongestant combination administered orally in a
chewable tablet form containing the active pharmaceutical ingredient, or
API, doxylamine succinate. It is indicated for the temporary relief of
runny nose, sneezing, itching of nose or throat, itchy, watery eyes due to
hay fever or other respiratory
allergies.
|
·
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Aldex CT. ALDEX CT is
an antihistamine/decongestant combination administered orally in a
chewable tablet form containing the API diphenhydramine HCl and
phenylephrine HCl. It is indicated for the temporary relief of nasal and
sinus congestion, sneezing, runny nose, and watery eyes that occur from
respiratory allergies.
|
·
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Aldex D. ALDEX D is an
antihistamine/decongestant combination for oral administration as a
suspension. Each 5mL dose contains the API phenylephrine HCI and
pyrilamine maleate. It is indicated for the symptomatic relief of coryza
and nasal congestion associated with the common cold, sinusitis, allergic
rhinitis and other upper respiratory tract
conditions.
|
·
|
Aldex DM. ALDEX DM is
an antihistamine/nasal decongestant/antitussive combination for oral
administration as a suspension. Each 5mL dose contains the API
phenylephrine HCI, pyrilamine maleate and dextromethorphan HBr. It is
indicated for the symptomatic relief of coryza, nasal decongestion, and
cough associated with the common cold, sinusitis, allergic rhinitis, and
other upper respiratory tract
conditions.
|
Market Opportunity. According
to the American Academy of Allergy Asthma and Immunology, at least
35.9 million people have seasonal allergic rhinitis, accounting for
$4.5 billion spent on direct care. The AAAI also states that allergic
disease affects more than 20% of the population, is the 5th
leading chronic disease in the U.S. among all ages and is the 3rd
leading chronic disease among children under 18 years old.
The U.S.
oral antihistamine/decongestant market is fairly fragmented with numerous
branded and generic antihistamines and decongestants. Pharmacists typically fill
prescriptions for antihistamines and decongestants with generic products when
available.
Four
commonly used first generation antihistamines are diphenhydramine, doxylamine,
pyrilamine and triprolidine. Diphenhydramine and doxylamine belong to the
ethanolamines class of antihistamines, are potent and effective H-1 blockers
that possess significant anticholinergic activity and have a pronounced tendency
to induce sedation. Pyrilamine belongs to the ethylenediamines class of
antihistamines. The drugs in this group are potent and effective H-1 receptor
blocking agents that inhibit the actions of histamine on smooth muscle,
capillary permeability, and can both stimulate and depress the central
nervous system. Pyrilamine also possesses significant anticholinergic
properties. It is one of the least sedating first generation antihistamines.
Triprolidine belongs to the alkylamines class of antihistamines. The drugs in
this group are potent and effective H-1 blockers which tend to produce more
central nervous system stimulation and less drowsiness than other 1st
generation antihistamines.
The two
most commonly used decongestants are phenylephrine and pseudoephedrine.
Phenylephrine is found in over-the-counter (OTC) treatments, such as Johnson and
Johnson’s Sudafed PE, Wyeth’s Robitussin® CF, McNeil-PPC, Inc.’s Tylenol® Sinus
and Novartis Consumer Health Inc.’s Theraflu®. Pseudoephedrine is found in OTC
treatments, such as Johnson and Johnson’s Sudafed®, Burroughs Wellcome Fund’s
Actifed®, GlaxoSmithKline plc’s Contac® and Schering-Plough HealthCare Products
Inc’s Claritin®-D.
We
believe that sales of antihistamines, decongestants, and cough suppressants that
contain pyrilamine and phenylephrine will continue to grow significantly over
the next several years as a percentage of the overall prescription
antihistamine, decongestant, and cough suppressant market.
Other Treatments. Other
branded prescription antihistamine, decongestant, and cough suppressants
marketed in the United States that compete with our ALDEX line include WraSer
Pharmaceutical’s VazoTab®, VazoBIDTM and
VazoTan®; Atley
Pharmaceutical Inc.’s Sudal®-12 and ATuss® DS; and Centrix Pharmaceutical Inc.’s
Dicel®.
Differentiators. The ALDEX
line is indicated for the temporary relief of respiratory allergies, allergic
rhinitis and symptoms of the common cold. In addition to its indications, it has
the following benefits and differentiators:
·
|
Our
ALDEX products incorporate the patented drug delivery technology developed
by Kiel Laboratories.
|
·
|
Because
of the rapid onset of first generation antihistamines like doxylamine,
found in ALDEX AN, symptomatic relief is almost
immediate.
|
·
|
ALDEX
CT contains the API diphenhydramine, one of the oldest, most effective
antihistamines on the market. It is well known and trusted by
doctors.
|
·
|
ALDEX
D and ALDEX DM both contain the API pyrilamine, one of the least sedating
first generation antihistamines
available.
|
Intellectual Property. The
ALDEX line incorporates a patent protected drug delivery technology owned by
Kiel Laboratories, Inc. The patents have claims for preparing a control delivery
technology; one is for liquid and semi-solid dosage forms and the other for
tablet, capsule, and solid dosage forms. Please see the “Patents” section of
this Item 1 for a more detailed description of the patents associated with the
ALDEX line of products. See the “License and other Agreements” section of this
Item 1 for a description of our rights to Kiel’s intellectual
property.
PEDIATEX
Line. Currently the only product that we promote in our PEDIATEX line is
PEDIATEX TD. PEDIATEX TD is a prescription antihistamine/nasal decongestant
combination liquid for oral administration. Each 1mL dose contains the API
Tripolidine HCI and Pseudoephedrine HCI. Tripolidine HCl is a first generation
antihistamine in the alkylamine class. Pseudoephedrine, a decongestant, is a
sympathomimetic, which acts predominantly on alpha-adrenergic receptors in the
mucosa of the respiratory tract, producing vasoconstriction and having minimal
effect on beta-receptors. It therefore functions as an oral nasal decongestant
with minimal central nervous system stimulation. This decongestant also
increases sinus drainage and secretions. PEDIATEX TD is indicated for the relief
of runny nose, sneezing, itching of nose and throat, itchy, watery eyes due to
hay fever or other respiratory allergies. We launched PEDIATEX TD in
August 2008. Our gross sales of PEDIATEX TD were approximately
$1.5 million in 2008 and $5.7 million in 2009, representing
approximately 6% and 15% of our gross sales for those periods,
respectively.
Market Opportunity. See
“Market Opportunity” in the discussion of our ALDEX product line
above.
Other Treatments.
Some of PEDIATEX TD’s
prescription competitors are Tiber Laboratories, LLC’s AccuHist TD® and JAYMAC
Pharmaceuticals, LLC’s J-Tan D PD®.
Differentiators. In addition
to its indications, PEDIATEX TD has the following benefits and
differentiators:
·
|
PEDIATEX
TD is effective for the relief of perennial and seasonal allergic
rhinitis, vasomotor rhinitis, nasal congestion due to the common cold, hay
fever or other respiratory allergies, and nasal congestion associated with
sinusitis. Its antihistamine is a potent agent with a rapid onset and long
duration of action.
PEDIATEX
TD, which utilizes Kiel’s patented drug delivery technology, can be used
two to four times per day, which is advantageous to caregivers with
children either at home or in day
care.
|
·
|
The
product has a unique safety mechanism that helps to prevent overdose. The
bottle adapter and calibrated syringe are included in each sample and
prescription bottle, ensuring safety precautions are taken before the
caregiver doses the patient.
|
Intellectual Property. The
PEDIATEX line incorporates Kiel’s patent protected drug delivery technology. The
patents have claims for preparing a control delivery technology; one is for
liquid and semi-solid dosage forms and the other for tablet, capsule, and solid
dosage forms. Please see the “Patents” section of this Item 1 for a more
detailed description of the patents associated with the PEDIATEX line of
products. See the “License and other Agreements” section of this Item 1 for a
description of our rights to Kiel’s intellectual property.
BROVEX Line.
The BROVEX Line is a line of prescription antihistamine combinations with
the API brompheniramine maleate, part of the first generation class of
antihistamines called alkylamines that are indicated for the temporary relief of
sneezing, itchy, watery eyes, itchy nose or throat, and runny nose due to hay
fever or other respiratory allergies. BROVEX was acquired by Pernix in
June 2009. Gross sales of BROVEX products were approximately
$5.8 million in 2009, or approximately 15% of our gross sales.
Product Description. We
market and sell the following BROVEX products.
·
|
BROVEX PEB.
BROVEX PEB is an antihistamine/decongestant combination
administered orally in a liquid form containing the API phenylephrine HCl,
a decongestant, and brompheniramine maleate, an antihistamine. It is
indicated for the temporary relief of nasal and sinus congestion,
sneezing, runny nose, and watery eyes that occur from seasonal and
perennial allergic rhinitis.
|
·
|
BROVEX PEB
DM. BROVEX PEB DM is an antihistamine/decongestant/antitussive
combination administered orally in a liquid form containing the active
pharmaceutical ingredients phenylephrine, brompheniramine maleate and
dextromethorphan, an antitussive. It is indicated for the relief of nasal
and sinus congestion, coughing, sneezing, runny nose, and watery eyes that
occur from seasonal and perennial allergic rhinitis or the common
cold.
|
·
|
BROVEX PSB.
BROVEX PSB is an antihistamine/decongestant administered orally in
a liquid form containing the active pharmaceutical ingredients
pseudoephedrine HCl, a decongestant, and brompheniramine maleate, an
antihistamine. It is indicated for the temporary relief of nasal and sinus
congestion, sneezing, runny nose, and watery eyes that occur from seasonal
and perennial allergic rhinitis.
|
·
|
BROVEX PSB
DM. BROVEX PSB DM is an antihistamine administered orally in a
liquid form containing the active pharmaceutical ingredients
pseudoephedrine HCl, a decongestant, brompheniramine maleate, an
antihistamine and dextromethorphan, an antitussive. It is indicated for
the temporary relief of nasal and sinus congestion, coughing, sneezing,
runny nose, and watery eyes that occur from seasonal and perennial
allergic rhinitis or the common
cold.
|
·
|
BROVEX PSE.
BROVEX PSE is an antihistamine administered orally in tablet form
containing the active pharmaceutical ingredients pseudoephedrine HCl, a
decongestant, and brompheniramine maleate, an antihistamine. It is
indicated for the temporary relief of nasal and sinus congestion,
sneezing, runny nose, and watery eyes that occur from seasonal and
perennial allergic rhinitis.
|
·
|
BROVEX PSE
DM. BROVEX PSE DM is an antihistamine administered orally in tablet
form containing the active pharmaceutical ingredients pseudoephedrine HCl,
a decongestant, brompheniramine maleate, an antihistamine, and
dextromethorphan, an antitussive. BROVEX PEB current suggested dosage is 1
tablet four times a day for ages 6 and up. It is indicated for the
temporary relief of nasal and sinus congestion, coughing, sneezing, runny
nose, and watery eyes that occur from seasonal and perennial allergic
rhinitis or the common cold.
|
Market Opportunity. See
“Market Opportunity” in the discussion of our ALDEX product line
above.
Other Treatments. Other
treatment options available are Tiber Laboratories, LLC’s Histex PD 12 ®, Pamlab
LLC’s Palgic ®, McNeil-PPC, Inc’s Zyrtec ® and WraSer Pharmaceuticals’ Vazol-D
®.
Differentiators. In addition
to its indication, BROVEX has the following benefits and differentiating
factors:
·
|
The
API brompheniramine maleate is in the least sedating class of
antihistamines called alkylamines.
|
·
|
First
generation antihistamines are more effective in treating allergies than
second generation antihistamines.
|
·
|
Alkylamines
have moderate anticholinergic
effects.
|
·
|
It
has a well known API, brompheniramine maleate, which doctors feel
comfortable prescribing.
|
·
|
It
has analgesic-sparing effects on opioid analgesics, which reduce codeine
and hydrocodone requirements by 10 to
35%.
|
Intellectual Property. The
BROVEX line is covered by trademark protection, and we acquired the trademarks
in June 2009. We acquired BROVEX primarily as a defensive strategy against
a competitor attempting to market a generic version of our Z-COF line, which we
believe violated our intellectual property.
Z-COF Line.
Currently, the only product that we promote in our Z-COF line is Z-COF
8DM. Z-COF 8DM is a prescription alcohol-free
antitussive/decongestant/expectorant suspension indicated for the treatment of
nasal congestion, chest congestion and cough that can lead to sinusitis. We
launched Z-COF 8DM in 2008 to replace Z-COF 12DM, which we discontinued at the
end of 2007. Each 5mL dose contains the API dextromethorphan hydrobromide,
pseudoephedrine HCl and guaifenesin. Dextromethorphan is an antitussive agent,
which unlike the isomeric levorphanol has no analgesic or addictive properties.
The drug acts as centrally and elevates the threshold for coughing. It is
approximately equal to codeine in depressing the cough reflex. In therapeutic
dosage dextromethorphan does not inhibit ciliary activity. Dextromethorphan is
rapidly absorbed from the gastrointestinal tract, metabolized by the liver and
excreted primarily in the urine. Pseudoephedrine, a decongestant, is discussed
in more detail in the PEDIATEX TD section of this document. This decongestant
also increases sinus drainage and secretions. Guaifenesin is an expectorant,
which increases the output of phlegm and bronchial secretions by reducing
adhesiveness and surface tension. The increased flow of less viscid secretions
promotes ciliary actions and changes a dry, unproductive cough to one that is
more productive and less frequent.
Z-COF 8DM
is indicated for the temporary relief of nasal congestion and dry non-productive
cough associated with the common cold and other respiratory allergies. Gross
sales of Z-COF 12DM were approximately $7.0 million in 2007, or
approximately 36% of our gross sales for the period. Our gross sales of
Z-COF 12DM were approximately $0.7 million in 2008, or approximately
3% of our gross sales. Our gross sales of Z-COF 8DM were approximately
$6.7 million in 2008 and $7.8 million in 2009, representing
approximately 26% and 20% of our gross sales for those periods respectively. We
intend to discontinue marketing Z-COF 8 DM and launch a new Z-COF product
currently in our product candidate pipeline during 2010.
Market Opportunity. See
“Market Opportunity” in the discussion of our ALDEX product line
above.
Other treatments. Similar
treatments to Z COF 8DM include OTC treatments, such as Johnson and Johnson’s
Sudafed®, Wyeth’s Robitussin® DAC and Robitussin® AC and Reckitt Benckiser Group
plc’s Mucinex®. Additionally, Z COF 8DM’s prescription competitors include
Centrix Pharmaceutical Inc.’s Tenar® DM, Laser Pharmaceuticals, LLC’s
Donatussin® DM and Lorens Pharmaceutical International Division Inc.’s Tusnel®
DM.
Differentiators. Z-COF 8DM
suspension is indicated for the temporary relief of nasal congestion and dry
non-productive cough associated with the common cold and other respiratory
allergies. It also helps drainage of the bronchial tubes by thinning mucous. In
addition to its indication, Z-COF 8DM has several differentiating
factors:
·
|
It
utilizes Kiel’s patented drug release delivery
technology.
|
·
|
It
has twice the guaifenesin of many competitive
products.
|
·
|
Dextromethorphan,
an effective antitussive, is not a controlled substance like codeine or
hydrocodone.
|
·
|
It
can be taken during the day and a narcotic cough suppressant can be taken
at night, helping the patient rest.
|
·
|
It
does not contain an antihistamine. If the patient is on a daily
maintenance antihistamine like Schering-Plough HealthCare Products Inc’s
Clarinex® or McNeil-PPC, Inc.’s Zyrtec®, the doctor can add Z-COF 8DM to
treat new symptoms of nasal and chest congestion accompanied with a cough
without interrupting allergy
therapy.
|
·
|
It
is sugar and alcohol free.
|
Intellectual Property. The
Z-COF line incorporates Kiel’s patent protected drug delivery technology. The
patents have claims for preparing control delivery technology; one is for liquid
and semi-solid dosage forms and the other for tablet, capsule, and solid dosage
forms. Please see the “Patents” section of this Item 1 for a more detailed
description of the patents associated with the Z-COF line of products. See the
“License and other Agreements” section of this Item 1 for a description of our
rights to Kiel’s intellectual property.
REZYST Line.
Currently the only product that we promote in our REZYST line is REZYST
IM. REZYST IM is a prescription probiotic chewable tablet formulated to replace
active bacterial cultures that are destroyed by diet and antibiotics. Each 150
mg tablet contains the API lactobacillus acidophilus and bifidobacterium,
bacteria with probiotic characteristics. The Food and Agriculture Organization
(FAO) and the World Health Organization (WHO) define probiotics as “live
microorganisms which when administered in adequate amounts, confer a beneficial
health effect on the host.” Generally speaking, probiotics refers to dietary
supplements or foods that contain beneficial bacteria similar to those normally
in the body. REZYST IM current suggested dosage is 1 tablet per day. We launched
REZYST IM in February 2009. Gross sales of REZYST IM were less than 1% of
gross sales in 2009.
Market Opportunity. We
believe the U.S. probiotic industry is approximately $1 billion annually.
Probiotics are most often ingested by mouth and can be obtained from foods or
supplements.
In addition to supplements, probiotics can be found in some foods such as
yogurt. We believe there is a growing public and scientific interest in
probiotics. We believe these microorganisms may provide some of the same health
benefits that the bacteria already existing in the body do such as assisting
with digestion and helping protect against harmful bacteria. We believe
probiotics may help treat diarrhea and other gastrointestinal problems,
particularly resulting as a side effect of certain antibiotics, and may improve
general health.
There are
several other reasons for an increase in interest of probiotics,
including:
·
|
recognition
that antibiotic therapy has not been successful to the extent one might
have expected. Although it has no doubt solved some medical problems, it
has also created some new ones;
|
·
|
an
increasing awareness of the fact that antibiotic treatment deranges the
protective flora, and thereby predisposes them to the alteration of
infections; and
|
·
|
an
increasing fear of antibiotic-resistant microbial strains, as a result of
widespread over-prescription and misuse of
antibiotics.
|
Other treatments. Other
treatment options include Becton, Dickinson, and Company’s Lactinex®, Amerifit
Brands Inc.’s Culturelle®, Ganeden Biotech Inc.’s Sustenex®, and BioGaia© AB’s
probiotic products.
Differentiators. REZYST IM
replaces healthy bacteria in the digestive tract and can reduce symptoms
associated with mild irritable bowel syndrome and various gastrointestinal
issues. In addition to its indication, REZYST IM has several benefits and
distinguishing factors:
·
|
It
promotes the growth and colonization of microflora, a microorganism in the
intestine that helps digestion, trains the immune system, prevents growth
of harmful species, regulates the development of tissue and produces
vitamins and hormones.
|
·
|
It
is administered in a proprietary
formulation.
|
·
|
It
contains 3 billion CFU, or total viable cells per
tablet.
|
Intellectual Property. We do
not own or otherwise possess rights to any intellectual property covering RESYST
IM.
QUINZYME.
QUINZYME is the first proprietary blend prescription supplement for the
management of patients with depleted ubiquinone levels. Each tablet contains 90
mg of the API ubiquinone 58b. Coenzyme Q10 (CoQ10), also known as ubiquinone, is
a fat-soluble, vitamin-like substance found in every human cell. It is involved
in key biochemical reactions that produce energy in cells. It also functions as
an antioxidant, which is important in its clinical effects. Those organs with
the highest energy requirements, such as the heart and liver, have the highest
concentrations of CoQ10. QUINZYME’s current suggested dosage is one to two 90 mg
tablets per day. We launched QUINZYME in July 2009. Gross sales of QUINZYME
were less than 1% of gross sales for 2009.
Market Opportunity. Over
30 million Americans are on statin therapy for high cholesterol. Patients
on statin therapy show a reduction in ubiquinone levels. Statin-induced
ubiquinone deficiency can be reversed and managed with supplemental ubiquinone.
We believe the U.S. statin market is approximately $3 billion annually.
Ubiquinone is thought to have many potential benefits, including an enhancement
for statins in the treatment of congestive heart failure (CHF), cardiac
arrhythmias and hypertension, and in the reduction of hypoxic injury to the
myocardium. Other claimed effects include increase of exercise tolerance,
stimulation of the immune system and counteracting of the aging process. The
antioxidant properties of CoQ10 may serve to greatly reduce oxidative damage to
tissues, which has implications on the slowing of aging and age related
degenerative diseases.
Other Treatments. Currently
there are no prescription competitors. Over-the-counter ubiquinone products
include CoQ10 branded products.
Differentiators. QUINZYME
helps reverse statin-induced ubiquinone deficiencies. In addition to its
indication, QUINZYME also has the following benefits:
·
|
It
is involved in key biochemical reactions that produce energy in
cells.
|
·
|
It
functions as an antioxidant, which is important in clinical
effects.
|
·
|
It
comes in a smooth dissolve tablet for rapid
absorption.
|
·
|
There
is no gritty or chalky texture.
|
Intellectual Property. We do
not own or otherwise possess rights to any intellectual property
covering
QUINZYME.
Product
Candidates
We
currently have eight product candidates consisting of four antitussive product
candidates, two product candidates to treat symptoms associated with dermatitis,
one product candidate in our Z-COF product line and one product candidate in our
PEDIATEX product line. We have an exclusive license from Gaine, Inc. to a patent
that covers the particular indication for the antitussive API found in our
antitussive product candidates. We intend to launch two of our antitussive
product candidates in 2010 as medical foods. We intend to file an IND and
commence a clinical trial for our other antitussive product candidates and are
in the earliest stages of that process. For a discussion of our
relationship with Gaine, see “License and Other Agreements” below.
Research
and Development
We incur
research and development costs in connection with bringing our products and
product candidates to market. For the fiscal years ended December 31, 2008
and 2009, we incurred approximately $167,000 and $712,000, respectively, in
research and development costs.
Business
Strategy
Pernix
Therapeutics is a specialty pharmaceutical company with both development and
commercial sales capabilities focused on the pediatric market. The Company
markets a portfolio of revenue generating products and is advancing a pipeline
of products targeted at large, high growth markets. Key elements of its business
strategy include:
·
|
Continuing
to recruit a results-oriented sales force with performance based incentive
packages and an open, accountable
environment;
|
·
|
Enlisting
internal and external product development partnerships to develop
prescription NDA, medical food, OTC monograph products, 510k, 505(b)2 and
branded ANDA regulatory strategies;
|
·
|
Focusing
on operational efficiency through an authorized generic partnership with
our authorized generic partner Macoven Pharmaceuticals, which is described
in the section titled “Relationship with Macoven Pharmaceuticals, LLC”
below, and by exploring alternative generic production partners;
and
|
·
|
Aggressively
pursuing targeted business development opportunities through
cost-effective acquisitions, and specialty niche products, while being
pediatric focused.
|
Our goal
is to become a leading specialty pharmaceutical company that develops and
effectively commercializes products in large and growing markets in our focus
areas. We believe our key competitive strengths to help us achieve these goals
include the following:
·
|
Platform
to expand into larger markets
|
·
|
Low
cost infrastructure
|
·
|
Effective
sales, marketing, and distribution
|
·
|
Extensive
specialty pharmaceutical management
expertise
|
Platform
to Expand into Larger Markets
In recent
years, Pernix has significantly developed its operations, infrastructure, and
execution ability. We now have in place a solid platform to expand into larger
geographic and product markets. The Company has a significant number of
expansion opportunities, and is continually reviewing multiple business
opportunities, as they are provided through our internal business development
and industry consultants. These opportunities are then evaluated based upon
Pernix’s end vision and objectives.
Low
Cost Infrastructure
Through
strategically outsourced relationships, we believe we have created a dynamic
structure and a low cost means to access high value-added resources that give us
expanded capabilities and services for a higher return on investment. By
accessing high levels of experience and knowledge from our strategic partners,
our execution ability is significantly improved, while at a lower cost than if
these resources were brought in-house.
Effective
Sales, Marketing and Distribution
In
accordance with our goal of maintaining our low cost infrastructure, we intend
to strategically focus our sales force to provide a cost effective means to
access a large volume of physicians who utilize our products, or target niche
specialty markets that require a small strategic sales force. We believe fixed
costs from our field sales personnel are significantly less per representative
than those incurred by larger more established pharmaceutical companies due to
our higher ratio of incentive based compensation. This aligns representative pay
to their territorial performance, provides upside commission potential and
attracts top sales performers.
Extensive
Specialty Pharmaceutical Management Expertise
The
Company’s leadership has extensive management expertise in specialty
pharmaceutical commercialization, including starting and growing pharmaceutical
businesses, acquisitions, business development, and sales and marketing. The
Pernix team also has experience working with many leading pharmaceutical and
health care companies including Pfizer, Sepracor, Cornerstone and
Biovail.
Relationship
with Macoven Pharmaceuticals, LLC
Macoven
Pharmaceuticals, LLC was organized in 2008 as a wholly-owned subsidiary of
Pernix for the purpose of launching generic drugs, including authorized generic
equivalents of Pernix’s branded products. An authorized generic is a
pharmaceutical product that was marketed and sold by a brand company, but is
relabeled and marketed under a generic product name with the permission of the
brand company.
In
January 2009, Pernix transferred a 40% interest in Macoven to Michael
Venters, Executive Vice President of Operations of Pernix. On July 13,
2009, Pernix distributed its remaining 60% interest in Macoven to a limited
liability company owned by the stockholders of Pernix (in proportion to their
respective ownership interests in Pernix). Macoven is currently owned 60% by the
stockholders of Pernix (in proportion to their ownership of Pernix), 20% by
Michael Venters and 20% by an officer of Macoven.
On
July 27, 2009, Pernix and Macoven entered into an agreement whereby Pernix
granted Macoven a non-exclusive license to develop, market and sell generic
products based on Pernix branded products. The initial term of the agreement is
18 months, and is automatically renewable for successive twelve month terms
unless otherwise terminated by either party. Pursuant to the terms of the
agreement, Pernix paid Macoven a one-time development fee of $1,500,000. Pernix
has the exclusive rights to 100% of the proceeds from sales of generic
equivalents of Pernix products. Additionally, Pernix is entitled to 10% of
Macoven’s proceeds from sales of generics that are not based on Pernix products
in consideration for providing certain administrative and marketing services to
Macoven. In the third quarter of 2009, Macoven launched its first Pernix based
generic product, Pyril DM, an authorized generic based on Pernix’s ALDEX DM
product. In March, 2010, Macoven launched its second
Pernix based generic product, Trip PSE, based on Pernix’s PEDIATEX TD
product. Pernix recognized gross revenue totaling approximately
$254,000 in 2009 related to sales of Pyril DM and associated administrative
fees.
Sales
and Marketing; Co-promotion Agreements
Sales
and Marketing
We have
and continue to recruit a results-oriented sales force with a high ratio of
incentive based compensation, a focus on former collegiate athletes with
competitive backgrounds and an open, accountable environment. Our sales force
consists of 32 full-time sales professionals and two regional sales
directors. Our sales force is supported by six administrative staff and six
members of senior management. The current sales force promotes our ALDEX,
PEDIATEX, Z-COF, BROVEX, REZYST and QUINZYME family of products in approximately
30 states in the U.S. Our sales force also markets three non-Pernix
products pursuant to co-promotion agreements with the owners of these products.
Our sales management team has an average of nine years of sales management
experience.
Our sales
representatives currently call on high-prescribing physicians and significant
retail pharmacies. We believe this highly specialized approach provides us with
the opportunity for greater access to this group of health care professionals.
It also increases our market coverage and frequency of visits to this target
audience.
We seek
to differentiate our products from our competitors by emphasizing the clinical
advantages and favorable side effect profiles for patients who are suffering
from respiratory diseases or allergies, various GI issues, ubiquinone
deficiencies or atopic dermatitis. Our marketing programs to support our
products include: patient co-payment assistance, health care provider education,
information to further support patient compliance and participation in national
medical conventions. In addition, we are establishing a respiratory advisory
board with varying specialties to assist in developing our corporate strategy
for both our products and product candidates.
Co-promotion
Agreements
We seek
to enter into co-promotion agreements to enhance our promotional efforts and
sales of our products. We may enter into co-promotion agreements to obtain
rights to market other parties’ products in return for certain commissions
or percentages of revenue on the sales we generate. Alternatively, we may
enter into co-promotion agreements with respect to our products that are not
aligned with our product focus or when we lack sufficient sales force
representation in a particular geographic area. As of March 9, 2010, we have
entered into three co-promotion agreements to market other parties’ products.
For fiscal year 2009, these agreements did not contribute to a material part of
our net sales but may in the future.
Customers,
Distribution, and Reimbursement
Customers
and Distribution
Our
customers consist of drug wholesalers, retail drug stores, mass merchandisers
and grocery store pharmacies in the United States. We primarily sell products
directly to drug wholesalers, which in turn distribute the products to retail
drug stores, mass merchandisers and grocery store pharmacies. Our top three
customers, which represented 82% and 83% of gross product sales in 2009 and 2008
respectively, are all drug wholesalers and are listed below:
Customer |
|
|
|
2009
|
|
|
|
2008
|
|
Cardinal
Health
|
|
|
37% |
|
|
|
36% |
|
McKesson
Corporation
|
|
|
32% |
|
|
|
33% |
|
Morris
& Dickson
|
|
|
13% |
|
|
|
14% |
|
Consistent
with industry practice, we maintain a returns policy that allows our customers
to return products within a specified period prior and subsequent to the
expiration date. Occasionally, we may also provide additional discounts to some
customers to ensure adequate distribution of our products.
We
actively market our products to authorized distributors through regular sales
calls. We have many years of experience working with various industry
distribution channels. We believe that this significantly enhances our
performance by ensuring product stocking in major channels in the geographic
areas where we do business; continually following up with accounts and
monitoring of product performance; developing successful product launch
strategies; and partnering with customers on other value-added programs. Our
active marketing effort is designed to ensure appropriate distribution of our
products so that patients’ prescriptions can be filled with our products that
health care professionals prescribe.
We rely
on DDN, a third-party logistics provider, for the distribution of our products
to drug wholesalers, retail drug stores, mass merchandisers and grocery store
pharmacies. DDN ships our products from its warehouse in Memphis, Tennessee to
our customers throughout the United States.
We
believe DDN is the largest privately held provider of outsourced services to the
life-science industry. DDN works with emerging companies seeking to launch
quickly and remain as virtual as possible, and with market leaders looking to
streamline and simplify. Their clients receive supervised operations without
spending the time and money to develop and manage them, freeing up resources for
R&D, acquisitions, and other core initiatives.
Reimbursement
In the
U.S. market, sales of pharmaceutical products depend in part on the
availability of reimbursement to the patient from third-party payors, such as
government health administration authorities, managed care organizations, or
MCOs, and private insurance plans. Most of our products are generally covered by
managed care and private insurance plans. The status or tier within each plan
varies, but coverage for our products is similar to other products within the
same class of drugs. We also participate in the Medicaid Drug Rebate Program
with the Centers for Medicare & Medicaid Services and submit
substantially all of our products for inclusion in this program. Coverage of our
products under individual state Medicaid plans varies from state to state.
Third-party payors are increasingly challenging the prices charged for
pharmaceutical products and reviewing different cost savings efforts, which
could affect the reimbursement available for our products and ultimately the net
proceeds realized from the sales of our products.
Manufacturing
We
outsource all manufacturing of our products and product candidates but we
maintain internal quality standards, regulatory compliance and a committed level
of resources to administer the operations of these outsourcing relationships. We
currently depend, and will continue to depend, on outsourcing relationships for
the supply of the active ingredients in our pharmaceutical products and product
candidates, the manufacture of the finished product and the packaging needed. We
do not own or operate any manufacturing operations for our products or product
candidates. If any of our current manufacturers become unavailable, we may be
delayed in identifying replacements and/or unable to conclude arrangements with
replacements on favorable terms. For additional information regarding our
relationships with our manufacturers, see Item 2 - “Risk Factors - Risk Related
to Third Parties” contained in this Item 2.01. We use third parties to
manufacturer all of our products and product candidates. This may increase the
risk that we will not have sufficient quantities of our products or product
candidates or such quantities at an acceptable cost, which could result in
development and commercialization of our product candidates being delayed,
prevented or impaired.
The
following table summarizes information about some of our
manufacturers.
Manufacturer
|
|
Product/Product
Candidate
|
|
Location
|
|
|
|
|
|
Denison
Pharmaceuticals
|
|
Pediatex
TD
|
|
Pawtucket,
RI
|
|
|
|
|
|
Sonar
Products
|
|
Aldex
D, Aldex DM
|
|
Carlstadt,
NJ
|
|
|
|
|
|
Avema
Pharma Solutions
|
|
ReZyst
IM
|
|
Miami,
FL
|
|
|
|
|
|
Protoform,
Inc.
|
|
QuinZyme
|
|
Westampton,
NJ
|
|
|
|
|
|
TG
United
|
|
Brovex
Line
|
|
Brooksville,
FL
|
Our
products and product candidates are manufactured using established processes in
a reduced number of steps. There are no complex chemistry designs or unusual
manufacturing equipment used in the process. We plan to continue to develop
product candidates that can be manufactured in a cost effective manner at third
party manufacturing facilities. We entered into a supply agreement with Sonar
Products on February 24, 2009. The term of the agreement is two years and
will renew for successive one-year terms unless terminated by either party with
90 days prior written notice.
In
July 2009, we entered into an agreement with Protoform pursuant to which we
deposited $300,000 with Protoform relating to the renovation of a manufacturing
facility. In consideration of this deposit, Pernix will receive certain
discounts and credits on Pernix branded products manufactured by Protoform.
Additionally, Protoform agreed to pay Pernix 10% of its gross profits for the
period beginning on the two-year anniversary of the manufacturing facility
becoming operational, and ending on July 15, 2016.
All of
our other manufacturing arrangements are not subject to long-term agreements and
generally may be terminated by either party without penalty at any
time.
Most of
our manufacturers and suppliers are subject to the FDA’s current Good
Manufacturing Practices, or cGMP, requirements, DEA regulations and other rules
and regulations stipulated by other regulatory bodies.
Intellectual
Property
Our
performance relies partly on our capacity to achieve and maintain proprietary
protection for our products and product candidates, technology and know-how, to
function without infringing on the ownership rights of others and defend against
others from infringing on our ownership rights. Most of our products face
competition from generics. Our key intellectual property is described
below.
Patents
The
following table shows the U.S. patents relating to our products. We have rights
to the intellectual property in these patents through various licensing
agreements that are described in more detail below. We do not own any
patents.
Patent
Description
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Patent
Owners
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Product(s)
/ Product
Candidate(s)
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Expiration
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Process
for preparing control delivery capsule or other solid dosage
forms
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Kiel
Laboratories
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ALDEX
AN and ALDEX CT
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September 25,
2027
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|
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Process
for preparing control delivery liquid and semi-solid dosage
forms
|
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Kiel
Laboratories
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ALDEX
D, ALDEX DM, PEDIATEX TD and Z COF 8DM
|
|
August 22,
2026
|
Companies
in our industry tend to hold or license patent portfolios that are generally
uncertain and involve complicated legal and factual issues. To maintain and
solidify our rights to our technology we must obtain effective claims and
enforce those claims once granted. The patents licensed to us may be disputed,
limited, bypassed or found to be invalid or unenforceable, which could restrain
our ability to stop competitors from marketing related products. Additionally,
the competition may separately develop similar technologies to ours and the
rights granted under issued patents may not provide us with a meaningful
competitive advantage against these competitors. Furthermore, because of the
extensive amount of time required to bring products to market, it is possible
that any related patents may expire or be close to expiring before our products
can be commercialized, thus reducing any advantage of the patents.
Trade
Secrets
In some
circumstances, we may depend on trade secrets to protect our technology. We try
to protect our own technology by entering into confidentiality agreements with
our employees, independent contractors, consultants, and advisors. We also aim
to protect the confidentiality and integrity of our technology by maintaining
physical security of our facilities and physical and electronic security of our
data systems. While we have confidence in these security measures, they may be
breached and we may not have appropriate responses to manage those
breaches.
Trademarks
We
utilize trademarks on all of our current products and believe that having
distinguishing marks is an important factor in marketing these products. We
currently own 16 trademark interests, of which 5 are trademarks registered on
the principal trademark register. These marks include BROVEX, ALDEX, Z-COF, and
PEDIATEX TD. There are two different registrations for BROVEX. One is for the
word “BROVEX” and the other registration is for the stylized BROVEX mark. In
addition to the 5 registered marks listed above, we own 10 intent-to-use
trademarks that can be registered as use-in-commerce trademarks as soon as we
can file a statement of use illustrating use of the marks in commerce. Pernix
also owns 2 intent-to-use trademark applications that are currently pending in
the U.S. Patent and Trademark Office. We expect that having distinctive marks
for any additional products that we develop will also be an important marketing
characteristic. We have not sought any foreign trademark protection for our
products or product candidates. U.S. trademark registrations generally are
for fixed, but renewable, terms.
License
and Other Agreements
Relationships with Kiel, Gaine.
We have acquired most of our products and product candidates through
license agreements with Kiel Laboratories and Gaine, Inc. For fiscal years ended
December 31, 2009 and 2008, gross sales of the products covered by our
license agreements with Kiel and Gaine accounted for approximately 84% and 92%
of our gross sales, respectively.
Gaine was
incorporated in 2007 as a holding company for certain intellectual property
rights related to pharmaceutical products. We hold a 50% ownership interest in
Gaine, with the remaining 50% owned by various employees of Kiel. Gaine’s
four-member board is comprised of two officers of Pernix and two Kiel employees.
Subject to certain limited exceptions, any action of Gaine’s board of directors
or stockholders may be taken by the approval of a majority of the votes
cast.
Term Sheet Agreement with Kiel.
On January 30, 2009, Pernix and Kiel memorialized their
then-existing oral arrangement pursuant to which Kiel granted us an exclusive
license without geographic limitation to use its patented drug delivery
technology and related intellectual property, or Kiel technology, to manufacture
and market the ALDEX CT, ALDEX D, ALDEX DM and Z-COF-8DM products. In
consideration for this license, we agreed to pay Kiel per bottle royalties on
our sales of these products. These royalty payments may be increased at Kiel’s
discretion each year throughout the term of the agreement by up to 5%. We are
required to use manufacturers approved by Kiel and are responsible for all costs
associated with manufacturing these products.
The
exclusivity of our license is conditioned upon our placement of purchase orders
for products within 90 days of the previous order’s shipment date, all of our
purchase orders providing for delivery no more than 180 days from the date of
issuance and our payment of Kiel’s invoices within 30 days of issuance. The
agreement may be terminated by either party at any time after January 30,
2011 without cause upon 30 days written notice to the other party. Once
terminated, Pernix is entitled to place two additional purchase orders, and Kiel
may not market or sell, or authorize any other party to market or sell, any of
the covered products until all of Pernix’s inventory is exhausted. The agreement
may be assigned by either party at any time.
For
fiscal years ended December 31, 2009 and 2008, gross sales of the products
covered by the term sheet with Kiel accounted for approximately 67% and 76% of
our gross sales, respectively. The patents covering the Kiel technology expire
in 2026 and 2027.
Loan Agreement and Related License
with Gaine. On September 18, 2007, Pernix and Gaine entered into a
loan agreement pursuant to which Pernix lent Gaine $475,000 in order to finance
Gaine’s purchase of a U.S. patent with an API that we expect to use in two of
our product candidates. Using the loan proceeds, Gaine entered into a patent
assignment with the original owners of the patent on September 24, 2007,
pursuant to which ownership was assigned to Gaine for aggregate consideration
equal to $500,000. Due to the fact that Gaine is a controlled entity of Pernix,
its financials are combined in the financial statements of Pernix; therefore,
this loan is eliminated in consolidation for financial statement presentation
purposes.
The loan
agreement requires repayment to be made in 24 equal monthly installments ending
December 2009. The principal balance of the loan bears interest at the rate
of 10% per annum. In connection with the loan agreement, Gaine executed a
promissory note in favor of Pernix for the full loan amount, and granted Pernix
a security interest in the patent. In the event of a failure to make a loan
payment that remains uncured for 30 days, Pernix may accelerate the remaining
balance or require Gaine to transfer ownership of the patent to Pernix. On
February 5, 2010, Pernix granted Gaine an extension on its obligation to pay the
outstanding balance on the loan until June 30, 2010, during which time no
additional interest will accrue on the loan. During this time, Pernix
agreed not to declare the loan in default or otherwise take any action to take
ownership of the patent securing Gaine’s obligations.
In
connection with the loan, Gaine granted Pernix an exclusive, royalty-free
license to use the patent and related intellectual property to develop,
manufacture and market the products identified in the loan agreement. The
license is without geographic restriction, although the patent provides
protection only in the U.S. and another party holds the patent rights outside
the U.S. Additionally, Gaine granted Pernix a right of first refusal to market
and sell any other products using the patent not covered by the license to the
extent Gaine, including its affiliates and assigns, ceases to market and sell
products using the patent and related intellectual property. The term of the
license is for the remaining life of the patent, which expires in 2018. Neither
party may assign its rights under the loan agreement without the consent of the
other party.
2006 License Agreement with Gaine.
On November 10, 2006, Pernix and Gaine entered into a license
agreement whereby Gaine granted Pernix an exclusive license to use the Kiel
technology to manufacture and market certain products, including ALDEX AN and
PEDIATEX TD. The license for ALDEX AN and PEDIATEX TD is limited to the
exclusive marketing and sales rights in Texas, Louisiana, Mississippi, Alabama,
Georgia, Florida, North Carolina, South Carolina, Tennessee, Arkansas, Kentucky,
Indiana, Illinois, Ohio, Mississippi, Wisconsin and Michigan.
Under the
terms of the license agreement, Gaine agreed to develop and formulate the
covered products at its sole expense. Pernix is required to use a manufacturer
selected by Gaine, and is responsible for the cost of manufacturing the products
subject to the license agreement. Labeling of all covered products is subject to
Gaine’s approval and must reference Kiel’s trademarks relating to the Kiel
technology. The term of the license is for 15 years, and thereafter may be
renewed annually upon mutual agreement between the parties. In the event it does
not elect to renew the agreement at the expiration of the initial term or a
renewal period, Gaine is required to make a good faith effort to negotiate a new
agreement with Pernix before licensing its rights to the Kiel technology to a
third party.
To
maintain the exclusivity of its license, Pernix is obligated to make minimum
annual purchase orders of 224,000 1 oz. bottles and 14,000 16 oz. bottles of
PEDIATEX TD and 12,500 100-count bottles of ALDEX AN. The license agreement also
requires Pernix to make royalty payments to Gaine in the amount of $1.00 and
$16.00 for each 1 oz. and 16 oz. bottle, respectively, of PEDIATEX TD and $12.00
for each 100-count bottle of ALDEX AN sold. An aggregate of $700,000, $800,000
less an early payment discount of $100,000, in prepayments made by Pernix to
Gaine at the outset of the agreement covering research and development expenses
was credited toward future royalty payments. Beginning November 10, 2009,
the third anniversary of the license agreement, Gaine is permitted to increase
Pernix’s royalty payments during each subsequent 12-month period by up to 3%. To
date, Gaine has not increased these payments.
For
fiscal years ended December 31, 2009 and 2008, gross sales of the products
covered by the November 2006 license agreement with Gaine accounted for
approximately 17% and 16% of our gross sales, respectively. The patents covering
the Kiel technology expire in 2026 and 2027, respectively.
Gaine-Kiel License and Development
Agreements. Gaine acquired its rights to the products subject to the
November 2006 license agreement with Pernix described above pursuant to a
development agreement and license agreement it entered into with Kiel, the owner
of the Kiel technology, in October 2006. Pursuant to these agreements, Kiel
agreed to develop certain products using the Kiel technology, including ALDEX AN
and PEDIATEX TD, and granted Gaine an exclusive, worldwide license to
manufacture and market these products at Gaine’s expense.
Kiel also
granted Gaine an exclusive license to manufacture and market versions of ALDEX
D, ALDEX DM, ALDEX CT and Z-COF-8DM using the Kiel technology to the extent
Pernix requires that any of these products be marketed by over the counter
guidelines. The November 2006 license agreement between Pernix and Gaine
also grants Pernix an option to license, on an exclusive, worldwide basis, over
the counter versions of ALDEX CT, ALDEX DM, ALDEX D and Z-COF-8DM from Gaine to
the extent Pernix elects to change the designation of any of these products from
DESI to over the counter, at royalties to be agreed upon at the time of
election.
The term
of this license is 15 years. As consideration for the license and development of
these products, Gaine paid Kiel an aggregate fee of $800,000.
Brovex Purchase Agreement. In
June 2009, we entered into an asset purchase agreement, with DaySpring
Pharma, LLC, pursuant to which we obtained all rights to the BROVEX product
line, including related trademarks and inventory, for $450,000 in cash paid at
the closing.
CEDAX Purchase
Agreement. On January 8, 2010, Pernix entered into an asset
purchase agreement with Sciele Pharma to acquire substantially all of Sciele
Pharma's assets and rights relating to CEDAX, a prescription antibiotic used to
treat mild to moderate infections of the throat, ear and respiratory tract, for
an aggregate purchase price of $6.1 million. The closing is subject to a number
of customary closing conditions and contingencies, including obtaining all
necessary third party consents to Sciele Pharma's assignment of its rights under
certain manufacturing agreements and intellectual property licenses to Pernix.
With approximately $14.3 million of cash and cash equivalents on hand following
the consummation of the Merger with GTA, we expect to fund our acquisition of
the CEDAX assets using existing cash and cash equivalents and cash flows
provided by existing operations. The acquisition is expected to close at the end
of the first quarter of 2010.
Competition
The
pharmaceutical industry, including the pediatric market in which we primarily
participate, is defined by rapidly advancing technologies, extreme competition
and a focus on proprietary products. We face competition from numerous sources,
including other commercial pharmaceutical companies and biotechnology
organizations, academic institutions, government agencies and private and public
research institutions. Our current products compete with existing and new
therapies that may become available in the future.
Our
competition may have larger pools of financial resources and more sophisticated
expertise in research and development, manufacturing, clinical trials,
regulatory pathways and marketing approved products than we do. These
competitors are also recruiting and retaining exceptional sales and management
personnel. Usually, competition to our currently marketed products and product
candidates have distinguished brand names, are distributed by large
pharmaceutical companies with sizable amounts of resources and have achieved
widespread acknowledgement in the healthcare market. Small or early stage
companies may also prove to be serious competition, predominantly through
collaborative agreements with large and established companies. While we have
significant experience in developing and selling drugs through different
regulatory pathways, we have never developed an FDA-approved drug. With respect
to FDA-approval process, we are at a competitive disadvantage to many companies
with significantly more experience than we have in developing these
drugs.
Issues influencing the success of our products and product
candidates, if approved, are and should continue to be efficacy, safety,
convenience, price, the availability of patent protection or regulatory
marketing exclusivity, generic competition, position and availability within the
wholesale trade, and the availability of reimbursement from government and other
third-party payors.
Our
competitive position could be adversely affected if the competition develops and
commercializes products that are more effective, safer, have fewer or less
severe side effects, are more convenient or are less expensive than our
products. Our competitors may also obtain FDA or other regulatory approval
faster than we do. Additionally, our ability to compete may be diminished by
insurance companies or other third-party payors seeking to promote generic
products, which could result in branded products becoming unattractive to
consumers from a cost perspective.
The
products we currently market face substantial competition from a variety of
similarly therapeutic branded and generic products. We are potentially subject
to competition from generic versions of our branded products if a loss of
regulatory marketing exclusivity or patent protection is recognized or as a
result of regulatory pathway engineering strategies that provide for generic
product introduction before key product patent expirations. Generics typically
have lower prices than branded products and therefore may erode prescription
demand and sales of our branded products significantly.
In the
United States and other countries, federal, state, and local government
authorities comprehensively regulate the research, development, testing,
manufacture, packaging, storage, recordkeeping, labeling, advertising,
promotion, distribution, marketing, imports and exports of pharmaceutical
products that we market, sell and are developing.
FDA Regulation of Drug
Products
The FDA
regulates drugs under the Food Drug and Cosmetic Act and other implementing
regulations in the U.S. Obtaining regulatory approvals and the additional
compliance with appropriate governing bodies, statutes and regulations requires
the use of significant time and financial resources. Noncompliance with
applicable FDA requirements during the development, approval or post approval
process may subject an applicant to a range of judicial or administrative
penalties, such as the FDA’s refusal to approve pending applications, retraction
of approval, a clinical hold, warning letters, product recalls, product
seizures, suspension of production or distribution, fines, refusals of
contracts, or civil or criminal sanctions.
Before a
drug may be marketed in the U.S., the FDA requires a process that generally
involves the following:
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performance
of preclinical laboratory test, animal studies and formulation studies in
compliance with the FDA’s good laboratory practice, or GLP,
regulations;
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an
investigational new drug application, or IND, submitted to the FDA, which
must become effective before human clinical trials may
commence;
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an
independent institutional review board (IRB) approval at each clinical
site before each trial may begin;
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completion
of approved, well-controlled human clinical trials in accordance with good
clinical practices, or GCP, to establish the safety and efficacy of the
proposed drug for each indication;
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submission
of a new drug application, or NDA, to the
FDA;
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adequate
completion of an FDA advisory committee audit, if
applicable;
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adequate
completion of an FDA inspection of the manufacturing facilities at which
the product is produced to evaluate compliance with current good
manufacturing practices, or cGMP, and to assure that the facilities,
methods and controls are satisfactory to preserve the drug’s identity,
strength, quality and
purity; and
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FDA
review and approval of the NDA.
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Preclinical Studies. Product
candidates that undergo preclinical studies are subject to extensive laboratory
testing of chemistry, toxicity and formulation, and animal studies to evaluate
their potential safety and effectiveness. The preclinical test results must be
submitted by an IND sponsor, along with manufacturing documentation, analytical
data and any available clinical data and findings to the FDA as part of the IND.
Even after the IND is submitted, some preclinical testing may continue. Unless
the FDA raises concerns or questions related to proposed clinical trials and
places the clinical trials on a clinical hold, an IND automatically becomes
effective 30 days after receipt by the FDA. In this situation, the IND sponsor
and the FDA must settle any pending concerns prior to the commencement of a
clinical trial. Subsequently, presentation of an IND may not result in the
commencement of clinical trials allowed by the FDA.
Clinical Trials. In
accordance with GCP requirements, which include the requirement that all
research subjects provide their informed consent in writing for their
participation in any clinical trial, clinical trials involve the administration
of the investigational new drug to human subjects under the supervision of
qualified investigators.
Clinical
trials are performed in accordance with protocols detailing, the objectives of
the study, the criteria to be used in observing safety and the efficacy
parameters to be evaluated. The FDA must receive protocols for each clinical
trial and any successive protocol amendments as part of the IND. Additionally,
each institution participating in the clinical trial must have an IRB review and
approve the plan for any clinical trial before it commences at that
institution.
Clinical
trials performed on humans are generally conducted in three consecutive phases,
which may coincide or be combined:
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Phase 1: Healthy human
subjects or patients with the target disease or condition are tested for
safety, dosage tolerance, absorption, metabolism, distribution, excretion
and, if possible, to gain an early indication of its effectiveness, are
initially introduced to the drug.
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Phase 2: A limited
patient population is administered the drug to identify possible adverse
effects and safety risks, to preliminarily evaluate the efficacy of the
product for specific targeted diseases and to determine dosage tolerance
and optimal dosage.
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Phase 3: An expanded
patient population is administered the drug generally at geographically
unique clinical trial sites to further evaluate dosage, clinical efficacy
and safety, to establish the overall risk-benefit relationship of the
drug, and to provide adequate information for the labeling of the
drug.
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The FDA
must receive progress reports annually, detailing the results of clinical
trials, or more frequently if serious adverse events occur. Phase 1, 2, and 3
trials might not be successfully completed within a specified period of time, or
at all. Moreover, clinical trials may be suspended or terminated by the FDA or
sponsor at any time on a variety of grounds, including findings that the
research subjects are being exposed to an unacceptable level of health risk.
Similarly, approval of a clinical trial can be suspended or terminated if the
trial is not being conducted in accordance with the IRB’s requirements or if the
drug has been connected to unanticipated serious harm to patients.
Special Protocol Assessment.
The SPA process was created to assist the FDA’s review and approval of drug
products by permitting the FDA to assess the proposed design and size of
clinical trials that are intended to form the primary basis for determining a
drug product’s efficacy. If a clinical trial sponsor specifically requests, the
FDA will evaluate the protocol and respond to a sponsor’s questions regarding
primary efficacy endpoints, trial conduct and data analysis within 45 days
of receipt of the request. The FDA ultimately decides whether the protocol
design and planned analysis of the trial adequately address objectives in
support of a regulatory submission. An SPA letter or the minutes of a meeting
between the sponsor and the FDA must clearly document all agreements and
disagreements between the sponsor and FDA regarding the SPA.
The FDA
may revoke or alter its agreement, even if it agrees to the design, execution,
and analysis proposed in protocols reviewed under the SPA, under the following
circumstances:
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unrecognized
public health concerns emerge at the time of the protocol
assessment;
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protocol
that was agreed upon with the FDA has not been followed by a
sponsor;
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the
information in a request for SPA change, submitted by a sponsor, are found
to be false or contain misstatements or are found to exclude important
facts; or
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a
modification of the protocol is agreed upon by the FDA and the sponsor and
such modification is intended to improve the
study.
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Marketing Approval. If the
required clinical testing is completed successfully, the results of the
preclinical and clinical studies, coupled with detailed information concerning
the product’s chemistry, manufacture, controls and proposed labeling, among
other things, are submitted as part of an NDA to the FDA requesting approval to
market the product for one or more indications. The submission of an NDA is
subject to a substantial application fee in most cases.
Additionally,
an NDA or supplement to an NDA must contain data that is acceptable to properly
assess the safety and effectiveness of the drug for the claimed indications in
all relevant pediatric subpopulations, and to support dosing and administration
for each pediatric subpopulation for which the drug is safe and effective,
according to the Pediatric Research Equity Act of 2003, or PREA, as amended and
reauthorized by the Food and Drug Administration Amendment Act of 2007, or
FDAAA. The FDA is also authorized, under the FDAAA, to require sponsors of
currently marketed drugs to perform pediatric studies if the drug would provide
a “meaningful therapeutic benefit” for pediatric patients, the absence of
pediatric labeling could pose a risk to pediatric patients or serves a
substantial number of pediatric patients and adequate pediatric labeling could
benefit such patients. At the request of an applicant or by its own initiative,
the FDA may grant deferrals for submission of some or all pediatric data until
after approval of the drug for use in adults or full or partial waivers from the
pediatric data requirements. The pediatric data requirements do not apply to
products with orphan designation, unless otherwise required by
regulation.
60 days
after its receipt of an NDA, the FDA has to determine whether the application
will be accepted for filing based on the agency’s threshold determination that
it is adequately complete to authorize substantive review. Rather than accept an
NDA for filing, the FDA may request additional information. In such an event,
the NDA must be resubmitted with the subsequent information and is subject to
additional fees. Before the FDA accepts the resubmitted application for filing,
it is also subject to review. Once the submission is accepted for filing, the
FDA commences a detailed substantive review. For novel drug products or drug
products which present difficult questions of safety or efficacy, the FDA may
refer applications to an advisory committee for review, evaluation and a
recommendation as to whether the application should be approved and under what
conditions. The FDA considers such recommendations carefully when making
decisions but is not bound by the recommendations of the advisory
committee.
The FDA
will also examine the facility or facilities where the product is manufactured
before approving an NDA. The FDA will disapprove an application if it determines
that the manufacturing processes and facilities do not comply with cGMP
requirements and are unsatisfactory to assure consistent production within
required specifications. In addition, the FDA will typically inspect one or more
clinical sites to assure compliance with GCP before approving an
NDA.
The FDA
may issue an approval letter, or, in some cases, an approvable letter if the
FDA’s evaluation of the NDA and inspection of the manufacturing facilities are
favorable. An approvable letter typically contains a statement of specific
conditions that have to be met to achieve final approval of the NDA. When those
conditions have been met to the FDA’s satisfaction, the FDA will generally issue
an approval letter. An approval letter permits commercial marketing of the drug
with specific prescribing information for specific indications. The FDA may
require substantial post-approval testing and surveillance to monitor the drug’s
safety or efficacy as a condition of NDA approval. The FDA may also impose other
conditions, including labeling or distribution restrictions or other risk
management mechanisms, which can significantly affect the potential market and
profitability of the drug. Product approvals may be withdrawn, once granted, if
compliance with regulatory standards is not maintained or problems with the
product are identified following initial marketing.
The FDA
may refuse to approve the NDA or issue a not approvable letter, if the FDA’s
evaluation of the NDA or inspection of the manufacturing facilities is not
favorable. A not approvable letter describes the problems with the submission
and generally requires additional testing or information for the FDA to
reconsider the application. The FDA ultimately may decide that the application
does not satisfy the regulatory criteria for approval even with submission of
this additional information.
The FDA
may curb the permitted indications for use of the product even if it has given
approval. It may also require that post-approval studies, including Phase 4
clinical trials, be conducted to further assess a drug’s safety and
effectiveness after approval, require that contraindications, warnings or
precautions be included in the product labeling, or require testing and
surveillance programs to monitor the product after commercialization. Based on
the results of post-market studies or surveillance programs, the FDA may prevent
or limit further marketing of a product. Some types of changes to the approved
product, such as adding new indications, manufacturing changes, and additional
labeling claims, are subject to further FDA review and approval even after
initial approval has been delivered.
Special FDA Expedited Review and
Approval Programs. To expedite or simplify the process for the
development and FDA review of drug products that are intended for the treatment
of life threatening or other serious conditions and demonstrate the potential to
address unmet medical needs, the FDA has a variety of programs, including fast
track designations, accelerated approval and priority review. The purpose of
these expedited review and approval programs is to provide important new drugs
to patients faster than the standard FDA review procedures.
In order
to be qualified for a fast track designation, the FDA must establish, whether a
drug product designed to treat a life threatening or serious condition will have
an effect on factors such as day-to-day functioning or survival or it is likely
that the disease, if untreated, will progress from a less severe condition to
one more serious. The drug product must also satisfy an unmet medical need,
which is defined by the FDA as providing a therapy where none exists or
providing a therapy that may be potentially superior to existing therapies based
on efficacy or safety factors.
Additionally,
for drugs that offer significant advances in treatment, or provide a treatment
where no adequate therapy exists, the FDA may grant a priority review
designation. A priority review decreases the targeted time for the FDA to review
a new drug application from ten months to six months. Most drugs that are
expected to be considered appropriate to receive a priority review are also
eligible for fast track designation.
The FDA
may later decide that the drug no longer meets the conditions for qualification
or decide that the time period for FDA review or approval will not be shortened
even if a drug product qualifies for one or more of these programs.
Post-approval Requirements.
Drug products manufactured or distributed in pursuit of FDA approvals are
controlled by extensive and ongoing FDA regulation, including the reporting of
adverse experiences with the product, advertising and promotion, product
sampling and distribution, periodic reporting and requirements relating to
recordkeeping. There also are pervasive DEA regulations applicable to marketed
controlled substances.
Additionally,
drug manufacturers and other organizations involved in the distribution and
manufacture of approved drugs are required to register their organizations with
the FDA and state agencies, and are subject to periodic unannounced inspections
by the FDA and state agencies for compliance with cGMP requirements. Changes to
the manufacturing process are strictly regulated and generally require prior FDA
approval before implementation. Any deviations from cGMP require investigation
and correction under FDA regulations and impose reporting and documentation
requirements upon us and any third party manufacturers that we may decide to
use. Accordingly, manufacturers must continue to spend time, money, and effort
in the area of quality control and production to maintain cGMP
compliance.
The FDA
may withdraw an approval, once granted, if compliance with regulatory
requirements and standards is not maintained or if problems arise after the
product reaches the market. Previously unidentified problems with a product,
that are discovered later, including manufacturing processes, or adverse events
of unanticipated severity or frequency, or failure to comply with regulatory
requirements, may result in, among other things:
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product
recalls, complete withdrawal of the product from the market or
restrictions on the marketing or manufacturing of the
product;
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warning
letters, fines or holds on post-approval clinical
trials;
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suspension
or revocation of product license approvals, or refusal of the FDA to
approve pending applications or supplements to approved
applications;
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·
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refusal
to permit the import, or export of products or product seizure or
detention; or
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civil
or criminal penalties or
injunctions.
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Products
placed on the market are subject to strict advertising, labeling, marketing, and
promotion regulations by the FDA. Drugs may be promoted only for the approved
indications and in accordance with the provisions of the approved label. An
organization that is found to have improperly promoted off label uses may be
subject to significant liability by the FDA and other agencies that actively
enforce laws and regulations prohibiting the promotion of off label uses. The
Federal Trade Commission regulates advertising for over-the-counter drug
products. Advertising for these products must be truthful, not misleading and
adequately substantiated.
The
Prescription Drug Marketing Act, or PDMA, regulates the distribution of drugs
and drug samples at the federal level and sets minimum standards for the
registration and regulation of drug distributors by the states. The distribution
of prescription drug products is also regulated by the PDMA. Both the PDMA and
state laws limit the distribution of prescription pharmaceutical samples and
enforce requirements to ensure accountability in distribution.
Many of
the powers bestowed on the FDA by the new FDAAA legislation are aimed at
improving drug safety and assuring the safety of drug products after approval.
Under the FDAAA, the FDA is authorized to impose new distribution and use
restrictions, mandate changes to drug labeling to reflect new safety information
and require post-approval studies and clinical trials. The new requirements and
other changes that the FDAAA imposes may make it more difficult, and likely more
costly, to obtain approval of new pharmaceutical products and to produce,
distribute and market and existing products. In addition, FDA regulations,
policies and guidance are often revised or reinterpreted by the agency or the
courts in ways that may considerably affect our business and our products. It is
impossible to predict whether legislative changes will be enacted, or FDA
regulations, guidance or interpretations changed, or what the impact of such
changes, if any, may be.
Prescription Drug
Wrap-Up
The FDCA,
enacted in 1938, was the first statute requiring premarket approval of drugs by
the FDA. These approvals, however, focused exclusively on safety data. In 1962,
Congress amended the FDCA to require that sponsors demonstrate that new drugs
are effective, as well as safe, in order to receive FDA approval. These
amendments also required the FDA to conduct a retrospective evaluation of the
effectiveness of the drug products that the FDA approved between 1938 and 1962
on the basis of safety alone. The agency contracted with the National Academy of
Science/National Research Council, or the NAS/NRC, to make an initial evaluation
of the effectiveness of many drug products. The FDA’s administrative
implementation of the NAS/NRC reports was the Drug Efficacy Study
Implementation, or DESI.
Drugs
that were not subject to applications approved between 1938 and 1962 were not
subject to DESI review. For a period of time, the FDA permitted these drugs to
remain on the market without approval. In 1984, however, spurred by serious
adverse reactions to one of these products, Congress urged the FDA to expand the
new drug requirements to include all marketed unapproved prescription drugs. The
FDA created a program, known as the Prescription Drug Wrap-Up, to address these
remaining unapproved drugs. Most of these drugs contain active pharmaceutical
ingredients that were first marketed prior to the enactment of the FDCA in 1938.
Pernix believes that several of its marketed pharmaceutical products fall within
this category. For additional information, see “Risks Related to Regulatory
Matters- Some of Pernix’s specialty pharmaceutical products are now being
marketed without FDA approvals.”
As to
drugs marketed over the counter, the FDA exempts through regulation products
that have been determined to be generally recognized as safe and effective and
have been used to a material extent and for a material time. Two of our
products, PEDIATEX TD and ALDEX AN, follow over the counter
guidelines.
Abbreviated New Drug
Applications. Through the NDA approval process, applicants are obligated
to list with the FDA each patent with claims that cover the applicant’s product
or an approved use of the product. When the drug has been approved, each of the
patents listed in the application for the drug is then published in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known
as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by
Potential competitors can then cite drugs listed in the Orange Book in pursuit
of approval of an Abbreviated New Drug Application, or ANDA. An ANDA provides
for marketing of a drug product that has the same active pharmaceutical
ingredients in the same strengths and dosage form as the listed drug and has
been shown through bioequivalence testing to be therapeutically equivalent to
the listed drug. ANDA applicants are not required to conduct or submit results
of pre-clinical or clinical tests to prove the safety or efficacy of their drug
product, other than the requirement for bioequivalence testing. ANDA approved
drugs are commonly referred to as “generic equivalents” to the listed drug, and
can be replaced by pharmacists under prescriptions written for the original
listed drug.
The ANDA
applicant is required to certify to the FDA concerning each patent listed for
the approved product in the FDA’s Orange Book. Specifically, the applicant must
certify that:
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the
required patent information has not been
filed;
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the
listed patent has expired;
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the
listed patent will expire on a particular date, but has not expired and
approval is sought after patent
expiration; or
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the
listed patent is unenforceable, invalid or will not be infringed by the
manufacture, sale or use of the new
product.
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A
Paragraph IV certification demonstrates that the new product will not infringe
the already approved product’s listed patents or that such patents are invalid
or unenforceable. The ANDA application will not be approved until all the listed
patents claiming the referenced product have expired and if the applicant does
not challenge the listed patents. ANDA approval will not be delayed if there are
no listed patents or all patents have expired.
If a
Paragraph IV certification has been provided to the FDA by the ANDA applicant,
the NDA and patent holders must also receive notice from the applicant of the
Paragraph IV certification. The applicant must also send notice of the
Paragraph IV certification to the NDA and patent holders with a
comprehensive account of the factual and legal basis for the applicant’s belief
that the patents are invalid, unenforceable or not infringed once the ANDA has
been accepted for filing by the FDA. The NDA and patent holders may then
initiate a patent infringement lawsuit in response to the notice of the
Paragraph IV certification. The filing of a patent infringement lawsuit
within 45 days of the receipt of a Paragraph IV notice automatically
prevents the FDA from approving the ANDA until the earlier of 30 months
from the date of the NDA or receipt of notice by the patent holder, expiration
of the patent or a decision or settlement in the infringement case finding the
patent to be invalid, unenforceable or not infringed. Hatch-Waxman explicitly
encourages generic challenges to listed patents by providing for a 180 day
period of generic product exclusivity for the first generic applicant to
challenge a listed patent for an NDA-approved drug. Thus, many if not most
successful new drug products are subject to generic applications and patent
challenges prior to the expiration of all listed patents.
Section 505(b)(2) New Drug
Applications. Pursuant to an NDA or an ANDA, most drug products obtain
FDA marketing approval. A third alternative is a unique type of NDA, commonly
referred to as a Section 505(b)(2) NDA, which enables the applicant to
rely, in part, in support of its application, on the FDA’s findings of safety
and efficacy of an approved product, or published literature.
For
improved or new formulations or new uses of formerly approved products,
Section 505(b)(2) NDAs often present an alternate path to FDA approval.
Section 505(b)(2) allows the submission of an NDA where at least some of
the information required for approval comes from studies not conducted for or by
the applicant and for which the applicant has not obtained a right of reference.
With respect to particular preclinical studies or clinical trials conducted for
an approved product, the applicant may rely upon the FDA’s findings. The FDA
might also require applicants to perform supplemental studies or measurements to
support the change from the approved product. The FDA may then approve the new
product candidate for some or all of the label indications for which the
referenced product has been approved, as well as for any new indication sought
by the Section 505(b)(2) applicant.
To the
extent that the Section 505(b)(2) applicant is relying on studies conducted
for an already approved product, the applicant is subject to existing
exclusivity for the reference product and is required to certify to the FDA
concerning any patents listed for the approved product in the Orange Book to the
same extent that an ANDA applicant would. Therefore, authorization of a
Section 505(b)(2) NDA can be delayed until all the listed patents claiming
the referenced product have expired, until any non-patent exclusivity, such as
exclusivity for obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired, and, in the case of a
Paragraph IV certification and subsequent patent infringement suit, until
the earlier of 30 months or a decision or settlement in the infringement
case finding the patents to be unenforceable, invalid or not
infringed.
Some
pharmaceutical companies and others have opposed the FDA’s interpretation of
Section 505(b)(2), despite the approval of numerous products by the FDA
pursuant to Section 505(b)(2) over the last several years. A change in
interpretation by the FDA of Section 505(b)(2), could prevent or delay the
approval of any Section 505(b)(2) NDA that we submit.
In the
NDA submissions for our product candidates, we intend to follow the development
and approval pathway permitted under the FDCA that we believe will maximize the
commercial opportunities for these product candidates.
Marketing Exclusivity and Patent
Term Restoration. Newly-approved drugs and indications may benefit from a
statutory period of non-patent marketing exclusivity under the Hatch-Waxman Act.
The Hatch-Waxman Act grants five-year marketing exclusivity to the first
applicant to achieve approval of an NDA for a new chemical entity, or NCE,
meaning that the FDA has not previously approved any other drug containing the
same active pharmaceutical ingredient. The Hatch-Waxman Act prohibits the
submission of a Section 505(b)(2) NDA or an ANDA for another version of
such drug during the exclusivity period. But, submission of a
Section 505(b)(2) NDA or an ANDA containing a Paragraph IV
certification is allowed after four years, which may activate a 30-month stay of
approval of the Section 505(b)(2) NDA or ANDA. Even though protection under
the Hatch-Waxman Act will not block the submission or approval of another “full”
NDA, the applicant would have to conduct its own preclinical and sufficient and
well-controlled clinical trials to demonstrate safety and efficacy. The
Hatch-Waxman Act also provides three years of marketing exclusivity for the
approval of new and supplemental NDAs, including Section 505(b)(2) NDAs,
for, among other things, strengths of an existing drug, routes of
administration, dosage forms, or new indications, or for a new use, if new
clinical investigations that were performed or sponsored by the applicant are
determined by the FDA to be essential to the approval of the
application.
Pediatric Exclusivity.
Pediatric exclusivity is another type of non-patent marketing exclusivity in the
U.S. It provides an additional six months of marketing security to the term of
any existing regulatory exclusivity or listed patent term, if granted. This
six-month exclusivity may be approved based on the voluntary completion of a
pediatric study in accordance with an FDA-issued “Written Request” for such a
study. We plan to work with the FDA to establish the need for pediatric studies
for our product candidates, and may consider attempting to obtain pediatric
exclusivity for some of our product candidates.
New
medical devices are also subject to FDA approval and extensive regulation under
the FDCA. Under the FDCA, medical devices are classified into one of three
classes: Class I, Class II or Class III. The classification of a
device into one of these three classes generally depends on the degree of risk
associated with the medical device and the extent of control needed to ensure
safety and effectiveness.
Class I
devices are those for which safety and effectiveness can be assured by adherence
to a set of general controls. These general controls include:
(i) compliance with the applicable portions of the FDA’s Quality System
Regulation, which sets forth good manufacturing practice requirements;
(ii) facility registration and product reporting of adverse medical events
listing; (iii) truthful and non-misleading labeling; and
(iv) promotion of the device only for its cleared or approved intended
uses. Class II devices are also subject to these general controls, and any
other special controls as deemed necessary by the FDA to ensure the safety and
effectiveness of the device. Review and clearance by the FDA for these devices
is typically accomplished through the so-called 510(k) pre-market notification
procedure. When 510(k) clearance is sought, a sponsor must submit a pre-market
notification demonstrating that the proposed device is substantially equivalent
to a previously approved device. If the FDA agrees that the proposed device is
substantially equivalent to the predicate device, then 510(k) clearance to
market will be granted. After a device receives 510(k) clearance, any
modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
clearance or could require pre-market approval.
Both
before and after a medical device is commercially distributed, manufacturers and
marketers of the device have ongoing responsibilities under FDA regulations. The
FDA reviews design and manufacturing practices, labeling and record keeping, and
manufacturers’ required reports of adverse experiences and other information to
identify potential problems with marketed medical devices. Device manufacturers
are subject to periodic and unannounced inspection by the FDA for compliance
with the Quality System Regulation, current good manufacturing practice
requirements that govern the methods used in, and the facilities and controls
used for, the design, manufacture, packaging, servicing, labeling, storage,
installation and distribution of all finished medical devices intended for human
use.
If the
FDA finds that a manufacturer has failed to comply or that a medical device is
ineffective or poses an unreasonable health risk, it can institute or seek a
wide variety of enforcement actions and remedies, ranging from a public warning
letter to more severe actions such as: (i) fines, injunctions, and civil
penalties; (ii) recall or seizure of products; (iii) operating
restrictions, partial suspension or total shutdown of production;
(iv) refusing requests for 510(k) clearance or approval of new products;
(v) refusing requests for 510(k) clearance or approval of new products;
(vi) withdrawing 510(k) clearance or approvals already granted; and
(vii) criminal prosecution. The FDA also has the authority to require
repair, replacement or refund of the cost of any medical device.
The FDA
also administers certain controls over the export of medical devices from the
United States, as international sales of medical devices that have not received
FDA approval are subject to FDA export requirements. Additionally, each foreign
country subjects such medical devices to its own regulatory requirements. In the
European Union, a single regulatory approval process has been created, and
approval is represented by the CE Mark.
We
launched our first medical food products, REZYST IM and QUINZYME, in 2009.
Medical foods are specially formulated and intended for the dietary management
of a disease that has distinctive nutritional needs that cannot be met by normal
diet alone. They were defined in the Food and Drug Administration’s 1988 Orphan
Drug Act Amendments and are subject to the general food and safety labeling
requirements of the Federal Food, Drug, and Cosmetic Act.
Medical
foods are distinct from the broader category of foods for special dietary use
and from traditional foods that bear a health claim. In order to be considered a
medical food the product must, at a minimum:
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be
a food for oral ingestion or tube feeding (nasogastric
tube);
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be
labeled for the dietary management of a specific medical disorder, disease
or condition for which there are distinctive nutritional requirements;
and
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be
intended to be used under medical supervision. Medical foods require a
prescription from a physician.
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Regulation of
Controlled Substances
We sell
products that are “controlled substances” as defined in the Controlled
Substances Act of 1970, or CSA, which institutes registration, security,
recordkeeping, reporting, labeling, packaging, storage, distribution and other
requirements administered by the DEA. The DEA is concerned with the control of
handlers of controlled substances, and with the equipment and raw materials used
in their manufacture and packaging, in order to prevent loss and diversion into
illicit channels of commerce.
The DEA
regulates controlled substances as Schedule I, II, III, IV or V
substances. Schedule I substances by definition have no established
medicinal purpose, and may not be sold or marketed in the United States. A
pharmaceutical product may be listed as Schedule II, III, IV
or V, with Schedule II substances considered to present the highest
relative risk of abuse and Schedule V substances the lowest relative risk
of abuse.
Any
facility that manufactures, distributes, dispenses, imports or exports any
controlled substance is required to register annually with the DEA. The
registration is specific to the particular location, activity and controlled
substance schedule. A separate registration is needed for import and
manufacturing, and each registration will indicate which schedules of controlled
substances are authorized.
Prior to
issuing a registration, the DEA generally inspects a facility to evaluate its
security measures. Security requirements vary by controlled substance schedule,
with the most stringent requirements applying to Schedule I and
Schedule II substances. Required security measures include background
checks on employees and physical control of inventory through measures such as
surveillance cameras, cages, and inventory reconciliations. Records must be
maintained for the handling of all controlled substances, and periodic reports
issued to the DEA, including distribution reports for Schedule I
and II controlled substances, Schedule III substances that are
narcotics and other designated substances. Reports must also be made to obtain
approval to destroy any controlled substances, and for thefts or losses of any
controlled substance. Additionally, particular authorization and notification
requirements apply to imports and exports.
Registered
establishments that handle controlled substances must go through periodic
inspections by the DEA to meet specific DEA responsibilities. Failure to comply
with applicable requirements, particularly as manifested in loss or diversion,
can result in enforcement action that could have a significant negative effect
on our business, results of operations and financial performance. The DEA may
pursue civil penalties, refuse to renew necessary registrations, or initiate
proceedings to revoke those registrations. In certain circumstances, violations
could result in criminal proceedings.
Individual
states also regulate controlled substances, and we and our contract
manufacturers will be subject to state regulation concerning distribution of
these products.
Foreign
Regulation
Product
approval by comparable regulatory authorities may be required in foreign
countries prior to marketing the product in those countries, whether or not FDA
approval has been achieved. The approval procedure differs among countries and
can involve requirements for additional testing. The time necessary for approval
may vary from that required for the FDA. In general, each country has its own
procedures and requirements, many of which are time consuming and expensive.
Although there are some procedures for unified filings in some European
countries, such as the sponsorship of the country which first grants marketing
approval. Thus, there can be significant delays in obtaining mandatory approvals
from foreign regulatory authorities after the appropriate applications are
filed. We currently do not market any of our products outside of the United
States.
Hazardous
Materials
We depend
on third parties to support us in manufacturing and developing all of our
products and do not directly handle, store or transport hazardous materials or
waste products. We depend on these third parties to abide by all applicable
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous materials and waste products. We do
not anticipate the cost of complying with these laws and regulations to be
material.
Pharmaceutical
Pricing and Reimbursement
Our
ability to commercialize our products effectively depends substantially on the
availability of sufficient coverage and reimbursement from third-party payors,
including governmental bodies such as the Medicare and Medicaid programs, MCOs
and private insurers. Third-party payors are more frequently contesting the
prices charged for treatments and examining their cost effectiveness, in
addition to their efficacy and safety. We may need to conduct expensive
pharmacoeconomic studies in order to illustrate the cost effectiveness of our
products, in addition to the costs required to obtain FDA approvals. Even with
these studies, our products may be considered less effective, less safe or less
cost-effective than existing products, and third-party payors may decide not to
provide coverage and reimbursement for our products, in whole or in part. The
resulting payment rates may not be sufficient for us to sell our products at a
profit even if third-party payors approve coverage and
reimbursement.
Economic,
political and regulatory influences are subjecting the health care industry to
fundamental changes. We expect there will continue to be legislative and
regulatory proposals to change the health care system in ways that could
substantially affect our business.
We expect
that federal and state governments and the private sector will continue to
evaluate and may adopt health care policies intended to limit rising health care
costs. These cost containment measures could include:
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regulations
on government backed reimbursement for
drugs;
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regulations
on payments to health care providers that affect demand for drug
products;
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objections
to the pricing of drugs or limits or prohibitions on reimbursement for
specific products through other
means;
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waning
of restrictions on imports of
drugs; and
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increase
of managed care systems in which health care providers commit to provide
comprehensive health care for a fixed cost per
person.
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Within
the Medicare Part D prescription drug benefit, which took effect in
January 2006, Medicare participants can obtain prescription drug coverage
from private plans that are allowed to limit the number of prescription drugs
that are covered on their formularies in each therapeutic category and class. In
this program, our products may be disqualified from formularies and may be
subject to substantial price pressures that reduce the prices we are able to
charge.
Outpatient
pharmaceuticals sold to state managed Medicaid programs are subject to the
national Medicaid Drug Rebate Program. To have their drugs included under state
Medicaid programs, pharmaceutical companies must enter into an agreement in
which they agree to pay a rebate to the states that is decided on the basis of a
specified percentage of the “average manufacturer price” or the difference
between the average manufacturer price and the “best price.” Pharmaceutical
companies must also take part in a similar agreement with the
U.S. Department of Veterans Affairs to have their drugs covered by state
Medicaid programs, and some states may enforce additional rebate agreements. We
participate in these types of pricing agreements with respect to our currently
marketed products.
Foreign
countries that have price controls in place on pharmaceutical products may
generate lower-priced product competition. Proposed federal legislation may
increase consumers’ ability to import lower-priced versions of competing
products from Canada and elsewhere. In August 2007, the U.S. Congress
passed legislation that would permit increased levels of imports of prescription
drugs, but the U.S. Senate has yet to approve it. If this proposal or similar
proposals become law, our products may be susceptible to an increase in price
competition from lower priced imported drugs. Additionally, several local and
state governments have applied importation schemes for their citizens, and,
absent any federal action to restrict such activities, we anticipate other
states and local governments will launch importation programs. The importation
of foreign products that compete with ours could adversely impact our
business.
We are
unable to foresee what future legislation, regulations or policies, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted or what effect such legislation, regulations or policies would
have on our business. Any cost containment initiatives, including those listed
above, or other health care system reforms that are adopted could hinder our
ability to price our products above our costs, limit our ability to generate
revenue from government-funded or private third-party payors, curb the potential
revenue and profitability of our customers, suppliers and partners and impede
our access to capital needed to operate and grow. Any of these circumstances
could considerably limit our capacity to operate profitably.
Effects
of Proposed Legislation on the Pharmaceutical Industry
In 2009,
President Barack Obama began a push for comprehensive health care reform in the
U.S. This program’s central platform is to provide uninsured Americans with
access to health insurance while allowing insured Americans to keep their
existing coverage. The program would require most uninsured Americans to buy
coverage. This could be beneficial for us, as new customers could increase
prescription drug sales. However, some related proposals could have negative
effects on our business. One, being considered by the Senate, would have drug
companies partially refund the government for certain medications provided under
Medicare. Another is a push to rely on comparative-effectiveness research to
single out the best treatments for patients. Critics call CER intrusive, saying
it puts the government between doctor and patient. It could also hinder the drug
market, in which we participate, by favoring certain medications over others.
How health care reform, should it pass, will affect pharmaceutical companies
like ours is difficult to predict with so much still undecided.
Fraud
and Abuse Regulation
A number
of federal and state laws and regulations, loosely referred to as fraud and
abuse laws, are used to prosecute health care providers, suppliers, physicians
and others that fraudulently or wrongfully obtain reimbursement for health care
products or services from government programs, such as Medicare and Medicaid.
These laws may constrain our business and the financial arrangements through
which we market, sell and distribute our products. These laws and regulations
include:
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Federal Anti-Kickback
Law. The anti-kickback law contained in the federal Social Security
Act is a criminal statute that makes it a felony for individuals or
entities knowingly and intentionally to offer or pay, or to solicit or
receive, direct or indirect remuneration, in order to encourage the
purchase, order, lease, or recommending of items or services, or the
referral of patients for services, that are reimbursed under a federal
health care program, including Medicare and Medicaid. The term
“remuneration” has been interpreted broadly and includes both direct and
indirect compensation and other items and services of value. Both the
party offering and paying remuneration and the recipient may be found to
have violated the statute. Courts have interpreted the anti-kickback law
to cover any situation where one purpose of the remuneration is to
encourage purchases or referrals, despite if there are also legitimate
purposes for the arrangement. There are narrow exemptions and regulatory
safe harbors, but many legitimate transactions fall outside of the scope
of any exemption or safe harbor, although that does not necessarily mean
the arrangement will be subject to penalties under the anti-kickback
statute. Penalties for federal anti-kickback violations are severe,
including up to five years imprisonment, individual and corporate criminal
fines, exclusion from participation in federal health care programs and
civil monetary penalties in the form of treble damages plus $50,000 for
each violation of the statute.
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State Laws. Various
states have enacted laws and regulations comparable to the federal fraud
and abuse laws and regulations. These state laws and regulations may apply
to items or services reimbursed by any third-party payor, including
private, commercial insurers and other payors. Moreover, these laws and
regulations vary significantly from state to state and, in some cases, are
broader than the federal laws and regulations. These differences increase
the costs of compliance and the risk that the same arrangements may be
subject to different compliance standards in different
states.
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Employees
As of
March 9, 2010, we had 46 full-time employees. Within this group of employees,
there are 32 sales representatives, two sales managers, six members of senior
management, and six administrative staff personnel. None of our employees are
represented by a labor union or are bound by a collective bargaining agreement.
We believe our relationships with our employees is good.
If any of
the following risks actually occur, our results of operations, cash flows and
the value of our shares
could be
negatively impacted. Although we believe that we have identified and discussed
below the key risk factors affecting our business, there may be additional risks
and uncertainties that are not presently known that may adversely affect our
performance or financial condition.
Risks Related to
Commercialization
The commercial
success of our currently marketed products and any additional products that we
successfully commercialize will depend upon the degree of market acceptance by
physicians, patients, healthcare payors and others in the medical
community.
Any
products that we bring to the market may not gain market acceptance by
physicians, patients, healthcare 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 profitable. The degree of market
acceptance of our products depends on a number of factors,
including:
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the
prevalence and severity of any side
effect;
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the
efficacy and potential advantages over the alternative
treatments;
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the
ability to offer our products for sale at competitive prices, including in
relation to any generic products;
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relative
convenience and ease of
administration;
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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
strength of marketing and distribution support;
and
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sufficient
third party coverage or
reimbursement.
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We
face competition, which may result in others discovering, developing or
commercializing products before or more successfully than us.
The
development and commercialization of drugs is highly competitive. We face
competition with respect to our currently marketed products and any products
that we may seek to develop or commercialize in the future. Our competitors
include major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. Potential competitors also include academic
institutions, government agencies and other private and public research
organizations that seek patent protection and establish collaborative
arrangements for development, manufacturing and commercialization. We face
significant competition for our currently marketed products. Some of our
currently marketed products do not have patent protection and in most cases face
generic competition. All of our products face significant price competition from
a range of branded and generic products for the same therapeutic
indications.
Some or
all of our product candidates, if approved, may face competition from other
branded and generic drugs approved for the same therapeutic indications,
approved drugs used off label for such indications and novel drugs in clinical
development. For example, our product candidates may not demonstrate sufficient
additional clinical benefits to physicians to justify a higher price compared to
other lower cost products within the same therapeutic class. Notwithstanding the
fact that we may devote substantial amounts of our resources to bringing product
candidates to market, our commercial opportunity could be reduced or eliminated
if competitors develop and commercialize products that are more effective,
safer, have fewer or less severe side effects, are more convenient or are less
expensive than any products that we may develop and/or
commercialize.
Our
patent rights will not protect our products if competitors devise ways of making
products that compete with our products without legally infringing our patent
rights. The FDCA and FDA regulations and policies provide certain exclusivity
incentives to manufacturers to create modified, non-infringing versions of a
drug in order to facilitate the approval of ANDAs for generic substitutes. These
same types of exclusivity incentives encourage manufacturers to submit NDAs that
rely, in part, on literature and clinical data not prepared for or by such
manufacturers.
Manufacturers
might only be required to conduct a relatively inexpensive study to show that
their product has the same API, dosage form, strength, route of administration
and conditions of use or labeling as our product and that the generic product is
absorbed in the body at the same rate and to the same extent as our product, a
comparison known as bioequivalence. Such products would be significantly less
costly than our products to bring to market and could lead to the existence of
multiple lower-priced competitive products, which would substantially limit our
ability to obtain a return on the investments we have made in those products.
Our competitors also may obtain FDA or other regulatory approval for their
product candidates more rapidly than we may obtain approval for our product
candidates.
Our
products compete principally with the following:
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ALDEX
Line – Other branded prescription antihistamine, decongestant, and cough
suppressants marketed in the United States, such as WraSer
Pharmaceutical’s VazoTab®, VazoBIDTM
and VazoTan®; Atley
Pharmaceutical Inc.’s Sudal®-12 and ATuss® DS; Centrix Pharmaceutical
Inc.’s Dicel®.
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PEDIATEX
TD – Other branded phenylephrine products, such as Johnson and Johnson’s
Sudafed PE, Wyeth’s Robitussin® CF, McNeil-PPC, Inc.’s Tylenol® Sinus,
Novartis Consumer Health Inc.’s Theraflu®, ALDEX CT, ALDEX D and ALDEX DM;
and other pseudoephedrine products, such as Johnson and Johnson’s
Sudafed®, Burroughs Wellcome Fund’s Actifed®, GlaxoSmithKline plc’s
Contac®, and Schering-Plough HealthCare Products Inc’s
Claritin®-D.
|
·
|
BROVEX
Line – Other antihistamine combination products with the common API
brompheniramine maleate, such as Histex PD 12 ®, Pamlab LLC’s Palgic ®,
McNeil-ppc, Inc’s Zyrtec ® and Vazol-D
®.
|
·
|
Z-COF
8DM – Other antitussive/decongestant/expectorant combination products,
including Johnson and Johnson’s Sudafed®, Wyeth’s Robitussin® DAC and
Robitussin® AC and Reckitt Benckiser Group plc’s
Mucinex®.
|
·
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REZYST
IM – Other probiotic treatment options, including Lactanax®, Amerifit
Brands Inc.’s Culturelle®, Ganeden Biotech Inc.’s Sustenex®, and BioGaia©
AB’s probiotic products.
|
·
|
QUINZYME
– Currently there are no prescription competitors. Over-The-Counter
ubiquinone products include CoQ10 branded
products.
|
Many of
our competitors have significantly greater financial, technical and human
resources than we have and superior expertise in marketing and sales, research
and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products and thus may be
better equipped than us to discover, develop, manufacture and commercialize
products. These competitors also compete with us in recruiting and retaining
qualified management personnel, and acquiring technologies. Many of our
competitors have collaborative arrangements in our target markets with leading
companies and research institutions. In many cases, products that compete with
our products have already received regulatory approval or are in late-stage
development, have well known brand names, are distributed by large
pharmaceutical companies with substantial resources and have achieved widespread
acceptance among physicians and patients. Smaller or early stage companies may
also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies.
We will
face competition based on the safety and effectiveness of our products, the
timing and scope of regulatory approvals, the availability and cost of supply,
marketing and sales capabilities, reimbursement coverage, price, patent position
and other factors. Our competitors may develop or commercialize more effective,
safer or more affordable products, or products with more effective patent
protection, than our products. Accordingly, our competitors may commercialize
products more rapidly or effectively than we are able to, which would adversely
affect our competitive position, our revenue and profit from existing products
and anticipated revenue and profit from product candidates. If our products or
product candidates are rendered noncompetitive, we may not be able to recover
the expenses of developing and commercializing those products or product
candidates.
As
our competitors introduce their own generic equivalents of our products, our net
revenues from such products are expected to decline.
Product
sales of generic pharmaceutical products often follow a particular pattern over
time based on regulatory and competitive factors. The first company to introduce
a generic equivalent of a branded product is often able to capture a substantial
share of the market. However, as other companies introduce competing generic
products, the first entrant’s market share, and the price of its generic
product, will typically decline. The extent of the decline generally depends on
several factors, including the number of competitors, the price of the branded
product and the pricing strategy of the new competitors.
For
example, in the generic drug industry, when a company is the first to introduce
a generic drug, the pricing of the generic drug is typically set based on a
discount from the published price of the equivalent branded product. Other
generic manufacturers may enter the market and, as a result, the price of the
drug may decline significantly. In such event, we may in our discretion provide
our customers a credit with respect to the customers’ remaining inventory for
the difference between our new price and the price at which we originally sold
the product to our customers. There are circumstances under which we may, as a
matter of business strategy, not provide price adjustments to certain customers
and, consequently, we may lose future sales to competitors.
Macoven
Pharmaceuticals was formed in 2008 for the purpose of launching generic drugs.
Macoven is owned 60% by the stockholders of Pernix, 20% by an officer of Pernix
and 20% by an officer of Macoven. Pursuant to the terms of a development
agreement, Pernix granted Macoven a non-exclusive license to develop, market and
sell generic equivalents of Pernix products. Pernix is entitled to 100% of the
proceeds from sales of such generic equivalents. For additional information on
Macoven, see Item 1 - “Relationship with Macoven Pharmaceuticals, LLC”
above.
Negative
publicity regarding any of our products or product candidates could delay or
impair our ability to market any such product, delay or prevent approval of any
such product candidate and may require us to spend time and money to address
these issues.
If any of
our products or any similar products distributed by other companies prove to be,
or are asserted to be, harmful to consumers, our ability to successfully market
and sell our products could be impaired. Because of our dependence on patient
and physician perceptions, any adverse publicity associated with illness or
other adverse effects resulting from the use or misuse of our products or any
similar products distributed by other companies could limit the commercial
potential of our products and expose us to potential liabilities.
If
we are unable to attract, hire and retain qualified sales and management
personnel, the commercial opportunity for our products may be
diminished.
As of
March 9, 2010, our sales force consists of 32 sales representatives and two
sales managers. We may not be able to attract, hire, train and retain qualified
sales and sales management personnel. If we are not successful in our efforts to
maintain a qualified sales force, our ability to independently market and
promote our products may 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 such products. 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 maintain a qualified sales force, our sales force may not be
successful in commercializing our products.
A
failure to maintain optimal inventory levels to meet commercial demand for our
products could harm our reputation and subject us to financial
losses.
Our
ability to maintain optimal inventory levels to meet commercial demand depends
on the performance of third-party contract manufacturers. Certain of our
products, including Z-COF 8DM, PEDIATEX TD, BROVEX PSE-DM and BROVEX PSB-DM
contain controlled substances, which are regulated by the DEA under the
Controlled Substances Act. DEA quota requirements limit the amount of
controlled substance drug products a manufacturer can manufacture and the amount
of API it can use to manufacture those products. In some instances, third-party
manufacturers have encountered difficulties obtaining raw materials needed to
manufacture our products as a result of DEA regulations and because of the
limited number of suppliers of pseudoephedrine, an active ingredient in several
of our products.
If
our manufacturers are unsuccessful in obtaining quotas, if we are unable to
manufacture and release inventory on a timely and consistent basis, if we fail
to maintain an adequate level of product inventory, if inventory is destroyed or
damaged or if our inventory reaches its expiration date, patients might not have
access to our products, our reputation and our brands could be harmed and
physicians may be less likely to prescribe our products in the future, each of
which could have a material adverse effect on our financial condition, results
of operations and cash flows.
If
we or our manufacturers fail to comply with regulatory requirements for our
controlled substance products the DEA 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, our
manufacturers and certain of our products including Z-COF 8DM, PEDIATEX TD,
Brovex PSE-DM and Brovex PSB-DM, are subject to the Controlled Substances Act
and DEA regulations thereunder. Accordingly, we and our contract manufacturers
must adhere to a number of requirements with respect to our controlled substance
products including registration, recordkeeping and reporting requirements;
labeling and packaging requirements; security controls, procurement and
manufacturing quotas; and certain restrictions on prescription refills. Failure
to maintain compliance with applicable requirements can result in enforcement
action that could have a material adverse effect on our business, results of
operations and financial condition. The DEA may seek civil penalties, refuse to
renew necessary registrations or initiate proceedings to revoke those
registrations. In certain circumstances, violations could result in criminal
proceedings.
Product liability
lawsuits against us could cause us to incur substantial liabilities and limit
commercialization of any products that we may develop.
We face
an inherent risk of product liability exposure related to the sale of our
currently marketed products and any other products that we successfully develop
or commercialize. If we cannot successfully defend ourselves against claims that
our products or product candidates caused injuries, we will incur substantial
liabilities. Regardless of merit or eventual outcome, liability claims may
result in:
·
|
decreased
demand for our products or any products that we may
develop;
|
·
|
withdrawal
of client trial participants;
|
·
|
withdrawal
of a product from the market;
|
·
|
costs
to defend the related litigation;
|
·
|
substantial
monetary awards to trial participants or
patients;
|
·
|
diversion
of management time and attention;
|
·
|
the
inability to commercialize any products that we may
develop.
|
The
amount of insurance that we currently hold may not be adequate to cover all
liabilities that we may incur. Insurance coverage is increasingly expensive. We
may not be able to maintain insurance coverage at a reasonable cost and we may
not be able to obtain insurance coverage that will be adequate to satisfy any
liability that may arise.
Risks Related to Our Dependence on
Third Parties
We use third
parties to manufacture all of our products and product candidates. This may
increase the risk that we will not have sufficient quantities of our products or
product candidates or such quantities at an acceptable cost, which could result
in development and commercialization of our product candidates being delayed,
prevented or impaired.
We do not
own or operate, and do not currently have plans to establish, any manufacturing
facilities for our products or product candidates. We have limited personnel
with experience in drug manufacturing and we lack the resources and the
capabilities to manufacture any of our products or product candidates on a
clinical or commercial scale.
We
currently rely, and expect to continue to rely, on third parties for the supply
of the active pharmaceutical ingredients in our products and product candidates,
and the manufacture of the finished forms of these drugs and packaging. The
current manufacturers of our products and product candidates are, and any future
third party manufacturers that we enter into arrangements with will likely be,
our sole suppliers of our products and product candidates for a significant
period of time. These manufacturers are commonly referred to as single source
suppliers. Some of our manufacturing arrangements may be terminated at-will by
either party without penalty.
If any of
these manufacturers should become unavailable to us for any reason, we may be
unable to conclude arrangements with replacements on favorable terms, if at all,
and may be delayed in identifying and qualifying such replacements. In any
event, identifying and qualifying a new third party manufacturer could involve
significant costs associated with the transfer of the active pharmaceutical
ingredient or finished product manufacturing process. With any FDA approved
products, a change in manufacturer requires formal approval by the FDA before
the new manufacturer may produce commercial supplies of our FDA approved
products. This approval process typically takes a minimum of 12 to
18 months and, during that time, we may face a shortage of supply of our
products.
Reliance
on third party manufacturers entails risks to which we would not be subject if
we manufactured products or product candidates ourselves,
including:
·
|
reliance
on third party for regulatory compliance and quality
assurance;
|
·
|
the
possible breach of the manufacturing arrangement by the third party
because of factors beyond our control;
and
|
·
|
the
possible termination or nonrenewal of the manufacturing relationship by
the third party, based on its own business priorities, at a time that is
costly or inconvenient for us.
|
Our
products and product candidates may compete with other products and product
candidates for access to manufacturing facilities. There are a limited number of
manufacturers that operate under current good manufacturing practice, or cGMP,
regulations and that are both capable of manufacturing for us and willing to do
so. If the third parties that we engage to manufacture a product for commercial
sale or for clinical trials should cease to continue to do so for any reason, we
likely would experience delays in obtaining sufficient quantities of our
products for us to meet commercial demand or in advancing clinical trials while
we identify and qualify replacement suppliers. If for any reason we are not able
to obtain adequate supplies of our product candidates or the drug substances
used to manufacture them, it will be more difficult for us to develop our
product candidates and compete effectively.
We also
import the API for substantially all of our products from third parties that
manufacture such items outside the United States, and we expect to do so from
outside the United States in the future. This may give rise to difficulties in
obtaining API in a timely manner as a result of, among other things, regulatory
agency import inspections, incomplete or inaccurate import documentation or
defective packaging. For example, in January 2009, the FDA released draft
guidance on Good Importer Practices, which, if adopted, will impose additional
requirements on us with respect to oversight of our third-party manufacturers
outside the United States. The FDA has stated that it will inspect 100% of API
that is imported into the United States. If the FDA requires additional
documentation from third-party manufacturers relating to the safety or intended
use of the API, the importation of the API could be delayed. While in transit
from outside the United States or while stored with our third-party logistics
provider, DDN, our API could be lost or suffer damage, which would render such
items unusable. We have attempted to take appropriate risk mitigation steps and
to obtain transit or casualty insurance. However, depending upon when the loss
or damage occurs, we may have limited recourse for recovery against our
manufacturers or insurers. As a result, our financial performance could be
impacted by any such loss or damage.
Our
current and anticipated future dependence upon others for the manufacture of our
products and product candidates may adversely affect our profit margins and our
ability to develop and commercialize products and product candidates on a timely
and competitive basis.
We rely on our
third party manufacturers for compliance with applicable regulatory
requirements. This may increase the risk of sanctions being imposed on us or on
a manufacturer of our products or product candidates, which could result in our
inability to obtain sufficient quantities of these products or product
candidates.
Our
manufacturers may not be able to comply with cGMP regulations or other
regulatory requirements or similar regulatory requirements outside the United
States. DEA regulations also govern facilities where controlled substances are
manufactured. Our manufacturers are subject to DEA registration requirements and
unannounced inspections by the FDA, the DEA, state regulators and similar
regulators outside the United States. Our failure, or the failure of our third
party manufacturers, to comply with applicable regulations could result in
sanctions being imposed on us, including:
·
|
failure
of regulatory authorities to grant marketing approval of our product
candidates;
|
·
|
FDA
regulatory action against any currently marketed products or products in
development;
|
·
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delays,
suspension or withdrawal of
approvals;
|
·
|
suspension
of manufacturing operations;
|
·
|
seizures
or recalls of products or product
candidates;
|
·
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operating
restrictions; and
|
Any of
these sanctions could significantly and adversely affect supplies of our
products and product candidates.
We intend to rely
on third parties to conduct our clinical trials, and those third parties may not
perform satisfactorily, including failing to meet established deadlines for the
completion of such trials.
We do not
intend to independently conduct clinical trials for our product candidates. We
will rely on third parties, such as contract research organizations, clinical
data management organizations, medical institutions and clinical investigators,
to perform this function. Our reliance on these third parties for clinical
development activities reduces our control over these activities. We are
responsible for ensuring that each of our clinical trials is conducted in
accordance with the general investigational plan and protocols for the trial.
Moreover, the FDA requires us to comply with standards, commonly referred to as
Good Clinical Practices, for conducting, recording, and reporting the results of
clinical trials to assure that data and reported results are credible and
accurate and that the rights, integrity and confidentiality of trial
participants are protected.
We do not
have experience conducting clinical trials or complying with these requirements.
Our reliance on third parties that we do not control does not relieve us of
these responsibilities and requirements. Furthermore, these third parties may
also have relationships with other entities, some of which may be our
competitors. If these third parties do not successfully carry out their
contractual duties, meet expected deadlines or conduct our clinical trials in
accordance with regulatory requirements or our stated protocols, we will not be
able to obtain, or may be delayed in obtaining, regulatory approvals for our
product candidates and will not be able to, or may be delayed in our efforts to,
successfully commercialize our product candidates.
Our
success depends in part on our relationships with Kiel Laboratories and other
strategic partners.
We have
acquired a substantial amount of our intellectual property rights through
strategic partnerships with third parties, including Kiel Laboratories. We have
exclusive licenses to use Kiel’s patented drug delivery technology, or Kiel
Technology, to manufacture and market our Aldex, Z-COF and Pediatex product
lines. For the fiscal years ended December 31, 2009 and 2008, gross sales
of the products covered by these license arrangements accounted for
approximately 84% and 92% of our gross sales, respectively. We expect sales from
products using the Kiel Technology to continue to constitute a large but
decreasing percentage of our gross sales as we continue to expand our
product offerings.
Gaine,
Inc. was formed in 2007 as a holding company for certain intellectual property
rights. We hold a 50% ownership interest in Gaine, with the remaining 50% owned
by various Kiel employees. Gaine’s board of directors is comprised of two
officers of Pernix and two Kiel employees. Subject to certain limited
exceptions, any action of Gaine’s board of directors or stockholders may be
taken by the approval of a majority of the votes cast. In September 2007,
we loaned Gaine $475,000 in order to finance Gaine’s purchase of a U.S. patent
with an API that we expect to use in certain of our antitussive product
candidates. In consideration for advancing the loan proceeds, Gaine granted us
an exclusive, royalty-free license to use the patent and related intellectual
property rights to develop, manufacture and market certain of our antitussive
product candidates. As collateral for the loan, Gaine and Pernix entered into a
Grant of Security Interest/Assignment of Patent Rights Agreement. This agreement
provides that in the event of a default by Gaine that remains uncured for thirty
days following notice of the default, Pernix may accelerate the remaining
balance due on the loan or, alternatively, require Gaine to assign ownership of
the patent to Pernix. On February 5, 2010, Pernix granted Gaine an extension on
its obligation to pay the outstanding balance on the loan until June 30, 2010,
during which time no additional interest will accrue. During this
time, Pernix agreed not to declare the loan in default or otherwise take any
action to obtain ownership of the patent securing Gaine’s
obligations. For additional information regarding our commercial
arrangements with Kiel and Gaine, see Item 1 - “License Agreements- Relationship
with Gaine and Kiel” contained in this Item 2.01.
Our
inability to maintain our existing strategic relationships, including our
relationships with Kiel and the other co-owners of Gaine, or enter into new ones
could negatively affect our business and results of operations.
The concentration
of our product sales to only a few wholesale distributors increases the risk
that we will not be able to effectively distribute our products if we need to
replace any of these customers, which would cause our sales to
decline.
The
majority of our sales are to a small number of pharmaceutical wholesale
distributors, which in turn sell our products primarily to retail pharmacies,
which ultimately dispense our products to the end consumers. In 2009, Cardinal
Health accounted for 37% of our total gross sales, McKesson Corporation
accounted for 32% of our total gross sales and Morris & Dickson accounted
for 13% of our total gross sales.
If any of
these customers cease doing business with us or materially reduce the amount of
product they purchase from us and we cannot conclude agreements with replacement
wholesale distributors on commercially reasonable terms, we might not be able to
effectively distribute our products through retail pharmacies. The possibility
of this occurring is exacerbated by the recent significant consolidation in the
wholesale drug distribution industry, including through mergers and acquisitions
among wholesale distributors and the growth of large retail drugstore chains. As
a result, a small number of large wholesale distributors control a significant
share of the market.
Any collaboration
arrangements that we may enter into in the future may not be successful, which
could adversely affect our ability to develop and commercialize our product
candidates.
We may
enter into collaboration arrangements in the future on a selective basis. Any
future collaborations that we enter into may not be successful. The success of
our collaboration arrangements will depend heavily on the efforts and activities
of our collaborators. Collaborators generally have significant discretion in
determining the efforts and resources that they will apply to these
collaborations.
Disagreements
between parties to a collaboration arrangement regarding clinical development
and commercialization matters can lead to delays in the development process or
commercializing the applicable product candidate and, in some cases, termination
of the collaboration arrangement. These disagreements can be difficult to
resolve if neither of the parties has final decision making
authority.
Collaborations
with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party. Any such termination or expiration could
adversely affect us financially and could harm our business
reputation.
Pernix’s business
could suffer as a result of a failure to manage and maintain its distribution
network.
Pernix
relies on third parties to distribute its products. Pernix has contracted with
DDN/Obergfel, LLC, or DDN, for the distribution of its products to wholesalers,
retail drug stores, mass merchandisers and grocery stores in the United
States.
This
distribution network requires significant coordination with Pernix’s supply
chain, sales and marketing and finance organizations. Failure to maintain
Pernix’s contract with DDN, or the inability or failure of DDN to adequately
perform as agreed under its contract with Pernix, could negatively impact
Pernix. Pernix does currently have its own warehouse capabilities; however, we
plan to transition all of our warehouse functions to DDN. If Pernix was unable
to replace DDN in a timely manner in the event of a natural disaster, failure to
meet FDA and other regulatory requirements, business failure, strike or any
other difficulty affecting DDN, the distribution of its products could be
delayed or interrupted, which would damage Pernix’s results of operations and
market position. Failure to coordinate financial systems could also negatively
impact Pernix’s ability to accurately report and forecast product sales and
fulfill its regulatory obligations. If Pernix is unable to effectively manage
and maintain its distribution network, sales of its products could be severely
compromised and its business could be harmed.
Pernix
also depends on the distribution abilities of its wholesale customers to ensure
that Pernix’s products are effectively distributed through the supply chain. If
there are any interruptions in Pernix’s customers’ ability to distribute
products through their distribution centers, Pernix’s products may not be
effectively distributed, which could cause confusion and frustration among
pharmacists and lead to product substitution. For example, in the fourth quarter
of 2007 and the first quarter of 2008, several Cardinal Health distribution
centers were placed on probation by the DEA and were prohibited from
distributing controlled substances. Although Cardinal Health had a plan in place
to re-route all orders to the next closest distribution center for fulfillment,
system inefficiency resulted in a failure to effectively distribute Pernix’s
products to all areas.
Risks Related to Intellectual
Property
If we are unable
to obtain and maintain protection for the intellectual property relating to our
technology and products, the value of our technology and products will be
adversely affected.
Our
success will depend in part on our ability to obtain and maintain protection for
the intellectual property covering or incorporated into our technology and
products. The patent situation in the field of pharmaceuticals is highly
uncertain and involves complex legal and scientific questions. We may not be
able to obtain additional patent rights relating to our technology or products.
Even if issued, patents issued to us or licensed to us may be challenged,
narrowed, invalidated, held to be unenforceable or circumvented, which could
limit our ability to stop competitors from marketing similar products or limit
the length of term of patent protection we may have for our products. Changes in
either patent laws or in interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property or narrow
the scope of our patent protection.
Our
patents also may not afford us protection against competitors with similar
technology. Because patent applications in the United States and many other
jurisdictions are typically not published until 18 months after filing, or
in some cases not at all, and because publications of discoveries in the
scientific literature often lag behind actual discoveries, neither we nor our
licensors can be certain that we or they were the first to make the inventions
claimed in our or their issued patents or pending patent applications, or that
we or they were the first to file for protection of the inventions set forth in
these patent applications. If a third party has also filed a U.S. patent
application covering our product candidates or a similar invention, we may have
to participate in an adversarial proceeding, known as an interference, declared
by the U.S. Patent and Trademark Office to determine priority of invention
in the United States. The costs of these proceedings could be substantial and it
is possible that our efforts could be unsuccessful, resulting in a loss of our
U.S. patent position. In addition, patents generally expire, regardless of
the date of issue, 20 years from the earliest claimed non-provisional
filing date.
Some of
our products do not have patent protection and in some cases face generic
competition. For a description of our patent protection, see Item 1 - “Patents”
contained above.
Our
collaborators and licensors may not adequately protect our intellectual property
rights. These third parties may have the first right to maintain or defend our
intellectual property rights and, although we may have the right to assume the
maintenance and defense of our intellectual property rights if these third
parties do not, our ability to maintain and defend our intellectual property
rights may be comprised by the acts or omissions of these third
parties.
Trademark
protection of our products may not provide us with a meaningful competitive
advantage.
We use
trademarks on most of our currently marketed products and believe that having
distinctive marks is an important factor in marketing those products,
particularly ALDEX, BROVEX and PEDIATEX. Distinctive marks may also be important
for any additional products that we successfully develop and commercially
market. However, we generally do not expect our marks to provide a meaningful
competitive advantage over other branded or generic products. We believe that
efficacy, safety, convenience, price, the level of generic competition and the
availability of reimbursement from government and other third party payors are
and are likely to continue to be more important factors in the commercial
success of our products. For example, physicians and patients may not readily
associate our trademark with the applicable product or active pharmaceutical
ingredient. In addition, prescriptions written for a branded product are
typically filled with the generic version at the pharmacy, resulting in a
significant loss in sales of the branded product, including for indications for
which the generic version has not been approved for marketing by the FDA.
Competitors also may use marks or names that are similar to our trademarks. If
we initiate legal proceedings to seek to protect our trademarks, the costs of
these proceedings could be substantial and it is possible that our efforts could
be unsuccessful.
If we fail to
comply with our obligations in our intellectual property licenses with third
parties, we could lose license rights that are important to our
business.
We have
acquired rights to some of our products and all of our product candidates under
license agreements with third parties and expect to enter into additional
licenses in the future.
Our
existing licenses impose, and we expect that future licenses will impose,
various development and commercialization, milestone payment, royalty,
sublicensing, patent protection and maintenance, insurance and other obligations
on us. If we fail to comply with these obligations or otherwise breach the
license agreement, the licensor may have the right to terminate the license in
whole, terminate the exclusive nature of the license or bring a claim against us
for damages. Any such termination or claim could prevent or impede our ability
to market any product that is covered by the licensed patents. Even if we
contest any such termination or claim and are ultimately successful, our results
of operations and stock price could suffer. In addition, upon any termination of
a license agreement, we may be required to license to the licensor any related
intellectual property that we developed.
If we are unable
to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely
affected.
In
addition to patented technology, we rely upon unpatented proprietary technology,
processes and know-how. We seek to protect our unpatented proprietary
information in part by confidentiality agreements with our employees,
consultants and third parties. These agreements may be breached and we may not
have adequate remedies for any such breach. In addition, our trade secrets may
otherwise become known or be independently developed by competitors. If we are
unable to protect the confidentiality of our proprietary information and
know-how, competitors may be able to use this information to develop products
that compete with our products, which could adversely impact our
business.
If
we infringe or are alleged to infringe intellectual property rights of third
parties, it will adversely affect our business.
Our
development and commercialization activities, as well as any product candidates
or products resulting from these activities, may infringe or be claimed to
infringe one or more claims of an issued patent or may fall within the scope of
one or more claims in a published patent application that may be subsequently
issued and to which we do not hold a license or other rights. Third parties may
own or control these patents or patent applications in the United States and
abroad. These third parties could bring claims against us or our collaborators
that would cause us to incur substantial expenses and, if successful against us,
could cause us to pay substantial damages. Further, if a patent infringement
suit were brought against us or our collaborators, we or they could be forced to
stop or delay development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
As a
result of patent infringement or other similar claims or to avoid potential
claims, we or our potential future collaborators may choose or be required to
seek a license from a third party and be required to pay license fees or
royalties or both. These licenses may not be available on acceptable terms, or
at all. Even if we or our collaborators were able to obtain a license, the
rights may be nonexclusive, which could result in our competitors gaining access
to the same intellectual property. Ultimately, we could be prevented from
commercializing a product, or be forced to cease some aspect of our business
operations, if, as a result of actual or threatened patent infringement claims,
we or our collaborators are unable to enter into licenses on acceptable terms.
This could harm our business significantly.
There has
been substantial litigation and other proceedings regarding patent and other
intellectual property rights in the pharmaceutical and biotechnology industries.
In addition to infringement claims against us, we may become a party to other
patent litigation and other proceedings. The cost to us of any patent litigation
or other proceeding, even if resolved in our favor, could be substantial. Some
of our competitors may be able to sustain the costs of such litigation or
proceedings more effectively than we can because of their substantially greater
financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent litigation
and other proceedings may also absorb significant management time.
Many of
our employees were previously employed at other pharmaceutical companies,
including our competitors or potential competitors. We try to ensure that our
employees do not use the proprietary information or know-how of others in their
work for us. However, we may be subject to claims that we or these employees
have inadvertently or otherwise used or disclosed intellectual property, trade
secrets or other proprietary information of any such employee’s former employer.
Litigation may be necessary to defend against these claims and, even if we are
successful in defending ourselves, could result in substantial costs to us or be
distracting to our management. If we fail to defend any such claims, in addition
to paying monetary damages, we may lose valuable intellectual property rights or
personnel.
Risks
Related to Our Financial Position and Need for Additional Capital
We may need
substantial additional funding and may be unable to raise capital when needed,
which would force us to delay, reduce or eliminate our product development
programs, commercialization efforts or acquisition strategy.
We make
significant investments in our currently-marketed products for sales, marketing,
securing commercial quantities of product from our manufacturers, and
distribution. In addition, we expect to make significant investments with
respect to development, particularly to the extent we conduct clinical trials
and seek FDA approval for product candidates. We have used, and expect to
continue to use, revenue from sales of our marketed products to fund a
significant portion of our development costs and establishing and expanding our
sales and marketing infrastructure. However, we may need substantial additional
funding for these purposes and may be unable to raise capital when needed or on
attractive terms, which would force us to delay, reduce or eliminate our
development programs or commercialization efforts.
As of
March 9, 2010 after giving effect to the Merger between Pernix and GTA, the
combined company had approximately $14.3 million of cash and cash equivalents.
We believe that our existing cash and cash equivalents and revenue from product
sales will be sufficient to enable us to fund our operating expenses and capital
expenditure requirements for at least the next 12 months. Our future
capital requirements will depend on many factors, including:
·
|
the
level of product sales from our currently marketed products and any
additional products that we may market in the
future;
|
·
|
the
scope, progress, results and costs of clinical development activities for
our 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;
|
·
|
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 products and product
candidates; and
|
·
|
the
costs of preparing, filing and prosecuting patent applications and
maintaining, enforcing and defending intellectual property-related
claims.
|
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. Additional equity or debt
financing, or corporate collaboration and licensing arrangements, may not be
available on acceptable terms, if at all.
If we
raise additional funds by issuing equity securities, our stockholders will
experience dilution. Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring
dividends. Any debt financing or additional equity that we raise may contain
terms, such as liquidation and other preferences, which are not favorable to us
or our stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies, future revenue streams or product
candidates or to grant licenses on terms that may not be favorable to
us.
If
the estimates that we make, or the assumptions upon which we rely, in preparing
our financial statements prove inaccurate, our future financial results may vary
from expectations.
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of our financial
statements requires us to make estimates and judgments that affect the reported
amounts of our assets, liabilities, stockholders’ equity, revenues and expenses,
the amounts of charges accrued by us and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. For
example, at the same time we recognize revenues for product sales, we also
record an adjustment, or decrease, to revenue for estimated charge backs,
rebates, discounts, vouchers and returns, which management determines on a
product-by-product basis as its best estimate at the time of sale based on each
product’s historical experience adjusted to reflect known changes in the factors
that impact such reserves. Actual sales allowances may exceed our estimates for
a variety of reasons, including unanticipated competition, regulatory actions or
changes in one or more of our contractual relationships. We cannot assure you,
therefore, that any of our estimates, or the assumptions underlying them, will
be correct.
If
we fail to meet all applicable continued listing requirements of the NYSE Amex
and it determines to delist our common stock, the market liquidity and market
price of our common stock could decline.
If we
fail to meet all applicable listing requirements of NYSE Amex and it determines
to delist our common stock, a trading market for our common stock may not be
sustained and the market price of our common stock could decline. If a trading
market for our common stock is not sustained, it will be difficult for our
stockholders to sell shares of our common stock without further depressing the
market price of our common stock or at all. A delisting of our common stock also
could make it more difficult for us to obtain financing for the continuation of
our operations and could result in the loss of confidence by investors,
suppliers and employees.
If
significant business or product announcements by us or our competitors cause
fluctuations in our stock price, an investment in our stock may suffer a decline
in value.
The
market price of our common stock may be subject to substantial volatility as a
result of announcements by us or other companies in our industry, including our
collaborators. Announcements that may subject the price of our common stock to
substantial volatility include announcements regarding:
·
|
our
operating results, including the amount and timing of sales of our
products;
|
·
|
the
availability and timely delivery of a sufficient supply of our
products;
|
·
|
our
licensing and collaboration agreements and the products or product
candidates that are the subject of those
agreements;
|
·
|
the
results of discoveries, preclinical studies and clinical trials by us or
our competitors;
|
·
|
the
acquisition of technologies, product candidates or products by us or our
competitors;
|
·
|
the
development of new technologies, product candidates or products by us or
our competitors;
|
·
|
regulatory
actions with respect to our product candidates or products or those of our
competitors; and
|
·
|
significant
acquisitions, strategic partnerships, joint ventures or capital
commitments by us or our
competitors.
|
Because GTA acquired Pernix by means
of a reverse merger, we may not be able to attract the attention of major
brokerage firms.
Additional
risks to our investors may exist because GTA acquired Pernix through a “reverse
merger.” Prior to the Merger, security analysts of major brokerage firms did not
provide coverage for GTA. In addition, because of past abuses and fraud concerns
stemming primarily from a lack of public information about new public
businesses, there are many people in the securities industry and business in
general who view reverse merger transactions with suspicion. Without brokerage
firm and analyst coverage, there may be fewer people aware of the combined
company and its business, resulting in fewer potential buyers of our securities,
less liquidity, and depressed stock prices for our investors.
Because we do not
anticipate paying any cash dividends on our capital stock in the foreseeable
future, capital appreciation, if any, will be your sole source of
gain.
GTA has
not declared or paid cash dividends on its capital stock since 2001. We
currently intend to retain all of our future earnings, if any, to finance the
growth and development of our business. In addition, the terms of any future
debt agreements may preclude us from paying dividends. As a result, capital
appreciation, if any, of our common stock will be your sole source of gain for
the foreseeable future.
Insiders have
substantial control over the combined company and could delay or prevent a
change in corporate control, including a transaction in which the combined
company’s stockholders could sell or exchange their shares for a
premium.
Following
the merger, the combined company’s directors and executive officers together
with their affiliates beneficially owned, in the aggregate, approximately 62% of
the combined company’s common stock, on a fully diluted basis. As a result, our
directors and executive officers, together with their affiliates, if acting
together, have the ability to affect the outcome of matters submitted to
stockholders for approval, including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, these persons, acting together, will have the ability to control our
management and affairs. Accordingly, this concentration of ownership may harm
the value of our common stock by:
·
|
delaying,
deferring or preventing a change in
control;
|
·
|
impeding
a merger, consolidation, takeover or other business
combination; or
|
·
|
discouraging
a potential acquirer from making an acquisition proposal or otherwise
attempting to obtain control.
|
Resales
of shares of common stock following the Merger could materially adversely affect
the market price of our common stock.
We issued
shares of common stock in the Merger to the former stockholders of Pernix,
representing approximately 84% of the aggregate common stock then outstanding,
on a fully diluted basis.
These
shares were issued in the Merger pursuant to an exemption from the registration
requirements of the 1933 Act and are therefore “restricted securities” as
defined in Rule 144 under the 1933 Act. In addition to being subject to
restrictions on transfer imposed under the securities laws, each former
stockholder of Pernix entered into a stockholder agreement (which together cover
all 20.9 million shares issued in the Merger), which among other things,
prohibits the sale or transfer of these shares following the consummation of the
Merger for specified periods.
Additionally,
the executive officers and three independent directors of GTA each entered into
a stockholder agreement prohibiting the sale or transfer of shares issuable
pursuant to 310,000 options for as long as one year following the filing of this
Form 8-K with the SEC. The stockholder agreements entered into by the three
independent directors also prohibit the transfer or sale of an additional
1,328,183 shares (representing shares acquired in the open market or in
privately negotiated transactions from parties other than GTA or one of its
affiliates) for 90 days following the consummation of the Merger. Thereafter,
until the nine-month anniversary of the consummation of the Merger, transfers or
sales by these directors collectively in any one-week calendar period may not
exceed 29% of the prior week’s trading volume of the combined company’s common
stock as reported on NYSE Amex.
In
addition, the 2009 Stock Incentive Plan permits the issuance of up to
approximately 3.7 million shares pursuant to the Plan. We intend to register
under the 1933 Act the shares issuable under the Plan so that they will
genera
lly be
available for resale when issued.
We may
waive the restrictions on transfer under the stockholder agreements described
above, although we currently have no intention to do so. When the restrictions
in the stockholder agreements described above lapse and the shares become
available for resale, sales of a substantial number of shares of our common
stock in the public market, or the perception that these sales could occur,
could materially adversely affect the market price of our common
stock.
Our
operating results are likely to fluctuate from period to period.
We
anticipate that there may be fluctuations in our future operating results.
Potential causes of future fluctuations in our operating results may
include:
·
|
period-to-period
fluctuations in financial results;
|
·
|
issues
in manufacturing products;
|
·
|
unanticipated
potential product liability
claims;
|
·
|
new
or increased competition from
generics;
|
·
|
the
introduction of technological innovations or new commercial products by
competitors;
|
·
|
changes
in the availability of reimbursement to the patient from third-party
payers for our
products;
|
·
|
the
entry into, or termination of, key agreements, including key strategic
alliance agreements;
|
·
|
the
initiation of litigation to enforce or defend any of our intellectual
property rights;
|
·
|
the
loss of key employees;
|
·
|
the
results of pre-clinical testing, IND application, and potential clinical
trials of some product candidates;
|
·
|
the
results and timing of regulatory reviews relating to the approval of
product candidates;
|
·
|
the
results of clinical trials conducted by others on products that would
compete with our products and product
candidates;
|
·
|
failure
of any of our products or product candidates to achieve commercial
success;
|
·
|
general
and industry-specific economic conditions that may affect research and
development expenditures;
|
·
|
future
sales of our common stock; and
|
·
|
changes
in the structure of health care payment systems resulting from proposed
healthcare legislation or
otherwise.
|
Moreover,
stock markets in general have experienced substantial volatility that has often
been unrelated to the operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price of our common
stock.
Risks Related to Product
Development
We
may invest a significant portion of our efforts and financial resources in the
development of our product candidates and there is no guarantee we will obtain
requisite regulatory approvals or otherwise timely bring these product
candidates to market.
We intend
to seek FDA approval for two of our product candidates and are in the earliest
stages of that process. We do not have experience with that process, and
therefore it will require a significant amount of our managerial and financial
resources. Our ability to bring these products to market depends on a number of
factors including:
·
|
successful
completion of pre-clinical laboratory and animal
testing;
|
·
|
approval
by the FDA of an investigational new drug application or IND application,
which must occur before human clinical trials may
commence;
|
·
|
successful
completion of clinical trials;
|
·
|
receipt
of marketing approvals from the
FDA;
|
·
|
establishing
commercial manufacturing arrangements with third party
manufacturers;
|
·
|
launching
commercial sales of the product;
|
·
|
acceptance
of the product by patients, the medical community and third party
payors;
|
·
|
competition
from other therapies;
|
·
|
achieving
and maintaining compliance with all regulatory requirements applicable to
the product; and
|
·
|
a
continued acceptable safety profile of the product following
approval.
|
If we are
not successful in commercializing any of our product candidates, or are
significantly delayed in doing so, our business will be harmed, possibly
materially.
If our clinical
trials do not demonstrate safety and efficacy in humans, we may experience
delays, incur additional costs and ultimately be unable to commercialize our
product candidates.
Before
obtaining regulatory approval for the sale of some of our product candidates, we
must conduct, at our own expense, extensive clinical trials to demonstrate the
safety and efficacy of our product candidates in humans. Clinical testing is
expensive, difficult to design and implement, can take many years to complete
and is uncertain as to outcome. The outcome of early clinical trials may not be
predictive of the success of later clinical trials, and interim results of a
clinical trial do not necessarily predict final results. Even if early phase
clinical trials are successful, it is necessary to conduct additional clinical
trials in larger numbers of patients taking the drug for longer periods before
seeking approval from the FDA to market and sell a drug in the United States.
Clinical data is often susceptible to varying interpretations, and many
companies that have believed their products performed satisfactorily in clinical
trials have nonetheless failed to obtain FDA approval for their products.
Similarly, even if clinical trials of a product candidate are successful in one
indication, clinical trials of that product candidate for other indications may
be unsuccessful. A failure of one or more of our clinical trials can occur at
any stage of testing.
We may
experience numerous unforeseen events during, or as a result of, the clinical
trial process that could delay or prevent our ability to receive regulatory
approval or commercialize our product candidates, including:
·
|
regulators
or institutional review boards may not authorize us to commence a clinical
trial or conduct a clinical trial at a prospective trial
site;
|
·
|
our
clinical trials may produce negative or inconclusive results, and we may
decide, or regulators may require us, to conduct additional clinical
trials or we may abandon projects that we expect to be
promising;
|
·
|
the
number of patients required for our clinical trials may be larger than we
anticipate, enrollment in our clinical trials may be slower than we
anticipate, or participants may drop out of our clinical trials at a
higher rate than we anticipate;
|
·
|
our
third party contractors may fail to comply with regulatory requirements or
meet their contractual obligations to us in a timely
manner;
|
·
|
we
might have to suspend or terminate our clinical trials if the participants
are being exposed to unacceptable health
risks;
|
·
|
regulators
or institutional review boards may require that we hold, suspend or
terminate clinical research for various reasons, including noncompliance
with regulatory requirements;
|
·
|
the
cost of our clinical trials may be greater than we
anticipate;
|
·
|
the
supply or quality of our product candidates or other materials necessary
to conduct our clinical trials may be insufficient or inadequate;
and
|
·
|
the
effects of our product candidates may not be the desired effects or may
include undesirable side effects or the product candidates may have other
unexpected characteristics.
|
If we are
required to conduct additional clinical trials or other testing of our product
candidates in addition to those that we currently contemplate, if we are unable
to successfully complete our clinical trials or other testing, if the results of
these trials or tests are not positive or are only modestly positive or if there
are safety concerns, we may:
·
|
be
delayed in obtaining marketing approval for one or more of our product
candidates;
|
·
|
not
be able to obtain marketing
approval;
|
·
|
obtain
approval for indications that are not as broad as intended;
or
|
·
|
have
the product removed from the market after obtaining marketing
approval.
|
Our
product development costs also will increase if we experience delays in testing
or approvals. Significant clinical trial delays also could shorten the patent
protection period during which we may have the exclusive right to commercialize
our product candidates or allow our competitors to bring products to market
before we do and impair our ability to commercialize our products or product
candidates.
Risks Related to Regulatory
Matters
Some
of Pernix’s specialty pharmaceutical products are now being marketed without FDA
approvals.
Even
though the FDCA requires pre-marketing approval of all new drugs, as a matter of
history and regulatory policy, the FDA has historically refrained from taking
enforcement action against some marketed, unapproved new drugs. Specifically,
some marketed prescription and nonprescription drugs are not the subject of an
approved marketing application because they are thought to be identical,
related, or similar to historically-marketed products, which were thought not to
require pre-market review and approval, or which were approved only on the basis
of safety, at the time they entered the marketplace. Many such drugs are
marketed under FDA enforcement policies established in connection with the FDA’s
Drug Efficacy Study Implementation, or DESI, program, which was established to
determine the effectiveness of drug products approved before 1962. Prior to
1962, the FDCA required proof of safety but not efficacy for new drugs. Drugs
that were not subject to applications approved between 1938 and 1962 were not
subject to DESI review. For a period of time, the FDA permitted these drugs to
remain on the market without approval. In 1984, the FDA created a program, known
as the Prescription Drug Wrap-Up, also known as DESI II, to address these
remaining unapproved drugs. Most of these drugs contain active pharmaceutical
ingredients that were first marketed prior to 1938. The FDA asserts that all
drugs subject to the Prescription Drug Wrap-Up are on the market illegally and
are subject to FDA enforcement discretion because all prescription drugs must be
the subject of an approved drug application. There are several narrow
exceptions. For example, both the original statutory language of the FDCA and
the amendments enacted in 1962 include provisions exempting specified drugs from
the new drug requirements. The 1938 clause exempts drugs that were on the market
prior to the passage of the FDCA in 1938 and that contain the same
representations concerning the conditions of use as they did prior to passage of
the FDCA. The 1962 amendments exempt, in specified circumstances, drugs that
have the same composition and labeling as they had prior to the passage of the
1962 amendments. The FDA and the courts have interpreted these two exceptions
very narrowly. The FDA has adopted a risk-based enforcement policy concerning
these unapproved drugs. While all such drugs are considered to require FDA
approval, FDA enforcement against such products as unapproved new drugs
prioritizes products that pose potential safety risks, lack evidence of
effectiveness, prevent patients from seeking effective therapies or are marketed
fraudulently. In addition, the FDA has indicated that approval of an NDA for one
drug within a class of drugs marketed without FDA approval may also trigger
agency enforcement of the new drug requirements against all other drugs within
that class that have not been so approved.
Some of
Pernix’s specialty pharmaceutical products are marketed in the United States
without an FDA-approved marketing application because they have been considered
by Pernix to be identical, related or similar to products that have existed in
the market without an NDA or ANDA. Pernix’s gross sales of these unapproved
products was approximately $32.0 million, or 84.1% of gross sales, for the year
ended December 31, 2009, and $24.5 million, or 93% of gross sales, for the
year ended December 31, 2008. These products are marketed
subject to the FDA’s regulatory discretion and enforcement policies, and it is
possible that the FDA could disagree with Pernix’s determination that one or
more of these products is identical, related or similar to products that have
existed in the marketplace without an NDA or ANDA. If the FDA were to disagree
with Pernix’s determination, it could ask or require the removal of Pernix’s
unapproved products from the market, which would significantly reduce Pernix’s
gross sales.
In
addition, if the FDA issues an approved NDA for one of the drug products within
the class of drugs that includes one or more of Pernix’s unapproved products or
completes the efficacy review for that drug product, it may require Pernix to
also file an NDA or ANDA application for its unapproved products in that class
of drugs in order to continue marketing them in the United States. While the FDA
generally provides sponsors with a one-year grace period during which time they
are permitted to continue selling the unapproved drug, it is not statutorily
required to do so and could ask or require that the unapproved products be
removed from the market immediately. In addition, the time it takes Pernix to
complete the necessary clinical trials and submit an NDA or ANDA to the FDA may
exceed any applicable grace period, which would result in an interruption of
sales of such unapproved products. If the FDA asks or requires that the
unapproved products be removed from the market, Pernix’s financial condition and
results of operations would be materially and adversely affected.
If we are not
able to obtain required regulatory approvals, we will not be able to
commercialize our product candidates, and our ability to generate increased
revenue will be materially impaired.
Our
product candidates and the activities associated with their development and
commercialization, including their testing, manufacture, safety, efficacy,
recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution, are subject to comprehensive regulation by the FDA, the DEA and
other regulatory agencies in the United States and by comparable authorities in
other countries. Failure to obtain regulatory approval for a product candidate
will prevent us from commercializing the product candidate. We have not received
approval from the FDA or demonstrated our ability to obtain regulatory approval
for any drugs that we have developed or are developing. We have no significant
experience in filing and prosecuting the applications necessary to gain
regulatory approvals and expect to rely on third party contract research
organizations to assist us in this process. Securing FDA approval requires the
submission of extensive preclinical and clinical data and supporting information
to the FDA for each therapeutic indication to establish the product candidate’s
safety and efficacy. Securing FDA approval also requires the submission of
information about the product manufacturing process to, and inspection of
manufacturing facilities by, the FDA. Our future products may not be effective,
may be only moderately effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude our
obtaining regulatory approval or prevent or limit commercial use.
The
process of obtaining regulatory approvals is expensive, often takes many years,
if approval is obtained at all, and can vary substantially based upon a variety
of factors, including the type, complexity and novelty of the product candidates
involved and the nature of the disease or condition to be treated. Changes in
regulatory approval policies during the development period, changes in or the
enactment of additional statutes or regulations, or changes in regulatory review
for each submitted product application, may cause delays in the approval or
rejection of an application. The FDA has substantial discretion in the approval
process and may refuse to accept any application or may decide that our data is
insufficient for approval and require additional preclinical, clinical or other
studies. In addition, varying interpretations of the data obtained from
preclinical and clinical testing could delay, limit or prevent regulatory
approval of a product candidate. Any regulatory approval we ultimately obtain
may be limited or subject to restrictions or post-approval commitments that
render the approved product not commercially viable.
Pernix’s lack of
experience in obtaining FDA approvals could delay, limit or prevent such
approvals for its product candidates.
Pernix
has no significant experience in preparing and submitting the applications
necessary to gain FDA approvals and expects to rely on third-party contract
research organizations to assist it in this process. Pernix acquired the rights
to most of its currently marketed products and product candidates through
licensing transactions. Pernix has not received approval from the FDA for any of
its products or demonstrated its ability to obtain regulatory approval for any
drugs that it has developed or is developing. Pernix’s limited experience in
this regard could delay or limit approval of its product candidates if it is
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 are unable
to obtain adequate reimbursement and pricing from governments or third party
payors for our products, our revenue and prospects for profitability will
suffer.
Our level
of revenue depends, and will continue to depend, heavily upon the availability
of adequate reimbursement for the use of our products from governmental and
other third party payors in the United States. Reimbursement by a third party
payor may depend upon a number of factors, including the third party payor’s
determination that use of a product is:
·
|
a
covered benefit under its health
plan;
|
·
|
safe,
effective and medically necessary;
|
·
|
appropriate
for the specific patient;
|
·
|
neither
experimental nor investigational.
|
Obtaining
reimbursement approval for a product from a government or other third party
payor is a time consuming and costly process that could require us to provide
supporting scientific, clinical and cost-effectiveness data for the use of our
products to the payor. We may not be able to provide data sufficient to gain
acceptance with respect to reimbursement. Even when a payor determines that a
product is eligible for reimbursement, the payor may impose coverage limitations
that preclude payment for some uses that are approved by the FDA or comparable
authorities. In addition, there is a risk that full reimbursement may not be
available for high priced products. Moreover, eligibility for coverage does not
imply that any product will be reimbursed in all cases or at a rate that allows
us to make a profit or even cover our costs. Interim payments for new products,
if applicable, may also not be sufficient to cover our costs and may not be made
permanent.
We expect
recent changes in the Medicare program and increasing emphasis on managed care
to continue to put pressure on pharmaceutical product pricing. In 2003, the
U.S. government enacted legislation providing a partial prescription drug
benefit for Medicare recipients, which became effective in January 2006.
However, to obtain payments under this program, we are required to sell products
to Medicare recipients through drug procurement organizations operating pursuant
to this legislation. These organizations negotiate prices for our products,
which are generally lower than those we might otherwise obtain. Federal, state
and local governments in the United States continue to consider legislation to
limit the growth of healthcare costs, including the cost of prescription drugs.
Future legislation could limit payments for our products and the product
candidates that we are developing.
Any product for
which we obtain marketing approval could be subject to restrictions or
withdrawal from the market and we may be subject to penalties if we fail to
comply with regulatory requirements or if we experience unanticipated problems
with our products, when and if any of them are approved.
Any
product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data, recordkeeping, labeling, advertising and
promotional activities for such product, will be subject to continual
requirements of and review by the FDA and comparable regulatory authorities.
These requirements include submissions of safety and other post-marketing
information and reports, registration requirements, cGMP requirements relating
to quality control, quality assurance and corresponding maintenance of records
and documents, requirements regarding the distribution of samples to physicians
and recordkeeping. Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated uses for which the
product may be marketed or to the conditions of approval, or contain
requirements for costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. Later discovery of previously unknown
problems with our products, manufacturers or manufacturing processes, or failure
to comply with regulatory requirements, may result in actions such
as:
·
|
withdrawal
of the products from the market;
|
·
|
restrictions
on the marketing or distribution of such
products;
|
·
|
restrictions
on the manufacturers or manufacturing
processes;
|
·
|
refusal
to approve pending applications or supplements to approved applications
that we submit;
|
·
|
suspension
or withdrawal of regulatory
approvals;
|
·
|
refusal
to permit the import or export of our
products;
|
·
|
injunctions
or the imposition of civil or criminal
penalties.
|
Our relationships
with customers and payors are subject to applicable fraud and abuse and other
healthcare laws and regulations, which could expose us to criminal sanctions,
civil penalties, contractual damages, reputation harm, and diminished profits
and future earnings.
Healthcare
providers, physicians and others play a primary role in the recommendation and
prescription of our products. Our arrangements with third party payors and
customers may expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial
arrangements and relationships through which we market, sell and distribute our
products. Applicable federal and state healthcare laws and regulations, include,
but are not limited to, the following:
·
|
The
federal healthcare anti-kickback statute prohibits, among other things,
persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in cash or in kind, to
induce or reward either the referral of an individual for, or the
purchase, order or recommendation of, any good or service, for which
payment may be made under federal healthcare programs such as Medicare and
Medicaid.
|
·
|
The
Ethics in Patient Referrals Act, commonly referred to as the Stark Law,
and its corresponding regulations, prohibit physicians from referring
patients for designated health services reimbursed under the Medicare and
Medicaid programs to entities with which the physicians or their immediate
family members have a financial relationship or an ownership interest,
subject to narrow regulatory
exceptions.
|
·
|
The
federal False Claims Act imposes criminal and civil penalties, including
civil whistleblower or qui tam actions,
against individuals or entities for knowingly presenting, or causing to be
presented, to the federal government, claims for payment that are false or
fraudulent or making a false statement to avoid, decrease, or conceal an
obligation to pay money to the federal
government.
|
·
|
The
federal Health Insurance Portability and Accountability Act of 1996, or
HIPAA, imposes criminal and civil liability for executing a scheme to
defraud any healthcare benefit program and also imposes obligations,
including mandatory contractual terms, with respect to safeguarding the
privacy, security and transmission of individually identifiable health
information.
|
·
|
The
federal false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any
materially false statement in connection with the delivery of or payment
for healthcare benefits, items or
services.
|
·
|
Analogous
state laws and regulations, such as state anti-kickback and false claims
laws, may apply to sales or marketing arrangements and claims involving
healthcare items or services reimbursed by non-governmental third party
payors, including private insurers, and some state laws require
pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal
government.
|
Efforts
to ensure that our business arrangements with third parties comply with
applicable healthcare laws and regulations could be costly. It is possible that
governmental authorities will conclude that our business practices may not
comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our past
or present operations, including activities conducted by our sales team or
agents, are found to be in violation of any of these laws or any other
governmental regulations that may apply to us, we may be subject to significant
civil, criminal and administrative penalties, damages, fines, exclusion from
third party payor programs, such as Medicare and Medicaid, and the curtailment
or restructuring of our operations. If any of the physicians or other providers
or entities with whom we do business are found to be not in compliance with
applicable laws, they may be subject to criminal, civil or administrative
sanctions, including exclusions from government funded healthcare
programs.
Many
aspects of these laws have not been definitively interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of
subjective interpretations, which increases the risk of potential violations. In
addition, these laws and their interpretations are subject to change. Any action
against us for violation of these laws, even if we successfully defend against
it, could cause us to incur significant legal expenses, divert our management’s
attention from the operation of our business and damage our
reputation.
Recently enacted
legislation may make it more difficult and costly for us to obtain regulatory
approval of our product candidates and to produce, market and distribute our
existing products.
The Food
and Drug Administration Amendments Act of 2007, or the FDAAA, grants a variety
of new powers to the FDA, many of which are aimed at improving drug safety and
assuring the safety of drug products after approval. Under the FDAAA, companies
that violate the new law are subject to substantial civil monetary penalties.
The new requirements and other changes that the FDAAA imposes may make it more
difficult, and likely more costly, to obtain approval of new pharmaceutical
products and to produce, market and distribute existing products.
Future
legislation or regulatory changes to, or consolidation in, the healthcare system
may affect our ability to sell our products profitably.
There
have been, and we expect there will continue to be, a number of legislative and
regulatory proposals to change the healthcare system, and some could involve
changes that could significantly affect our business. While we cannot predict
what, if any, legislative or regulatory proposals will be adopted, the
announcement or adoption of such proposals could prevent our entry into new
markets or cause a reduction in sales or in the selling price of our products,
which would materially affect our business.
We may be subject
to investigations or other inquiries concerning our compliance with reporting
obligations under federal healthcare program pharmaceutical pricing
requirements.
Under
federal healthcare programs, some state governments and private payors
investigate and have filed civil actions against numerous pharmaceutical
companies alleging that the reporting of prices for pharmaceutical products has
resulted in false and overstated average wholesale price, which in turn may be
alleged to have improperly inflated the reimbursements paid by Medicare, private
insurers, state Medicaid programs, medical plans and others to healthcare
providers who prescribed and administered those products or pharmacies that
dispensed those products. These same payors may allege that companies do not
properly report their “best prices” to the state under the Medicaid program.
Suppliers of outpatient pharmaceuticals to the Medicaid program are also subject
to price rebate agreements. Failure to comply with these price rebate agreements
may lead to federal or state investigations, criminal or civil liability,
exclusion from federal healthcare programs, contractual damages, and otherwise
harm our reputation, business and prospects.
Risks Related to Employee Matters and
Managing Growth
If we fail to
attract and retain key personnel, or to retain our executive management team, we
may be unable to successfully develop or commercialize our
products.
Our
success depends in part on our continued ability to attract, retain and motivate
highly qualified managerial personnel. We are highly dependent upon our
executive management team. The loss of the services of any one or more of the
members of our executive management team or other key personnel could delay or
prevent the successful completion of some of our development and
commercialization objectives.
Recruiting
and retaining qualified sales and marketing personnel is critical to our
success. We may not be able to attract and retain these personnel on acceptable
terms given the competition among numerous pharmaceutical and biotechnology
companies for similar personnel. In addition, we rely on consultants and
advisors, including scientific and clinical advisors, to assist us in
formulating our development and commercialization strategy. Our consultants and
advisors may be employed by employers other than us and may have commitments
under consulting or advisory contracts with other entities that may limit their
availability to us.
We may encounter
difficulties in managing our growth, which could disrupt our
operations.
To manage
our anticipated future growth, we must continue to implement and improve our
managerial, operational and financial systems, and continue to recruit and train
additional qualified personnel. Due to our limited financial resources and the
inexperience of our management team in managing a company during a period of
such anticipated growth, we may not be able to effectively manage the expansion
of our operations or recruit and train additional qualified personnel. The
expansion of our operations may lead to significant costs and may divert our
management and business development resources. Any inability to manage growth
could delay the execution of our business plans or disrupt our
operations.
Our
management will be required to devote substantial time to comply with public
company regulations.
As a
public company, we expect to incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and NYSE Amex, imposes various requirements on public
companies, including with respect to corporate governance practices. Most of our
management and other personnel do not have experience complying with the
requirements applicable to public companies and will need to devote a
substantial amount of time to these requirements. Moreover, these rules and
regulations will increase legal and financial compliance costs and will make
some activities more time-consuming and costly.
In
addition, the Sarbanes-Oxley Act requires, among other things, that our
management maintain adequate disclosure controls and procedures and internal
control over financial reporting. In particular, we must perform system and
process evaluation and testing of our internal control over financial reporting
to allow management and, as applicable, our independent registered public
accounting firm to report on the effectiveness of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
Our compliance with Section 404 will require us to incur substantial
accounting and related expenses and expend significant management efforts. We
may need to hire additional accounting and financial staff to satisfy the
ongoing requirements of Section 404. Because the nature of the combined
company’s business will be significantly different and more complex than the
business conducted by GTA, we expect compliance costs for the combined company
will be greater than for GTA. Moreover, if we are not able to comply with the
requirements of Section 404, or if we or our independent registered public
accounting firm identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, our financial reporting
could be unreliable and misinformation could be disseminated to the
public.
Any
failure to develop or maintain effective internal control over financial
reporting or difficulties encountered in implementing or improving our internal
control over financial reporting could harm our operating results and prevent us
from meeting our reporting obligations. Ineffective internal controls also could
cause our stockholders and potential investors to lose confidence in our
reported financial information, which would likely have a negative effect on the
trading price of our common stock. In addition, investors relying upon this
misinformation could make an uninformed investment decision, and we could be
subject to sanctions or investigations by the SEC, NYSE Amex or other regulatory
authorities, or to stockholder class action securities litigation.
Risks Related to Our Acquisition
Strategy
Our
strategy of obtaining, through product acquisitions and in-licenses, rights to
products and product candidates for our development pipeline and to proprietary
drug delivery and formulation technologies for our life cycle management of
current products may not be successful.
Part of
our business strategy is to acquire rights to pharmaceutical products,
pharmaceutical product candidates in the late stages of development and
proprietary drug delivery and formulation technologies. Because we do not have
discovery and research capabilities, the growth of our business will depend in
significant part on our ability to acquire or in-license additional products,
product candidates or proprietary drug delivery and formulation technologies
that we believe have significant commercial potential and are consistent with
our commercial objectives. However, we may be unable to license or acquire
suitable products, product candidates or technologies from third parties for a
number of reasons.
The
licensing and acquisition of pharmaceutical products, product candidates and
related technologies is a competitive area, and a number of more established
companies are also pursuing strategies to license or acquire products, product
candidates and drug delivery and formulation technologies, which may mean fewer
suitable acquisition opportunities for us, as well as higher acquisition prices.
Many of our competitors have a competitive advantage over us due to their size,
cash resources and greater clinical development and commercialization
capabilities.
Other
factors that may prevent us from licensing or otherwise acquiring suitable
products, product candidates or technologies include:
·
|
We
may be unable to license or acquire the relevant products, product
candidates or technologies on terms that would allow us to make an
appropriate return on investment;
|
·
|
Companies
that perceive us as a competitor may be unwilling to license or sell their
product rights or technologies to
us;
|
·
|
We
may be unable to identify suitable products, product candidates or
technologies within our areas of
expertise; and
|
·
|
We
may have inadequate cash resources or may be unable to obtain financing to
acquire rights to suitable products, product candidates or technologies
from third parties.
|
If we are
unable to successfully identify and acquire rights to products, product
candidates and proprietary drug delivery and formulation technologies and
successfully integrate them into our operations, we may not be able to increase
our revenues in future periods, which could result in significant harm to our
financial condition, results of operations and prospects.
If we fail to
successfully manage any acquisitions, our ability to develop our product
candidates and expand our product pipeline may be harmed.
Our
failure to adequately address the financial, operational or legal risks of any
acquisitions or in-license arrangements could harm our business. Financial
aspects of these transactions that could alter our financial position, reported
operating results or stock price include:
·
|
higher
than anticipated acquisition costs and
expenses;
|
·
|
potentially
dilutive issuances of equity
securities;
|
·
|
the
incurrence of debt and contingent liabilities, impairment losses or
restructuring charges;
|
·
|
large
write-offs and difficulties in assessing the relative percentages of
in-process research and development expense that can be immediately
written off as compared to the amount that must be amortized over the
appropriate life of the
asset; and
|
·
|
amortization
expenses related to other intangible
assets.
|
Operational
risks that could harm our existing operations or prevent realization of
anticipated benefits from these transactions include:
·
|
challenges
associated with managing an increasingly diversified
business;
|
·
|
disruption
of our ongoing business;
|
·
|
difficulty
and expense in assimilating the operations, products, technology,
information systems or personnel of the acquired
company;
|
·
|
diversion
of management’s time and attention from other business
concerns;
|
·
|
inability
to maintain uniform standards, controls, procedures and
policies;
|
·
|
the
assumption of known and unknown liabilities of the acquired company,
including intellectual property
claims; and
|
·
|
subsequent
loss of key personnel.
|
If we are
unable to successfully manage our acquisitions, our ability to develop and
commercialize new products and continue to expand our product pipeline may be
limited.
We may
not realize the benefits we expect from the
Merger.
The
integration of the GTA and Pernix businesses has some risk and may disrupt our
business. We will need to overcome significant challenges and will face many
risks in order to realize any benefits from the Merger. These challenges and
risks include:
·
|
the
potential disruption of our ongoing business and distraction of
management;
|
·
|
the
potential strain on our financial and managerial controls and reporting
systems and procedures;
|
·
|
unanticipated
expenses and potential delays related to integration of the operations,
technology and other resources of the two
companies;
|
·
|
the
impairment of relationships with employees, suppliers and customers as a
result of any integration of new management
personnel;
|
·
|
greater
than anticipated costs and expenses related to
integration; and
|
·
|
potential
unknown or currently unquantifiable liabilities associated with the Merger
and the combined operations.
|
We may
not succeed in addressing these risks or any other problems encountered in
connection with the Merger. The inability to successfully integrate the
operations, technology and personnel of GTA and Pernix, or any significant delay
in achieving integration, could have a material adverse effect on us and, as a
result, on the market price of our common stock.
ITEM 2.
FINANCIAL INFORMATION
PERNIX’S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of Pernix’s financial
condition and results of operations together with financial statements and
accompanying notes included in this Form 8-K. In addition to historical
information, the following discussion contains forward-looking statements that
involve risks, uncertainties and assumptions. Pernix’s actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many important factors, including, but not limited to, those set forth
in “Item 1A – Risk Factors” of Item 2.01 of this Form 8-K.
Overview
Pernix
Therapeutics, Inc. is a growing and profitable specialty pharmaceutical company
focused on developing and commercializing branded pharmaceutical products to
meet unmet medical needs primarily in pediatrics. Our goal is to build a broad
portfolio of products through a combination of internal development, acquisition
and in-licensing activities, and to utilize our sales force to promote our
products in our target markets.
We
utilize unique formulations and drug delivery technologies for existing drug
compounds to improve patient care by increasing patient compliance and reducing
adverse side effects relative to existing therapies. Additionally, we focus our
product development strategy on placing solid intellectual property around our
products to protect our investment. We have acquired substantially all of the
intellectual property associated with our products through license agreements
and acquisitions.
Since our
inception in 1999, we have assembled a product portfolio that currently includes
six marketed product lines consisting of 14 products. Our ALDEX product line
currently includes ALDEX AN, ALDEX CT, ALDEX D and ALDEX DM, which are oral
antihistamine/decongestant/antitussive (cough suppressant) combinations
indicated for the treatment of allergies and symptoms of the common cold.
PEDIATEX TD is also an oral antihistamine/decongestant combination indicated for
the treatment of respiratory allergies. Z-COF 8DM is an oral
decongestant/expectorant/ cough suppressant indicated for the treatment of
allergies and symptoms of the common cold. The BROVEX line currently includes
BROVEX PEB, BROVEX PEB DM, BROVEX PSB, BROVEX PSB DM, BROVEX PSE and BROVEX PSE
DM, which are oral antihistamine/decongestant/antitussive (cough suppressant)
combinations indicated for the treatment of allergies and symptoms of the common
cold. In February 2009, we introduced our first medical food product,
REZYST IM. REZYST IM is a chewable tablet probiotic indicated to replace active
cultures that are destroyed by diet and antibiotics and to reduce symptoms
associated with irritable bowel syndrome and various gastrointestinal issues.
Our second medical food product, QUINZYME, was launched in July 2009.
QUINZYME is a 90 mg ubiquinone smooth dissolve tablet for patients with depleted
ubiquinone levels and for patients on statin therapy. In addition to our own
product portfolio, we have entered into co-promotion agreements with various
parties to market certain of their products in return for commissions
or percentages of revenue on the sales we generate. As of March 9, 2010, we
marketed three products under co-promotion agreements. To date, these
co-promotion agreements have not contributed to a material part of our net sales
but may in the future.
Some of
our products are marketed without an FDA-approved marketing application because
we consider them to be identical, related or similar to products that have
existed in the market without an FDA-approved marketing application, and which
were thought not to require pre-market approval, or which were approved only on
the basis of safety, at the time they entered the marketplace, subject to FDA
enforcement policies established with the FDA’s Drug Efficacy Study
Implementation, or DESI, program. For a more complete discussion regarding FDA
drug approval requirements, please see Item 1A-“Risks Factors-Some of Pernix’s
specialty pharmaceutical products are now being marketed without FDA approvals”
of Item 2.01 of this Form 8-K.
Our sales
force, which consists of 32 full-time sales representatives and 2 regional sales
directors as of March 9, 2010, promotes our products in approximately
30 states in the U.S. Our sales force is supported by six senior managers and
six administrative staff. Our sales management team consists of pharmaceutical
industry veterans experienced in management, business development, and sales and
marketing, and has an average of nine years of sales management
experience.
For the
fiscal years ended December 31, 2009 and 2008, our net sales were
approximately $27,930,000 and $20,656,000 and our income before incomes taxes
and non-controlling interest was approximately $9,238,000 and $7,610,000,
respectively. Our net cash provided by operating activities for the years ended
December 31, 2009 and 2008 were approximately $9,943,000
and $8,208,000, respectively.
On
January 8, 2010, Pernix entered into an asset purchase agreement with Sciele
Pharma, Inc. to acquire substantially all of Sciele Pharma’s assets and rights
relating to CEDAX, a prescription antibiotic used to treat mild to moderate
infections of the throat, ear and respiratory tract, for an aggregate purchase
price of $6.1 million. The acquisition is expected to close during the first
quarter of 2010. For additional information on our acquisition of
CEDAX, see Note 18 to Pernix’s Combined and Consolidated Financial Statements
for the years ended December 31, 2009 and 2008 contained in Item 9.01 of this
Form 8-K.
Effective
March 9, 2010, pursuant to an Agreement and Plan of Merger dated October 6, 2009
by and among Pernix, the Registrant and Transitory Subsidiary, Pernix merged
with and into Transitory Subsidiary, with Transitory Subsidiary surviving the
merger, and became a wholly-owned subsidiary of the Registrant. The
acquisition of Pernix is treated as a reverse acquisition for accounting
purposes, and the business of Pernix became the business of the Registrant as a
result thereof. As a result of the Merger, the Registrant’s name was
changed to Pernix Therapeutics Holdings, Inc. Trading of the combined
companies’ common stock commenced on the NYSE Amex under the symbol “PTX” on
March 10, 2010. For additional information on the Merger, see the
section titled “Overview” in this Item 2.01 above.
Financial
Operations Overview
The discussion in this section
describes our income statement categories. For a discussion of our
results of operations, see “Results of Operations” below.
Net
Sales
Pernix’s
net sales consist of net product sales and collaboration revenue from
co-promotion and other revenue sharing agreements. Pernix recognizes product
sales net of estimated allowances for product returns, discounts and Medicaid
rebates. The primary factors that determine Pernix’s net product sales are the
level of demand for Pernix’s products, unit sales prices and the amount of sales
adjustments that Pernix recognizes. In addition to our own product portfolio, we
have entered into co-promotion agreements and other revenue sharing
arrangements with various parties to market certain of their products
in return for commissions or percentages of revenue on the sales we
generate or on the sales they generate on generic products based on our brand
products. As of March 9, 2010, we marketed three products under co-promotion
agreements. To date, these co-promotion agreements have not contributed to a
material part of our net sales but may in the future. Since Pernix’s
inception in 1999, approximately 99% of Pernix’s net sales have been from
product sales.
The
following table sets forth a summary of Pernix’s net sales for the years ended
December 31, 2009 and 2008 (all amounts in thousands).
|
|
Year
Ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Gross
Product Sales
|
|
|
|
|
|
|
ALDEX
Family
|
|
$ |
18,390 |
|
|
$ |
17,642 |
|
PEDIATEX
Family
|
|
|
5,699 |
|
|
|
1,466 |
|
BROVEX
Family
|
|
|
5,796 |
|
|
|
— |
|
Z-COF
Family
|
|
|
7,756 |
|
|
|
7,429 |
|
REZYST
Family
|
|
|
285 |
|
|
|
— |
|
QUINZYME
|
|
|
55 |
|
|
|
— |
|
Collaboration
Revenue
|
|
|
292 |
|
|
|
— |
|
Gross
Sales
|
|
$ |
38,273 |
|
|
$ |
26,537 |
|
Adjustments
|
|
|
229 |
|
|
|
(226
|
) |
Discounts
|
|
|
(2,938
|
) |
|
|
(1,879
|
) |
Allowance
for Returns
|
|
|
(2,810
|
) |
|
|
(1,985
|
) |
Medicaid
Rebate Expense
|
|
|
(4,824
|
) |
|
|
(1,791
|
) |
Net
Sales Revenues
|
|
$ |
27,930 |
|
|
$ |
20,656 |
|
Cost
of Sales
Pernix’s
cost of sales is primarily comprised of the costs of manufacturing and
distributing Pernix’s pharmaceutical products and samples. In particular, cost
of sales includes third-party manufacturing and distribution costs and the cost
of active pharmaceutical ingredients. Pernix partners with third parties to
manufacture all of its products and product candidates.
In
July 2009, we entered into an agreement with Protoform pursuant to which we
deposited $300,000 with Protoform during the six months ended December 31,
2009 related to the renovation of a manufacturing facility. In
consideration of these deposits, Pernix will receive certain discounts and
credits on Pernix branded products manufactured by Protoform. Additionally,
Protoform agreed to pay Pernix 10% of its gross profits for the period beginning
on the two-year anniversary of the manufacturing facility becoming operational,
and ending on July 15, 2016.
Most of
our manufacturing arrangements are not subject to long-term agreements and
generally may be terminated by either party without penalty at any time. Changes
in the price of raw materials and manufacturing costs could adversely affect
Pernix’s gross margins on the sale of its products. Changes in Pernix’s mix of
products sold also affect its cost of sales.
Selling
Expenses
Pernix’s
selling expenses consist of salaries, commission and incentive expenses for our
sales force; all overhead costs of our sales force; and freight, advertising and
promotion costs. The most significant component of Pernix’s sales and marketing
expenses is salaries, commissions and incentive expenses for our sales force.
Sales commissions are based on when our customers sell Pernix products to retail
customers not when we sell Pernix products to our customers. Therefore, there
may be a lag between the time of Pernix’s sale to its customer and when the
commission is ultimately earned on that sale.
Pernix
expects that its sales and marketing expenses will increase as it expands its
sales and marketing infrastructure to support additional products.
Royalty
Expenses
Royalty
expenses include the contractual amounts Pernix is required to pay the licensors
from which it has acquired the rights to certain of its marketed products.
Although product mix affects Pernix’s royalties, Pernix expects that its royalty
expenses will increase as total net sales increase. For a description of
Pernix’s license and co-promotion agreements, see “Item 1-“Description
of Business” contained above and the Notes captioned “Intangible
Assets, ” “Collaborations,” and “Commitments and Contingencies” to Pernix’s
Combined and Consolidated Financial Statements for the years ended
December 31, 2009 and 2008, respectively.
General
and Administrative Expenses
General
and administrative expenses primarily include salaries and benefits of
management and administrative personnel; professional fees; consulting fees;
management and administrative personnel overhead expenses; and
insurance. Pernix expects that its general and administrative
expenses will increase significantly due to the public company costs including,
but not limited to, accounting and legal professional fees, exchange listing
fees, Public Company Accounting Oversight Board fees, and printing and reporting
fees.
Research
and Development Expenses
Research
and development expenses consist of costs incurred in identifying, developing
and testing products and product candidates. Pernix either expenses research and
development costs as incurred or will pay manufacturers a prepaid research and
development fee. Pernix believes that significant investment in research and
development is important to its competitive position and plans to increase its
expenditures for research and development to realize the potential of the
product candidates that it is developing or may develop.
Other
Income and Expenses
Depreciation
Expense
Depreciation
expense is recognized for Pernix’s property and equipment, which it depreciates
over the estimated useful lives of the assets using the straight-line
method.
Income
Taxes
Pernix
elected to be taxed as an S Corporation effective January 1, 2002. As such,
taxable earnings and losses after that date were included in the personal income
tax returns of the Company’s stockholders. Accordingly, Pernix was subject to
certain “built-in” gains tax for the difference between the fair value and tax
reporting bases of assets at the date of conversion to an S Corporation, if the
assets were sold (and a gain was recognized) within ten years following the date
of conversion. Pernix’s exposure to built-in gains was limited. Effective
January 1, 2010, Pernix made an election to be taxed as a
corporation. As a result of this election, income taxes are accounted
for using the asset and liability method pursuant to Accounting Standards
Codification (“ASC”) Topic 740-Income Taxes. Deferred taxes
are recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to the difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. Pernix will
recognize future tax benefits to the extent that realization of such benefits is
more likely than not.
Macoven
is a limited liability company wholly owned by Pernix as of December 31,
2008 which was subsequently deconsolidated as of July 2009. Macoven
was disregarded for federal tax purposes and its activities are reported as part
of Pernix’s income tax returns until July 13, 2009. See Note 1-
“Organization and Merger” to Pernix’s Combined and Consolidated Financial
Statements for the years ended December 31, 2009 and 2008.
Gaine is
taxed as a corporation for income tax purposes. Accordingly, income taxes for
this subsidiary are accounted for using the asset and liability method pursuant
to Accounting Standards Codification (“ASC”) Topic 740-Income Taxes. Deferred taxes
are recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to the difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
recognizes future tax benefits to the extent that realization of such benefits
is more likely than not. Deferred income taxes were not material as of December
31, 2009 and 2008.
Non-controlling
interest
The
non-controlling interest represents the 50% outside ownership of Gaine. See Note
1- “Organization and Merger” to Pernix’s Combined and Consolidated Financial
Statements for the years ended December 31, 2009 and 2008.
Critical
Accounting Estimates
Management’s
discussion and analysis of Pernix’s financial condition and results of
operations are based on Pernix’s combined and consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of Pernix’s combined and
consolidated financial statements requires Pernix’s management to make estimates
and assumptions that affect Pernix’s reported assets and liabilities, revenues
and expenses and other financial information. Reported results could differ
significantly under different estimates and assumptions. In addition, Pernix’s
reported financial condition and results of operations could vary due to a
change in the application of a particular accounting standard.
Pernix
regards an accounting estimate or assumption underlying its 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 its financial condition or
operating performance is material.
|
Pernix’s
significant accounting policies are described in the notes to Pernix’s combined
and consolidated financial statements appearing elsewhere in this Form 8-K. Not
all of these significant accounting policies, however, fit the definition of
“critical accounting estimates.” Pernix believes that its estimates relating to
revenue recognition, inventory and accrued expenses described below fit the
definition of “critical accounting estimates.”
Revenue
Recognition
Pernix
recognizes revenue from its product sales when the goods are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed and determinable. Pernix sells its products primarily to
pharmaceutical wholesalers, distributors and pharmacies, which have the right to
return the products they purchase, as described below. Pernix recognizes product
sales net of estimated allowances for discounts, product returns and Medicaid
rebates.
Consistent
with industry practice, Pernix offers customers the ability to return products
in the six months prior to, and the 12 months after, the products expire. Pernix
adjusts its estimate of product returns if it becomes aware of other factors
that it believes could significantly impact its expected returns. These factors
include its estimate of inventory levels of its products in the distribution
channel, the shelf life of the product shipped, competitive issues such as new
product entrants and other known changes in sales trends.
Segment
Reporting
The
Company is engaged solely in the business of marketing and selling prescription
pharmaceutical products. Accordingly, the Company’s business is classified in a
single reportable segment, the sale and marketing of prescription products.
Prescription products include a variety of branded pharmaceuticals primarily in
pediatrics.
Allowances
for Returns, Discounts and Rebates
Pernix’s
estimates of product rebates and discounts are based on its estimated mix of
sales to various third-party payors, which are entitled either contractually or
statutorily to discounts from Pernix’s listed prices of its products. Pernix
makes these judgments based upon the facts and circumstances known to it in
accordance with generally accepted accounting principles (United States), or
GAAP. In the event that the sales mix to third-party payors is different from
its estimates, Pernix may be required to pay higher or lower total rebates than
it has estimated.
Sales
returns allowances are based on the products’ expiration dates and are generally
eighteen months from the date the product was originally sold. Sales returns
allowances were approximately $2,810,000, or 7.4% of gross sales, and
$1,985,000, or 7.5% of gross sales, for the years ended December 31, 2009 and
2008, respectively.
Medicaid
rebates were approximately $4,824,000, or 12.6% of gross sales, and $1,791,000,
or 6.8% of gross sales, for the years ended December 31, 2009 and 2008,
respectively. The increase in Medicaid rebates as a percentage of gross
sales is due in part to an increase in sales of products eligible for Medicaid
rebates and the addition of a Medicaid supplemental rebate beginning in the
third quarter of 2009. Medicaid rebates are based on sales and,
therefore, fluctuate as sales fluctuate.
Discounts
taken were approximately $2,938,000, or 7.7% of gross sales, and $1,879,000, or
7.1% of gross sales, for the years ended December 31, 2009 and 2008,
respectively. Discounts are applied pursuant to the contracts
negotiated with certain vendors and are primarily based on sales.
|
|
Sales
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
1,922,000 |
|
|
$ |
616,000 |
|
|
$ |
354,000 |
|
Current
provision
|
|
|
1,985,000 |
|
|
|
1,791,000 |
|
|
|
1,879,000 |
|
Payments
and credits
|
|
|
(1,521,000
|
) |
|
|
(1,669,000
|
) |
|
|
(1,524,000
|
) |
Balance
at December 31, 2008
|
|
|
2,386,000 |
|
|
|
738,000 |
|
|
|
709,000 |
|
Current
provision
|
|
|
2,810,000 |
|
|
|
4,824,000 |
|
|
|
2,938,000 |
|
Payments
and credits
|
|
|
(1,221,000
|
) |
|
|
(3,261,000
|
) |
|
|
(3,127,000
|
) |
Balance
at December 31, 2009
|
|
$ |
3,975,000 |
|
|
$ |
2,301,000 |
|
|
$ |
647,000 |
|
Accrued
Personnel and Other Expenses
As part
of the process of preparing its combined and consolidated financial statements,
Pernix is required to estimate certain expenses. This process involves
identifying services that have been performed on its behalf and estimating the
level of service performed and the associated cost incurred for such service as
of each balance sheet date in its combined and consolidated financial
statements. Examples of estimated expenses for which Pernix accrues include
professional fees, payroll, sales commissions and other sales benefits that will
be redeemed in the future. Pernix also accrues for certain non-expense
disbursements such as dividends.
Inventory
Inventory
consists of finished goods which include pharmaceutical products ready for
commercial sale or distribution as samples. Inventory is stated at the actual
cost per bottle determined under the specific identification method. Pernix’s
estimate of the net realizable value of its inventories is subject to judgment
and estimation. The actual net realizable value of its inventories could vary
significantly from its estimates and could have a material effect on its
financial condition and results of operations in any reporting period. An
allowance for slow-moving or obsolete inventory, or declines in the value of
inventory is determined based on management’s assessments. The inventory reserve
includes provisions for inventory that may become damaged in shipping or in
distribution to the customer. As of December 31, 2009 and 2008, Pernix had
approximately $1,082,000 and $1,521,000 in inventory, respectively, for which no
reserve was deemed necessary.
Results
of Operations
Comparison
of the Years Ended December 31, 2009 and 2008
Net Sales
Net sales
were approximately $27,930,000 and $20,656,000 for the years ended December 31,
2009 and 2008, respectively, an increase of approximately $7,274,000, or 35.2%.
This increase is primarily due to sales of new products, including our BROVEX
product line, PEDIATEX TD, and REZYST, and increases in unit prices and the
expansion of Pernix’s sales force in additional territories.
Cost of Sales
Cost of
sales was approximately $5,437,000 and $4,873,000 for the years ended December
31, 2009 and 2008, respectively, an increase of approximately
11.6%. The cost of product samples included in cost of product sales
was approximately $1,251,000 and $975,000 for the years ended December 31, 2009
and 2008, respectively, an increase of approximately $276,000,
or 28.3%, which was primarily due to the addition of the BROVEX
product line and our expansion into new sales territories. Cost of sales in the
years ended December 31, 2009 and 2008 consisted primarily of the expenses
associated with manufacturing and distributing Pernix’s products. The increase
in cost of sales and gross margin year-over-year is primarily the result of the
$7.3 million increase in net sales.
Selling Expenses
Selling
expenses were approximately $4,743,000 and $4,341,000 for the years ended
December 31, 2009 and 2008, respectively, an increase of approximately $402,000,
or 9.3%. Sales salaries, commissions and incentives represented
approximately $3,909,000, or 82.4%, and $3,697,000, or 85.2%, of total selling
expenses for the years ended December 31, 2009 and 2008, respectively. The
increase in sales salaries, commissions and incentives of approximately
$213,000, or 5.8%, is primarily the result of increased commissions paid as a
result of increased net sales; however, the increase in commissions did not
increase proportionately with the increase in sales due to a change in our
commission policy. Other selling expenses, including freight, advertising,
promotional items, cell phone, operating and office supplies, vehicle expenses,
travel and entertainment, and other miscellaneous overhead expenses of our sales
force, were approximately $833,000 and $644,000 for the years ended December 31,
2009 and 2008, respectively. This increase of approximately $189,000, or 29.4%,
was primarily due to increases in (i) sales report expenses of approximately
$98,000, (ii) freight of approximately $50,000, (iii) training expenses of
approximately $47,000, (iv) program management fee expenses of approximately
$25,000, (v) advertising expenses of approximately $16,000 and (vi) other
selling expenses including travel, entertainment, telephone, supplies
and postage expenses of approximately $15,000 offset by decreases of
approximately $36,000 in sales promotion expense and $26,000 in auto
expense.
Royalty Expenses
Royalty
expenses were approximately $1,224,000 for the year ended December 31,
2009. Pernix did not incur royalty expenses in the year ended
December 31, 2008. Royalty expenses are related to obligations under license and
co-promotional agreements Pernix entered into in 2009. For a description of
Pernix’s license and co-promotion agreements, see Item 1–“Description of the
Business” above and Note 14 “Commitments and Contingencies” to
Pernix’s Combined and Consolidated Financial Statements for the years ended
December 31, 2009 and 2008, respectively.
General and Administrative
Expenses
General
and administrative expenses were approximately $6,388,000 and $3,709,000 for the
years ended in December 31, 2009 and 2008, respectively, an increase of
approximately $2,679,000, or 72.2%. Management and administrative
salaries and bonuses represented approximately $2,062,000, or 32.3%, and
$1,481,000, or 39.9%, of the total general and administrative expenses for the
years ended December 31, 2009 and 2008, respectively. The increase of
approximately $581,000, or 39.2%, was primarily due to the hiring of
an executive vice president of operations in January 2009 and a vice
president of supply chain management in October 2009 and an increase of
approximately $276,000 in bonuses paid in 2009. Other general and
administrative costs were $4,326,000 and $2,228,000 for the years ended December
31, 2009 and 2008, respectively, an increase of approximately $2,098,000, or
94.2%. This increase was primarily due to increases of approximately (i)
$681,000 in stock compensation expense related to a stock transaction in
January 2009 between one outside stockholder and certain officers of Pernix
at a discount to fair value, (ii) $870,000 in professional fees primarily
related to the Merger, (iii) $201,000 in consulting fees primarily related to
the termination of a long-term consulting arrangement, (iv) $92,000 in
management travel expenses due to increased efforts to expand Pernix’s product
offerings and territories, (v) $75,000 in printing and packaging costs, (vi)
$24,000 in office and operating supplies, (vii) $126,000 in personnel
related costs such as payroll taxes, health and life insurance, workers
compensation insurance, 401k employer contributions and other personnel related
expenses, and a net increase of approximately $28,000 in other
general and administrative expenses including property insurance, rent,
utilities, telephone, taxes and licenses and other miscellaneous
expenses.
Research
and Development Expense
Research
and development expenses were approximately $712,000 and $167,000, respectively,
for the years ended December 31, 2009 and 2008. The increase in research and
development expenses is primarily the result of increased development costs paid
to outside manufacturers.
Other
Income and Expenses
Gain on Disposal. Pernix sold
certain equipment and a warehouse facility located in Houma, Louisiana, during
the year ended December 31, 2008 that resulted in a gain on disposal of
approximately $68,000.
Depreciation and Amortization
Expense. Depreciation expenses were approximately $32,000 and $43,000 for
the years ended December 31, 2009 and 2008, respectively. The decrease of
approximately $11,000, or $25.6%, is due to the distribution of the office and
warehouse facilities in Magnolia, Texas and Gonzales, Louisiana to Pernix’s
stockholders in the third quarter of 2009. Each stockholder of Pernix
contributed his or her interests in these two properties to a limited liability
company wholly-owned by the stockholders of Pernix (in proportion to their
respective ownership interests in Pernix) that, in turn, leased both properties
back to Pernix. The term of each lease is month to month and may be terminated
by either party without penalty. As of December 31, 2009, Pernix pays rent of
$2,500 and $1,500 per month for the Texas and Louisiana facilities,
respectively, which Pernix believes approximates market rates.
Amortization
expense was approximately $179,000 and $112,000 for the years ended December 31,
2009 and 2008. The increase of approximately $67,000, or 59.8%, is
due to the amortization under certain agreements that were entered in to in
2009. For a description of Pernix’s license and other agreements, see Item
1–“Description of the Business” above and Note 14 “Commitments and
Contingencies” to Pernix’s Combined and Consolidated Financial Statements for
the years ended December 31, 2009 and 2008, respectively.
Interest
Income. Interest income was approximately $20,000 and $22,000
for the years ended December 31, 2009 and 2008,
respectively. Interest expense was approximately $14,000 for the year
ended December 31, 2008 and we had no interest expense during the year ended
December 31, 2009. Pernix had two loans that were paid in full during
the year ended December 31, 2008, for which interest expense was
incurred.
Other Income. Other
miscellaneous income was approximately $2,000 and $296,000 for the years ended
December 31, 2009 and 2008, respectively. The other income in 2008 was primarily
the result of a gain on the settlement of certain accounts payable.
Liquidity
and Capital Resources
Sources
of Liquidity
Pernix’s
net income was approximately $9,340,000 and $7,452,000 for the years ended
December 31, 2009 and 2008, respectively. As an S-corporation for the years
ended December 31, 2009 and 2008, Pernix generally did not pay
federal income taxes. Instead, Pernix’s income and losses were
generally included in the taxable income of its stockholders, who reported the
income and losses on their individual income tax returns and paid the
appropriate tax individually. As a result, Pernix’s net income before
non-controlling interest and net income attributable to controlling interest
line items in Pernix’s combined and consolidated statements of operations for
the financial periods reflected in this Form 8-K do not reflect the taxes on
Pernix’s income paid by its stockholders. Effective January 1, 2010, Pernix
revoked its S-corporation election, and began to pay income taxes at prevailing
federal and state corporate income tax rates.
Pernix
requires cash to meet its operating expenses and for capital expenditures,
acquisitions, and in-licenses of rights to products. To date, Pernix has funded
its operations primarily from product sales and co-promotion agreement revenues.
As of December 31, 2009, Pernix had approximately $4,874,000 in cash and cash
equivalents. As of March 9, 2010, after giving effect to the Merger
between Pernix and GTA, the combined company had approximately $14.3 million in
cash and cash equivalents.
Cash
Flows
The
following table provides information regarding Pernix’s cash flows for the years
ended December 31, 2009 and 2008.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
provided by (used in)
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
9,943,000 |
|
|
$ |
8,208,000 |
|
Investing
activities
|
|
|
(733,000
|
) |
|
|
(245,000
|
) |
Financing
activities
|
|
|
(9,506,000
|
) |
|
|
(3,911,000
|
) |
Net
increase (decrease) in cash and cash
equivalents
|
|
$ |
(296,000 |
) |
|
$ |
4,052,000 |
|
Net
Cash Provided By Operating Activities
Net cash
provided by operating activities for the year ended December 31, 2009 was
approximately $9,943,000 which primarily reflected Pernix’s net income of
approximately $9,199,000, adjusted by non-cash expenses totaling $1,541,000 and
changes in accounts receivable, inventories, accrued expenses and other
operating assets and liabilities. Non-cash items included amortization and
depreciation of approximately $211,000, stock compensation expense of
approximately $681,000 and provision for returns of approximately $860,000.
Accounts receivable increased approximately $1,651,000 from December 31,
2008, primarily due to increased product sales during 2009. Inventories
decreased approximately $579,000 from December 31, 2008, primarily due to
changes in product mix. Prepaid expenses and other assets increased by
approximately $2,093,000 primarily due to the prepaid contract with Macoven
under which we paid Macoven a one-time development fee of
$1,500,000. For a description of our agreement with Macoven, see Item
1-“Description of the Business” above.
Accrued
expenses increased approximately $1,768,000 from December 31, 2008,
primarily due to increases in accrued sales allowances, discounts and Medicaid
rebates. Accounts payable increased approximately $389,000 due to inventory
orders based on customer demand.
Net cash
provided by operating activities for the year ended December 31, 2008 was
approximately $8,208,000 which primarily reflected Pernix’s net income of
approximately $7,497,000, adjusted by non-cash expenses totaling approximately
$433,000 and changes in accounts receivable, inventories, accrued expenses and
other operating assets and liabilities. Non-cash items included provision for
returns of approximately $464,000, impairment of intangibles of approximately
$172,000 (related to the discontinuation of Z-COF 12DM), amortization and
depreciation of approximately $154,000, gain on the disposition of certain
equipment of approximately $68,000, and a gain on the settlement of certain
accounts payable owed by Gaine to Kiel of approximately $289,000 in
December 2008. Accounts receivable decreased approximately $239,000
primarily due to an increase in estimated discounts. Inventories increased
approximately $77,000 from December 31, 2007, primarily due to increased
sales in the fourth quarter of 2008. Accounts payable decreased approximately
$381,000 primarily due to payables due to Kiel at December 31, 2007 for
inventory orders. Accrued expenses increased approximately $1,082,000 from
December 31, 2007, primarily due to an increase of approximately $549,000
in accrued commissions, an increase of approximately $339,000 in accrued vendor
discounts and an increase of approximately $122,000 in the Medicaid rebate
accrual, all of which are driven by the increase in sales, along with an
increase of approximately $210,000 in contracts payable from a license agreement
that was executed in October 2008.
Net
Cash Used in Investing Activities
Net cash
used in investing activities for the years ended December 31, 2009 was
approximately $732,000. Pernix paid approximately (i) $100,000 to Kiel
Laboratories to amend an existing development agreement, (ii) $250,000 pursuant
to a non-compete settlement agreement related to the cancellation of a license
agreement to market Ubiquinone products offset by a non-cash adjustment of
approximately $180,000 for the write-off of unamortized balance under the
cancelled agreement, (iii) $450,000 for the acquisition of Brovex
assets including the trade name and related inventory, and (iv) $112,000 for the
purchase of certain office equipment . For a description of the
related agreements, see Item 1–“Description of the Business” above and Note
12 - “Intangible Assets” to Pernix’s Combined and Consolidated Financial
Statements for the years ended December 31, 2009 and 2008,
respectively.
Net cash
used in investing activities in the year ended December 31, 2008 was
approximately $245,000 which primarily reflected proceeds from the sale of
equipment of approximately $206,000 net of payments on construction in progress
of approximately $191,000. Additionally, Pernix paid $260,000 for a three-year
license to market Ubiquinone products (which Pernix markets under the QUINZYME
brand), which was terminated in October 2009 as noted above.
Net
Cash Used in Financing Activities
Net cash
used in financing activities for the year ended December 31, 2009 was
approximately $9,506,000 which included distributions to stockholders of
approximately $9,456,000 and approximately $51,000 representing the distribution
of Pernix’s 60% interest in Macoven as previously discussed.
Net cash
used in financing activities in the year ended December 31, 2008 was
approximately $3,911,000 which included payments on long-term debt of
approximately $293,000, distributions to stockholders of approximately
$2,842,000 and net treasury stock transactions of approximately
$776,000.
Funding
Requirements
As of
December 31, 2009, Pernix had no long-term debt. Pernix’s future capital
requirements will depend on many factors, including:
·
|
the
level of product sales of its currently marketed products and any
additional products that Pernix may market in the
future;
|
·
|
the
scope, progress, results and costs of development activities for Pernix’s
current product candidates;
|
·
|
the
costs, timing and outcome of regulatory review of Pernix’s product
candidates;
|
·
|
the
number of, and development requirements for, additional product candidates
that Pernix pursues;
|
·
|
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 Pernix’s product candidates and
products;
|
·
|
the
extent to which Pernix acquires or invests in products, businesses and
technologies;
|
·
|
the
extent to which Pernix chooses to establish collaboration, co-promotion,
distribution or other similar arrangements for its 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
Pernix.
|
To the
extent that Pernix’s capital resources are insufficient to meet its future
capital requirements, Pernix will need to finance its cash needs through public
or private equity offerings, debt financings, corporate collaboration and
licensing arrangements or other financing alternatives. Equity or debt
financing, or corporate collaboration and licensing arrangements, may not be
available on acceptable terms, if at all.
As of
December 31, 2009, Pernix had approximately $4,578,000 of cash and cash
equivalents on hand. As of March 9, 2010 after giving effect to the
Merger between Pernix and GTA, the combined company had approximately $14.3 of
cash and cash equivalents on hand. Pernix expects to fund the entire
$6.1 million purchase price for substantially all of Sciele Pharma’s assets and
rights related to CEDAX with the combined company’s existing cash and cash
equivalents and revenues from product sales. Additionally, based on
its current operating plans, Pernix believes that the combined company’s
existing cash and cash equivalents and revenues from product sales will be
sufficient to continue to fund its existing level of operating expenses and
capital expenditure requirements for the foreseeable future.
Off-Balance
Sheet Arrangements
Since its
inception, Pernix has not engaged in any off-balance sheet arrangements,
including structured finance, special purpose entities or variable interest
entities.
Effects
of Inflation
Pernix
does not believe that inflation has had a significant impact on its revenues or
results of operations since inception.
Recent
Accounting Pronouncements
See Note
2 – “Summary of Significant Accounting Policies” to Pernix’s Combined and
Consolidated Financial Statements for the years ended December 31, 2009 and
2008.
With
respect to Pernix, the information contained in the section of the Registrant’s
Definitive Proxy Statement filed with the SEC on February 8, 2010 titled
“Information about Pernix- Facilities” is incorporated herein by
reference.
With
respect to GTA, the information contained in Item 2 of the Registrant’s Form
10-K for the fiscal year ended December 31, 2009 filed with the SEC on February
24, 2010 is incorporated herein by reference.
ITEM 4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table describes, as of March 9, 2010, the beneficial ownership of our
common stock by (a) each of our directors, (b) each of our executive officers,
(c) all of our directors and executive officers as a group, and (d) each person
known to us to be the beneficial owner of five percent or more of our
outstanding common stock. Each person named in the table has sole voting and
investment/disposition power with respect to all of the shares of common stock
shown as beneficially owned by such person, except as otherwise set forth in the
notes to the table. Unless otherwise noted, the address of each person in the
table is c/o Pernix Therapeutics Holdings, Inc., 33219 Forest West Street,
Magnolia, Texas 77354.
|
|
Before
Merger and
Reverse
Split (1)
|
|
|
After
Merger and
Reverse
Split (2)
|
|
Name
of Beneficial Owner
|
|
Number
of
Shares
of
Common
Stock
|
|
|
Percentage
of
Class
|
|
|
Number
of
Shares
of
Common
Stock
|
|
|
Percentage
of
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper
C. Collins
|
|
|
* |
|
|
|
* |
|
|
|
9,405,000 |
|
|
|
38.3 |
% |
James
E. Smith, Jr.
|
|
|
* |
|
|
|
* |
|
|
|
5,225,000 |
|
|
|
21.28 |
% |
Anthem
Blanchard
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
Tracy
S. Clifford (3)
|
|
|
36,667 |
|
|
|
* |
|
|
|
30,000 |
|
|
|
* |
|
Jan
H. Loeb (4)
|
|
|
884,100 |
|
|
|
12.02 |
% |
|
|
462,050 |
|
|
|
1.88 |
% |
Michael
C. Pearce (5)
|
|
|
211,668 |
|
|
|
2.81 |
% |
|
|
180,000 |
|
|
|
* |
|
Michael
Venters
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
David
Waguespack
|
|
|
* |
|
|
|
* |
|
|
|
2,090,000 |
|
|
|
8.51 |
% |
Elizabeth
E. Bonner Deville
|
|
|
* |
|
|
|
* |
|
|
|
2,090,000 |
|
|
|
8.51 |
% |
Brandon
Belanger
|
|
|
* |
|
|
|
* |
|
|
|
2,090,000 |
|
|
|
8.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and executive officers as a group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
persons)
|
|
|
1,132,435 |
|
|
|
15.48 |
% |
|
|
15,302,050 |
|
|
|
62.31 |
% |
(1)
|
Based
on 7,317,163 common shares outstanding immediately prior to the Merger and
reverse stock split. In accordance with the rules of the Securities and
Exchange Commission, each person’s percentage interest is calculated by
dividing such person’s beneficially owned common shares by the sum of the
total number of common shares outstanding plus the number of options which
will become exercisable within 60 days of March 9, 2010 according to their
respective vesting schedules.
|
(2)
|
Beneficial
ownership reported under the heading “After Merger and Reverse Split”
reflects the change in ownership of our common stock following
consummation of the Merger based on the issuance of 20,900,000 additional
shares of the Registrant’s common stock to the former stockholders of
Pernix, the immediate vesting of all outstanding, unvested options held by
our directors and executive officers pursuant to the Merger Agreement, and
a one for two reverse stock split.
|
(3)
|
Beneficial
ownership reported under the heading “Before Merger and Reverse Split”
includes options to purchase 36,667 shares of our common stock which have
vested and are exercisable as of March 9, 2010, or will become exercisable
within 60 days from that date, and excludes 23,333 options which are
scheduled to vest as follows: (i) 16,667 options on January 18, 2011;
(ii) 3,333 options on February 27, 2011; and (iii) 3,333 options on
February 27, 2012.
|
(4)
|
Mr.
Loeb’s business address is 10451 Mill Run Circle, Owings Mills, Maryland
21117. Mr. Loeb reports that he has sole power to vote or to direct the
vote of 806,100 shares, shared power to vote or to direct the vote of
38,000 shares, sole power to dispose or to direct the disposition of
806,100 shares and shared power to dispose or to direct the disposition of
38,000 shares. Beneficial ownership reported under the heading “Before
Merger and Reverse Split” includes options to purchase 40,000 shares of
our common stock which have vested and are exercisable as of March 9,
2010, or will become exercisable within 60 days from that date, and
excludes 40,000 options which are scheduled to vest as follows: (i) 13,334
options on January 23, 2011; (ii) 13,333 options on March 4,
2011; and (iii) 13,333 options on March 4,
2012.
|
(5)
|
Beneficial
ownership reported under the heading “Before Merger and Reverse Split”
includes options to purchase 211,668 shares of our common stock which have
vested and are exercisable as of March 9, 2010, or will become exercisable
within 60 days from that date, and excludes 148,332 options which are
scheduled to vest as follows: (i) 91,666 on December 24, 2010, (ii)28,333
on February 27,2011, and (iii) 28,333 on February 27,
2012.
|
ITEM 5.
DIRECTORS AND EXECUTIVE OFFICERS.
Directors
and Executive Officers
The Registrant’s
directors and executive officers, their ages and their positions are as
follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Michael
C. Pearce
|
|
48
|
|
Chairman
of the Board
|
Cooper
C. Collins
|
|
30
|
|
President
and Chief Executive Officer, and Director
|
Jan
H. Loeb
|
|
51
|
|
Director
|
Anthem
Blanchard
|
|
29
|
|
Director
|
Jim
Smith
|
|
57
|
|
Director
|
Tracy
S. Clifford
|
|
41
|
|
Chief
Financial Officer, Treasurer and Secretary
|
Michael
Venters
|
|
44
|
|
Executive
Vice President of Operations
|
In
choosing our directors, we have sought persons with the highest personal and
professional ethics, integrity and values, who can commit themselves to
representing the long-term interests of our stockholders. Our
directors must also have an inquisitive and objective perspective, practical
wisdom and mature judgment. Our directors must be willing to devote
sufficient time to carrying out their duties and responsibilities effectively
and should be committed to serve on our board for an extended period of
time. In addition to these attributes, each of our directors has a
strong and unique background and experience which led us to conclude that he
should serve as a director of our company. These qualifications are
set forth below each director’s biography. Additionally, in
determining the composition of our board, we consider the director independence
and committee requirements of NYSE Amex rules and all legal
requirements.
Michael C.
Pearce has been a director of the Registrant since September 17,
2007 and served as Chief Executive Officer and President of the Registrant from
November 8, 2007 to March 9, 2010. He has been Chairman of the board of
directors since December 17, 2007. Mr. Pearce has been a private investor
in various companies since 2002, with emphasis in distressed securities of
publicly-traded entities. From late 1999 through 2001, he served as Chief
Executive Officer of iEntertainment Network. From 1996 to 1998, he served as
Senior Vice President of Sales and Marketing of publicly-traded VocalTec
Communications, later returning in 1999 in a consulting capacity to its Chairman
on matters pertaining to strategic alternatives, business development and
mergers and acquisitions. From 1983 to 1996, he was employed in various
technology industry management positions, including Senior Vice President of
Sales and Marketing at Ventana Communications, a subsidiary of Thomson
Corporation, Vice President of Sales at Librex Computer Systems, a subsidiary of
Nippon Steel, and National Sales Manager at Hyundai Electronics America. From
1979 to 1983, he attended Southern Methodist University. Mr. Pearce also serves
on the boards of directors of AVP, Inc. and Spatializer Audio Laboratories,
Inc.
Areas of
experience include:
·
|
Public
company management
|
·
|
Sales
and marketing knowledge and
experience
|
Cooper C.
Collins was appointed President and Chief Executive Officer and a
director of the Registrant effective upon the closing of the
Merger. Mr. Collins joined Pernix in 2002 and served as President of
Pernix since December 2007 and as a director of Pernix since
January 2007. In June 2008, Mr. Collins was appointed
Chief Executive Officer. From December 2005 to December 2007,
Mr. Collins served as Vice President of Business and Product
Development. From December 2003 to December 2005,
Mr. Collins served as Territory Manager of Pernix. Over Mr. Collins’
tenure as an executive with Pernix, he has been responsible for increasing the
overall growth, profitability and efficiency of the organization, overseeing
product development and acquisitions, and managing the capital structure of
Pernix. Before joining Pernix, Mr. Collins was employed by the NFL
franchise the New Orleans Saints in their media relations department.
Mr. Collins received a Bachelors of Arts from Nicholls State University
while on a football scholarship and additionally received a Master’s degree in
Business Administration from Nicholls State University.
Areas of
experience include:
·
|
Operational
knowledge of our company
|
·
|
Sales
and marketing knowledge and
experience
|
Jan H.
Loeb has been an independent director of the Registrant under the rules
of the NYSE Amex since November 17, 2006 and Chairman of the Registrant’s
Audit Committee since October 10, 2007. He is the Audit Committee’s
financial expert and also served on the Registrant’s Nominating Committee. Mr.
Loeb is currently a portfolio manager for Leap Tide Capital Management, Inc., a
position he has held since February 2005. From February 2004 through
January 2005, Mr. Loeb was a portfolio manager for Chesapeake Partners.
From January 2002 through December 2004, Mr. Loeb was a Managing
Director of Jefferies & Company, Inc., an investment banking firm based in
New York City. From 1994 through 2001, Mr. Loeb was a Managing Director of
Dresdner Kleinwort and Wasserstein, Inc., an investment banking firm based in
New York City, which was formerly known as Wasserstein Perella & Co., Inc.
Mr. Loeb also serves on the board of directors of American Pacific Corporation,
a chemical and aerospace corporation, and TAT Technologies, LTD, which provides
services and products to the military and commercial aerospace and ground
defense industries. He serves on the boards of numerous charitable
organizations. Mr. Loeb holds a Bachelor of Business Administration from Bernard
M. Baruch College.
Areas of
experience include:
·
|
Public
company management
|
·
|
Audit
Committee experience
|
Anthem
Blanchard has been a director of the Registrant since March 9, 2010 and
is currently the CEO and a director of nuMetra, Inc., a software manufacturer
enabling network carriers to offer ‘over the top’ IPTV service to consumers via
‘guaranteed’ delivery of broadband across the Internet. Prior to joining the
nuMetra team as its CEO in September 2008, Mr. Blanchard served as a
key strategic advisor to the company since December 2002. From
September 2002 through August 2008, Mr. Blanchard served as one
of the founding members of online precious metal retailer and currency provider
GoldMoney.com in the role of Director of Strategic Development & Marketing.
During his tenure at GoldMoney, Mr. Blanchard identified and served in an
advisory role to several entrepreneurial ‘newcomers’ to the precious metal
industry, including Robert Kiyosaki’s Rich Dad Precious Metals Expert, and
author Michael Maloney of GoldSilver.com and author Trace Mayer, J.D. of
RunToGold.com. Mr. Blanchard holds a Bachelor of Arts in Finance &
Accounting from Emory University.
Areas of
experience include:
·
|
Emerging
company management
|
James E. (“Jim”)
Smith, Jr. served as Chairman of the board of Pernix from June 2008
until the consummation of the Merger and became a director of the Registrant on
March 9, 2010. Mr. Smith has also served as the managing partner of Stewart
Title of Louisiana since 1987. Prior to joining Stewart Title, Mr. Smith
founded Smith Law Firm, where he practiced from 1984 to 1987. Before founding
the Smith Law Firm in 1984, Mr. Smith was a staff attorney for the Federal
Energy Regulatory Commission of the U.S. Department of Energy from 1978 to 1980.
From 1980 to 1983, he was Corporate Counsel for T. Smith & Son, Inc.
Mr. Smith received his undergraduate degree from Boston College in 1975. He
attended Cambridge University in England where he received an L.L.B. in 1978 and
earned an L.L.M. in 1980 from George Washington University. Jim also obtained
postgraduate legal training in admiralty law at Tulane University. Jim offers
extensive experience in land use and real estate matters. He manages an active
real estate practice and directs projects of various sizes and characters.
Mr. Smith represents buyers, sellers, and lenders in real estate
transactions, including all types of contract and document preparation and
numerous real estate financings. He practices before the U.S. District Court for
the Eastern District of Louisiana, the U.S. Court of Appeals for the Fifth
Circuit, the U.S. Tax Court and the Supreme Court of Louisiana. He is a member
of the New Orleans Bar Association, Louisiana State Bar Association (sections on
Real Estate, Business, and Corporate Law), American Bar Association (sections on
Real Estate, Corporations, Banking and Business Law, and Tax Law), Board of
Trustees of the International Association of Gaming Attorneys, and the American
Bar Association Committee on Gaming Law. Mr. Smith also serves as a
director of various private corporations.
Areas of
experience include:
·
|
Private
company management
|
·
|
Operational
knowledge of our company
|
Tracy S.
Clifford was appointed Chief Financial Officer on January 18, 2008, a
position she continues to hold with the Registrant following the Merger.
Previously, Ms. Clifford served as the Registrant’s Principal Accounting Officer
since February 5, 2007, and as its Corporate Secretary since February 20, 2007.
On March 10, 2010, Ms. Clifford was appointed Treasurer. Ms. Clifford
had been GTA’s Controller since September 1999. Before joining GTA, Ms.
Clifford served as a Director of Finance (February 1999 to September 1999) and
Manager of Accounting and Financial Reporting (May 1995 to February 1999) at
United Healthcare of Georgia in Atlanta.
From June
1993 to May 1995, Ms. Clifford served as Manager of Accounting (January 1994 to
May 1995) and Senior Accountant (June 1993 to January 1994) at North Broward
Hospital District in Fort Lauderdale, Florida. Ms. Clifford began her career at
Deloitte & Touche in Miami, Florida, where she was an auditor primarily for
clients in the healthcare industry from September 1991 to June 1993. Ms.
Clifford holds a Bachelor of Science degree in Accounting from the College of
Charleston and a Master’s degree in Business Administration with a concentration
in finance from Georgia State University. Ms. Clifford is a member of the South
Carolina Association of CPAs and the American Institute of CPAs and serves as an
adjunct faculty member in the School of Business and Economics at the College of
Charleston.
Michael
Venters was appointed as the Registrant’s Executive Vice President of
Operations effective upon the closing of the Merger. He has served as
Pernix’s Executive Vice President of Operations since he joined Pernix in
January 2009. Mr. Venters was a founding stockholder of Cornerstone
BioPharma, Inc. and its affiliate Aristos Pharmaceuticals, Inc. (Cornerstone’s
generic division), and, prior to joining Pernix, served as Vice President of
Business Development of Aristos Pharmaceuticals. From February 2000 to
September 2003, Mr. Venters served as National Account
Manager for DJ Pharma, Inc. which was later purchased by Biovail
Pharmaceuticals, Inc. His pharmaceutical career began in 1993 as a
field sales representative at Dura Pharmaceuticals, Inc. He was later promoted
to several other sales and marketing positions within Dura. Mr. Venters
holds a Bachelors of Arts degree from the University of Kentucky.
With
respect to Pernix, the information contained in the sections of the Registrant’s
Definitive Proxy Statement filed with the SEC on February 8, 2010, titled
“Information about Pernix-Executive Compensation” and “Information about
Pernix-Director Compensation” are incorporated herein by reference.
Compensation
Committee Interlocks and Insider Participation.
Prior to
the Merger, Pernix did not have a compensation committee. During
fiscal year 2009, all deliberations and decisions concerning executive officer
compensation were made by Pernix’s board of directors, including Cooper Collins,
Pernix’s President and Chief Executive Officer. None of Pernix’s
executive officers served during the last fiscal year on the board of directors
or on the compensation committee of another entity, one of whose executive
officers served on Pernix’s board of directors.
With
respect to GTA, the information contained in Item 11 – “Executive Compensation”
of the Registrant’s Form 10-K for the fiscal year ended December 31, 2009 filed
with the SEC on February 24, 2010 is incorporated herein by
reference.
ITEM 7. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
With
respect to Pernix, the information contained in the section of the Registrant’s
Definitive Proxy Statement filed with the SEC on February 8, 2010 titled
“Information about Pernix-Related Party Transactions” is incorporated herein by
reference.
With
respect to the GTA, the information contained in Item 13 – “Certain
Relationships and Related Party Transactions, and Director Independence” of the
Registrant’s Form 10-K for the fiscal year ended December 31, 2009 filed with
the SEC on February 24, 2010 is incorporated herein reference.
Director
Independence
All of the members of the
Registrant’s board of directors meet the standards for independence under NYSE
AMEX corporate governance standards, other than Messrs. Pearce and
Collins. All of the members of the Registrant’s audit committee meet
the standards for independence for audit committee members under the SEC’s and
NYSE AMEX rules.
ITEM 8.
LEGAL PROCEEDINGS.
With
respect to Pernix, the information contained in the section of the Registrant’s
Definitive Proxy Statement filed with the SEC on February 8, 2010 titled
“Information about Pernix-Legal Proceedings” is incorporated herein
reference.
With
respect to GTA, the information contained in Item 3 – “Legal Proceedings” of the
Registrant’s Form 10-K for the fiscal year ended December 31, 2009 filed with
the SEC on February 24, 2010 is incorporated herein by reference.
ITEM 9.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
With respect to Pernix, the
information contained in the section of the Registrant’s Definitive Proxy
Statement filed with the SEC on February 8, 2010 titled “Information about
Pernix-Market Price and Dividends” is incorporated herein by
reference.
With respect to GTA, the information
contained in Item 5- “Market for Registrant’s Common Equity, Related Stockholder
Maters and Issuer Purchases of Equity Securities” of the Registrant’s Form 10-K
for the fiscal year ended December 31, 2009 filed with the SEC on February 24,
2010 is incorporated herein by reference.
ITEM 10.
RECENT SALES OF UNREGISTERED SECURITIES.
Recent
Sales of Unregistered Securities by Pernix
On
January 1, 2007, Pernix issued 335 shares of $1.00 par value common stock,
which included 3 shares of treasury stock for $1,005,000. Also, during the year
ended December 31, 2007, Pernix repurchased 275 shares of common stock for
$2,750,000 under a stock repurchase plan previously authorized by the board of
directors.
On
January 1, 2008, Pernix also amended its Articles of Incorporation to
reduce the number of authorized shares of its common stock from 1,000 to 300,
and reduced the par value of its common stock from $1.00 to no par value. On
April 1, 2008, Pernix issued 9 shares of treasury stock for $99,000 to
three employees.
Recent
Sales of Unregistered Securities by GTA
With
respect to the unregistered shares issued in the Merger, the information
contained in Item 2.01 – “Overview” of this Form 8-K is incorporated herein by
reference.
ITEM 11.
DESCRIPTION OF REGISTRANT’S SECURITIES TO BE
REGISTERED
The
following summary description of the material features of the Registrant’s
capital stock is qualified in its entirety by reference to the applicable
provisions of Maryland law and by the Registrant’s Articles of Incorporation and
bylaws.
Authorized and
Outstanding Capital Stock. Our authorized capital stock consists of: (i)
10,000,000 shares of preferred stock, $.01 par value per share, of which none
are outstanding; and (ii) 90,000,000 shares of common stock, par value $.01 per
share, of which 24,558,582 shares are issued and outstanding as of March 9,
2010.
As of
March 9, 2010, 360,000 shares of our common stock were subject to options held
by our current and former executive officers and directors under our 2007 Stock
Option Plan, all of which vested upon the closing of the Merger.
As of
March 9, 2010, there were 3,683,787 shares of our capital stock reserved for
issuance under our 2009 Stock Incentive Plan. On March 10, 2010, the Registrant
awarded 25,000 options and 25,000 shares of restricted stock to each of the
members of the Registrant’s board of directors. Except as indicated herein,
there are no outstanding or authorized options, warrants, rights, agreements,
convertible or exchangeable securities, or other commitments, contingent or
otherwise, relating to our capital stock pursuant to which we are or may become
obligated to make a cash payment or to issue shares of capital stock or any
securities convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of our capital stock.
Common
Stock. The holders of our common stock possess exclusively all voting
power and are entitled to one vote per share on all matters voted on by the
company’s stockholders, including elections of directors. Our Articles of
Incorporation do not provide for cumulative voting for the election of
directors. The holders of our common stock are entitled to such dividends as may
be declared from time to time by the company’s board of directors from funds
available therefor. Upon liquidation, holders of our common stock will be
entitled to receive pro rata all of our assets available for distribution to
such holders, after payment to holders of preferred stock, if any such payment
is required. The holders of our common stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to our common stock.
Preferred
Stock. Our board of directors is empowered to authorize the issuance, in
one or more series, of shares of preferred stock at such times, for such
purposes and for such consideration as it may deem advisable without stockholder
approval. Our board is also authorized to fix the designations, voting,
conversion, preference and other relative rights, qualifications and limitations
of any such series of preferred stock. No shares of our preferred stock are
outstanding as of the date of this Form 8-K.
The board
of directors, without stockholder approval, may authorize the issuance of one or
more series of preferred stock with voting and conversion rights which could
affect adversely the voting power of the holders of our common stock and, under
certain circumstances, discourage an attempt by others to gain control of our
company.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is BNY Mellon Shareowner
Services, 480 Washington Blvd., 29th Floor, Jersey City, NY 07310.
ITEM 12.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section
2-418 of the Maryland General Corporation Law (the “MGCL”) empowers us to
indemnify, subject to the standards set forth therein, any person who is a party
in any action in connection with any action, suit or proceeding brought or
threatened by reason of the fact that the person was a director, officer,
employee or agent of our company, or is or was serving as such with respect to
another entity at our request. The MGCL also provides that we may purchase
insurance on behalf of any such director, officer, employee or
agent.
Our
articles of incorporation and bylaws provide for indemnification of our officers
and directors to the fullest extent permitted under Section 2-418 of the MGCL.
The articles and bylaws also provide that the expenses of officers and directors
incurred in defending any action, suit or proceeding, whether civil, criminal,
administrative or investigative, must be paid by us as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to repay all
amounts so advanced if it is ultimately determined by a court of competent
jurisdiction that the officer or director is not entitled to be indemnified by
us.
Our
articles of incorporation and bylaws limit the liability of our directors and
officers for money damages to the company and its stockholders to the fullest
extent permitted from time to time by Maryland law. Maryland law presently
permits the liability of directors and officers to a corporation or its
stockholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. This provision does not limit the ability of
the company or its stockholders to obtain other relief, such as an injunction or
rescission.
Our
articles of incorporation and bylaws also require us to purchase and maintain
director and officer insurance.
Insofar
as indemnification for liabilities arising out of the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, the we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by our directors, officers or
controlling persons in the successful defense of any action suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the act an will be governed by the final
adjudication of such issue.
ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
See
Item 9.01 Financial Statements and Exhibits.
ITEM 14.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Change in
GTA’s Independent Registered Accountants for Fiscal Year
2008. On
April 10, 2008, GTA’s board of directors, based on its Audit Committee’s
recommendation, dismissed BDO Seidman, LLP (“BDO”) as the company’s independent
registered public accountants and approved the engagement of Cherry Bekaert
& Holland, L.L.P. to serve as the company’s independent registered public
accountants for fiscal year 2008. BDO’s reports on GTA’s financial statements
for the years ended December 31, 2007 and 2006 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the years ended
December 31, 2007 and 2006 and through the date of dismissal of BDO, there
were no disagreements with BDO on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to BDO’s satisfaction, would have caused them to make reference
to the subject matter in conjunction with their report on the company’s
consolidated financial statements for such years; and there were no reportable
events, as listed in Item 304(a)(1)(v) of Regulation S-K. The company
provided BDO with a copy of the foregoing disclosures and requested in writing
that BDO furnish the company with a letter addressed to the Securities and
Exchange Commission stating whether or not they agree with such disclosures. BDO
provided a letter, dated April 15, 2008 stating its agreement with such
statements.
Change in
Pernix’s Independent Registered Accountant. On October 14, 2009, Pernix’s
board of directors unanimously approved the engagement of Cherry Bekaert &
Holland, L.L.P. (“CBH”) to audit Pernix’s financial statements in
accordance with the auditing and professional practice standards established by
the Public Company Accounting Oversight Board (“PCAOB”) which are required as
part of the SEC reporting requirements. Prior to this engagement, Pernix’s
financial statements were historically audited by BDO Seidman, LLP
(“BDO”).
The
reports of BDO on Pernix’s financial statements for the fiscal years ended
December 31, 2008 and 2007 were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During
the years ended December 31, 2008 and 2007, respectively, and the period from
January 1, 2009 through October 14, 2009, there were no (i) disagreements
between Pernix and BDO on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure with respect to
Pernix which disagreements, if not resolved to the satisfaction of BDO, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report, or (ii) except as disclosed in the paragraph below,
“reportable events” as described in Item 304(a)(1)(v) of Regulation
S-K.
During
BDO’s audit of Pernix’s financial statements for the fiscal year ended December
31, 2008, BDO identified material weaknesses in Pernix’s internal control over
financial reporting related to Pernix’s need to implement a structured periodic
(monthly, quarterly, annual) closing process, including preparing
reconciliations of all significant accounts and the lack of segregation of
duties in the posting and reconciling of cash. These comments were repeated in
Pernix’s communications from CBH. Management is in the process of
implementing certain controls to remediate these material
weaknesses.
The
Registrant has provided BDO with a copy of the above disclosure and requested
that BDO furnish the Registrant with a letter addressed to the SEC stating
whether or not they agree with such disclosure. A copy of the letter
from BDO to the SEC, dated March 9, 2010 is attached as Exhibit 16.1 to this
Form 8-K.
ITEM 15.
FINANCIAL STATEMENTS AND EXHIBITS
See
Item 9.01 Financial Statements and Exhibits.
ITEM
2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On March
10, 2010, Cooper Collins, President and Chief Executive Officer of the
Registrant, delivered a presentation on behalf of the Registrant at the Cowen
and Company 30th
Annual Health Care Conference. The presentation was accompanied by
slides that included information pertaining to the financial results, results of
operations and business strategies of Pernix. The slides used in the
presentation are furnished as Exhibit 99.1.
The
information in this Item 2.02 of this Form 8-K and Exhibit 99.1 attached
hereto shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933 or any proxy statement
or report or other document we may file with the SEC, regardless of any general
incorporation language in any such filing, except as shall be expressly set
forth by specific reference in such filing.
ITEM
3.02 UNREGISTERED SALES OF EQUITY SECURITIES
The
information contained in Item 2.01 – “Overview” of this Form 8-K is incorporated
herein by reference.
ITEM
5.01 CHANGES IN CONTROL OF REGISTRANT
The information contained in Item 2.01
– “Overview” of this Form 8-K and the section of the Registrant’s Definitive
Proxy Statement filed with the SEC on February 8, 2010 titled “The Merger” are
incorporated herein by reference.
ITEM
5.02. DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF
CERTAIN OFFICERS
The information contained in the
sections titled “Overview” and Item 5 of Item 2.01 of this Form 8-K and the
section of the Registrant’s Definitive Proxy Statement filed with the SEC on
February 8, 2010 titled “Information about Pernix-Related Party Transactions”
are incorporated herein by reference.
ITEM
5.03 AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR
Effective
March 10, 2010, the Registrant’s board of directors unanimously approved two
amendments to its bylaws. The first amendment amended and restated in
its entirety Article I, Section 1 of the bylaws, to change the Registrant’s name
to “Pernix Therapeutics Holdings, Inc.” and establish the Registrant’s principal
office as 33219 Forrest West Drive, Magnolia, Texas 77354, or any other place as
the board may from time to time determine. The second amendment amended and
restated in its entirety Article III, Section 1, providing that the location of
all stockholder meetings shall be any place in the United States as may be
stated in the notice of the annual or special meeting.
The foregoing description of amendments
to the bylaws in this Item 5.03 is qualified in its entirety by reference
to the full text of the bylaws filed as Exhibit 3.2 to this report and
incorporated herein by reference.
ITEM
5.06 CHANGE IN SHELL COMPANY STATUS
To the extent the Registrant was at any
time deemed to be a shell company, it is no longer a shell company as a result
of the Merger. The information contained in the section titled
“Overview” of Item 2.01 of this Form 8-K and the section of the Registrant’s
Definitive Proxy Statement filed with the SEC on February 8, 2010 titled “The
Merger” are incorporated herein by reference.
ITEM
9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a)
|
Financial
statements of business acquired. Audited financial statements
of Pernix Therapeutics, Inc. for the fiscal years ended December 31, 2009
and 2008.
|
(b)
|
Pro
forma financial information. Combined audited pro forma balance
sheet of Pernix Therapeutics, Inc. at December 31, 2009 and Golf Trust of
America, Inc. at December 31, 2009.
|
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger By and Among Golf Trust of America, Inc., GTA
Acquisition, LLC and Pernix Therapeutics, Inc. dated as of October 6, 2009
(previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
on October 7, 2009, and incorporated herein by
reference)
|
|
|
|
|
|
Articles
of Incorporation, as currently in effect
|
|
|
|
|
|
Bylaws,
as currently in effect
|
|
|
|
|
|
2009
Stock Incentive Plan
|
|
|
|
10.2
|
|
Pharmaceuticals
Agreement dated as of July 27, 2009, by and between Pernix Therapeutics,
Inc. and Macoven Pharmaceuticals, L.L.C.
|
|
|
|
|
|
Employment
and Non-Compete Agreement, dated December 31, 2008, by and between Pernix
Therapeutics, Inc. and Michal Venters
|
|
|
|
|
|
Employment
Non-Compete Agreement, dated Jun 1, 2008, by and between Pernix
Therapeutics, Inc. and Cooper Collins
|
|
|
|
10.5
|
|
Form
of Merger Partner Stockholder Agreement (previously filed as Exhibit A to
Exhibit 10.1 to our Current Report on Form 8-K filed on October 7, 2009,
and incorporated herein by reference.
|
|
|
|
|
|
Letter
from BDO Seidman, LLP to the SEC dated March 12, 2010
|
|
|
|
|
|
Subsidiaries
of the Company
|
|
|
|
|
|
Consent
of Cherry, Bekeart & Holland, L.L.P.
|
|
|
|
|
|
Cowen
and Company Healthcare Conference Presentation dated March 10,
2010
|
INDEX TO FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
Page |
|
Unaudited Pro Forma
Combined Consolidated Balance Sheets |
|
|
F-3 |
|
Unaudited Pro Forma
Combined Consolidated Statements of
Operations |
|
|
F-4 |
|
Notes to the
Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Operations |
|
|
F-5 |
|
|
|
|
|
|
|
|
|
|
|
PERNIX THERAPEUTICS,
INC. |
|
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm –Cherry, Bekaert &
Holland, L.L.P. |
|
|
F-8 |
|
Combined and
Consolidated Balance Sheets at December 31, 2009 and
2008 |
|
|
F-9 |
|
Combined
and Consolidated Statements of Income for Years Ended December
31, 2009 and 2008 |
|
|
F-10 |
|
Combined
and Consolidated Statements of Stockholders’ Equity for Years Ended
December
31, 2009 and 2008 |
|
|
F-11 |
|
Combined and
Consolidated Statements of Cash Flows |
|
|
F-12 |
|
Notes to Combined
and Consolidated Financial Statements |
|
|
F-13 |
|
UNAUDITED
PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL INFORMATION
The
following unaudited pro forma combined and consolidated financial information is
designed to show how the merger of GTA and Pernix might have affected historical
financial statements if the merger had been completed at an earlier time and was
prepared based on the historical financial results reported by GTA and disclosed
by Pernix in this Form 8-K.
The
unaudited pro forma combined and consolidated balance sheet data assumes that
the merger took place on December 31, 2009, and combines GTA’s consolidated
balance sheet as of December 31, 2009 with Pernix’s combined and
consolidated balance sheet as of December 31, 2009. The unaudited pro forma
combined and consolidated statements of operations for the year ended December
31, 2009 give effect to the merger as if it occurred on January 1, 2009.
The unaudited pro forma combined and consolidated financial statements give
effect to the proposed merger under the acquisition method of
accounting.
The
unaudited pro forma combined and consolidated financial information, while
helpful in illustrating the financial characteristics of the combined and
consolidated company under one set of assumptions, does not reflect the benefits
of any cost savings or opportunities to earn additional revenue and,
accordingly, does not attempt to predict or suggest future results. It also is
not necessarily indicative of the financial condition or results of operations
of future periods or the financial condition or results of operations that
actually would have been realized had the companies been combined during these
periods.
PERNIX
THERAPEUTICS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED AND CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
Historical
as of
December
31, 2009
|
|
|
|
|
|
|
|
|
|
Golf
Trust of
America,
Inc.
|
|
|
Pernix
Therapeutics,
Inc.
|
|
|
Pro forma
Adjustments
|
|
|
Pro
forma
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,714 |
|
|
$ |
4,579 |
|
|
$ |
(383) |
(e) |
|
$ |
10,910 |
|
Note
receivable – current
|
|
|
133 |
|
|
|
— |
|
|
|
— |
|
|
|
133 |
|
Accounts
receivable
|
|
|
— |
|
|
|
3,836 |
|
|
|
— |
|
|
|
3,836 |
|
Inventories
|
|
|
— |
|
|
|
1,082 |
|
|
|
— |
|
|
|
1,082 |
|
Prepaids
and other current assets
|
|
|
28 |
|
|
|
1,984 |
|
|
|
— |
|
|
|
2,012 |
|
Deferred
tax asset - current
|
|
|
— |
|
|
|
— |
|
|
|
2,738 |
(d)
|
|
|
2,738 |
|
Total
current assets
|
|
|
6,875 |
|
|
|
11,481 |
|
|
|
2,355 |
|
|
|
20,711 |
|
Property
& equipment – net
|
|
|
965 |
|
|
|
139 |
|
|
|
— |
|
|
|
1,104 |
|
Intangible
assets
|
|
|
— |
|
|
|
1,409 |
|
|
|
— |
|
|
|
1,409 |
|
Other
assets – long-term
|
|
|
— |
|
|
|
383 |
|
|
|
634 |
(d) |
|
|
1,017 |
|
Note
receivable – long-term
|
|
|
120 |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
TOTAL
ASSETS
|
|
$ |
7,960 |
|
|
$ |
13,412 |
|
|
$ |
2,989 |
|
|
$ |
24,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
86 |
|
|
$ |
437 |
|
|
$ |
— |
|
|
$ |
523 |
|
Accrued
expenses
|
|
|
62 |
|
|
|
243 |
|
|
|
(29) |
(e) |
|
|
276 |
|
Accrued
allowances
|
|
|
— |
|
|
|
6,795 |
|
|
|
— |
|
|
|
6,795 |
|
Accrued
personnel cost
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
current liabilities |
|
|
148 |
|
|
|
8,036 |
|
|
|
(29 |
) |
|
|
8,155 |
|
Total
Liabilities
|
|
|
148 |
|
|
|
8,036 |
|
|
|
(29 |
) |
|
|
8,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
and Non-Controlling Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
73 |
|
|
|
— |
|
|
|
172 |
(a)
|
|
|
245 |
|
Additional
Paid in Capital
|
|
|
8,982 |
|
|
|
998 |
|
|
|
1,957 |
(a)(d) |
|
|
11,937 |
|
Retained
earnings
|
|
|
(1,243
|
) |
|
|
4,308 |
|
|
|
889 |
(a)
|
|
|
3,954 |
|
Total
Stockholders’ Equity
|
|
|
7,812 |
|
|
|
5,306 |
|
|
|
3,018 |
|
|
|
16,136 |
|
Non-controlling
equity
|
|
|
— |
|
|
|
70 |
|
|
|
— |
|
|
|
70 |
|
Total
Equity
|
|
|
7,812 |
|
|
|
5,376 |
|
|
|
3,018 |
|
|
|
16,206 |
|
TOTAL
LIABILITIES & EQUITY
|
|
$ |
7,960 |
|
|
$ |
13,412 |
|
|
$ |
2,989 |
|
|
$ |
24,361 |
|
See
accompanying notes to combined and consolidated financial
statements.
PERNIX
THERAPEUTICS, INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
Historical Year
Ended
December
31, 2009
|
|
|
|
|
|
|
|
|
Golf
Trust of
America,
Inc.
|
|
|
Pernix
Therapeutics,
Inc.
|
|
|
Pro forma
Adjustments
|
|
Pro forma
|
|
Net
Sales
|
|
$ |
— |
|
|
$ |
27,930 |
|
|
$ |
— |
|
$ |
27,930 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
— |
|
|
|
5,437 |
|
|
|
— |
|
|
5,437 |
|
Selling
expenses
|
|
|
— |
|
|
|
4,742 |
|
|
|
— |
|
|
4,742 |
|
Royalty
expenses
|
|
|
— |
|
|
|
1,224 |
|
|
|
— |
|
|
1,224 |
|
General
and administrative
|
|
|
1,562 |
|
|
|
6,388 |
|
|
|
(1,064) |
(b) |
|
6,886 |
|
Research
and development expense
|
|
|
— |
|
|
|
712 |
|
|
|
— |
|
|
712 |
|
Impairment
loss
|
|
|
80 |
|
|
|
— |
|
|
|
— |
|
|
80 |
|
Depreciation
and amortization expense
|
|
|
4 |
|
|
|
211 |
|
|
|
(16) |
(c) |
|
199 |
|
Total
costs and expenses
|
|
|
1,646 |
|
|
|
18,714 |
|
|
|
(1,080) |
|
|
19,280 |
|
Income
(loss) from operation
|
|
|
(1,646
|
) |
|
|
9,216 |
|
|
|
1,080 |
|
|
8,650 |
|
Other
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
96 |
|
|
|
20 |
|
|
|
— |
|
|
116 |
|
Other
income
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
2 |
|
Other
income, net
|
|
|
96 |
|
|
|
22 |
|
|
|
— |
|
|
118 |
|
Income
(loss) from continuing operations before income tax and non-controlling
interest
|
|
|
(1,550
|
) |
|
|
9,238 |
|
|
|
1,080 |
|
|
8,768 |
|
Less:
Provision for taxes
|
|
|
— |
|
|
|
39 |
|
|
|
3,250 |
(d) |
|
3,289 |
|
Net
income/(loss) before
non-controlling interest
|
|
|
(1,550
|
) |
|
|
9,199 |
|
|
|
(2,170) |
|
|
5,479 |
|
Net
loss attributable to the
non-controlling interests
|
|
|
— |
|
|
|
(41) |
|
|
|
— |
|
|
(41) |
|
Net
income/(loss)
attributable
to controlling interest
|
|
$ |
(1,550 |
) |
|
$ |
9,240 |
|
|
$ |
(2,170) |
|
$ |
5,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings
per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and fully diluted
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
$ |
0.22 |
|
Weighted
average
number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,558,581) |
(a) |
|
|
|
Basic
and fully diluted
|
|
|
7,317,163 |
|
|
|
|
|
|
|
41,800,000 |
(a) |
|
24,558,581 |
|
See
accompanying notes to combined and consolidated financial
statements.
Basis
of Presentation
The
statements contained in this section may be deemed to be forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Such statements are intended to be covered by the safe harbor for
“forward-looking statements” provided by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by the
words “believe,” “expect, “anticipate,” “intend,” “estimate” and similar
expressions. These forward-looking statements are based largely on management’s
expectations and are subject to a number of uncertainties. Actual results could
differ materially from these forward-looking statements. Neither Golf Trust of
America, Inc. nor Pernix Therapeutics, Inc. undertakes any obligation to update
publicly or revise any forward-looking statements.
The
unaudited combined and consolidated pro forma results of operations for the year
ended December 31, 2009 are presented to give effect to the merger of
Golf Trust of America, Inc. and Pernix Therapeutics, Inc. as if it had occurred
on January 1, 2009. The unaudited combined and consolidated pro forma
balance sheet is presented to give effect to the merger of Golf Trust of
America, Inc. and Pernix Therapeutics, Inc. as if it had occurred on December
31, 2009. This pro forma information is based on, and should be read in
conjunction with, the historical financial statements of Golf Trust of America,
Inc. for the year ended December 31, 2009, included in our Annual Report on
Form 10-K filed on February 24, 2010, and the historical financial
statements of Pernix Therapeutics, Inc. for the year ended December 31,
2009 which are included elsewhere in this document. We have not adjusted the
historical financial statements of either entity for any costs recognized during
the year that may be considered to be nonrecurring. We have, however, reflected
pro forma adjustments for the identifiable incremental merger costs of each
entity that are considered to be nonrecurring.
All
unaudited interim combined and consolidated financial statements furnished
herein reflect all adjustments which are, in the opinion of management,
necessary to present a fair statement of the results for the interim periods
presented. All such adjustments are of a normal and recurring
nature.
The
unaudited combined and consolidated pro forma financial statements were prepared
using the assumptions described below and in the related notes.
The
unaudited combined and consolidated pro forma financial statements are provided
for illustrative purposes only. They do not purport to represent what Pernix
Therapeutics, Inc.’s combined and consolidated results of operations and
financial position would have been had the transaction actually occurred as of
the dates indicated, and they do not purport to project Pernix Therapeutics,
Inc.’s future combined and consolidated results of operations or financial
position.
In
December 2007, the FASB issued authoritative guidance that establishes
principles and requirements for how an acquirer in a business combination
(i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (ii) recognizes and measures goodwill acquired in a business
combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. In addition, this
guidance requires that changes in the amount of acquired tax attributes be
included in the Company’s results of operations. This guidance became effective
for the Company on January 1, 2009 and will be applied to business
combinations that have an acquisition date on or after January 1,
2009.
Unaudited
Pro forma Combined and Consolidated Balance Sheets and Results of Operations
notes referenced to the Pro forma Financial Statements
(a)
|
In
general terms, pursuant to the terms and subject to the conditions set
forth in an Agreement and Plan of Merger (the “Merger Agreement”), dated
as of October 6, 2009, by and among Golf Trust of America, Inc.
(“GTA”), GTA Acquisition LLC (“Transitory Sub”) and Pernix Therapeutics,
Inc. (“Pernix”), Pernix merged (the “Merger”) with and into Transitory
Sub, a wholly-owned subsidiary of GTA, with Transitory Sub as the
surviving corporation. As a condition to the consummation of the Merger,
each share of Pernix common stock was converted into the right to receive
209,000 shares of GTA common stock (representing in the aggregate
20,900,000 shares, after adjusting for the effect of the reverse stock
split, of GTA stock issuable to the stockholders of Pernix in connection
with the Merger) subject to certain
adjustments.
|
In
addition, GTA had 740,000 (370,000 after adjusting for the effect of the reverse
stock split) stock options outstanding, of which 293,337 are vested as of
December 31, 2009 and 446,663 will be subject to accelerated vesting upon the
change of control, at the following exercise prices:
·
|
Options
to purchase an aggregate of 20,000 shares of GTA Common Stock at an
exercise price per share of $17.94 issued on February 6, 2000 and
which expired on February 6, 2010 (10,000 options at $35.88 after
giving effect to the reverse stock
split);
|
·
|
Options
to purchase an aggregate of 20,000 shares of GTA Common Stock at an
exercise price per share of $7.85 issued on February 6, 2001 and
expiring on February 6, 2011 (10,000 options at $15.70 after giving
effect to the reverse stock split);
|
·
|
Options
to purchase an aggregate of 275,000 shares of GTA Common Stock at an
exercise price per share of $2.10 issued on December 24, 2007 and
expiring ratably over three years starting on December 24, 2011
(137,500 options at $4.20 after giving effect to the reverse stock
split);
|
·
|
Options
to purchase an aggregate of 50,000 shares of GTA Common Stock at an
exercise price per share of $1.90 issued on January 18, 2008 and
expiring ratably over three years starting on January 18, 2012
(25,000 options at $3.80 after giving effect to the reverse stock
split);
|
·
|
Options
to purchase an aggregate of 160,000 shares of GTA Common Stock at an
exercise price per share of $1.82 issued on January 23, 2008 and
expiring ratably over three years starting on January 23, 2012
(80,000 options at $3.64 after giving effect to the reverse stock
split;
|
·
|
Options
to purchase an aggregate of 95,000 shares of GTA Common Stock at an
exercise price per share of $1.10 issued on February 27, 2009 and
expiring ratably over three years starting on February 27, 2013
(47,500 options at $2.20 after giving effect to the reverse stock split);
and
|
·
|
Options
to purchase an aggregate of 120,000 shares of GTA Common Stock at an
exercise price per share of $0.97 issued on March 4, 2009 and
expiring ratably over three years starting on March 4, 2013 (60,000
options at $1.94 after giving effect to the reverse stock
split).
|
The
options that were outstanding and vested as of 1/1/09 (the pro forma date of the
merger transaction for income statement presentation) were anti-dilutive using
the treasury stock method because they were not in-the-money as of 12/31/09
based on the average stock price during the year ended December 31, 2009 of
$1.21. There were no pro forma adjustments related to the options listed
above.
The
unrecognized stock option expense as of December 31, 2009 related to the stock
options above that is not included as a pro-forma adjustment but that will be
included in GTA’s combined and consolidated financial statements subsequent to
the closing of the merger transaction as a result of the accelerated vesting of
these options is approximately $225,000.
Since the
consideration for the Merger is stated in a fixed number of shares of GTA Common
Stock the value of the Merger may fluctuate based on the fluctuations of the
price of GTA’s Common Stock. The closing prices of GTA’s Common Stock on March
8, 2009, the day prior to the closing date of the merger was $1.35 resulting in
an estimated value of this transaction of approximately $9,878,000 based upon
the total number of outstanding shares of GTA Common Stock.
This
entry records the purchase of GTA and the issuance of GTA Common Stock to Pernix
stockholders.
At the
conclusion of this transaction an additional 17,241,418 (41,800,000/2 –
7,317,163/2) common shares will have been issued, after consideration of the
issuance of 41,800,000 shares and the 1 for 2 reverse stock split, and for the
purposes of calculating proforma earnings/(loss) per share it has been assumed
that these shares were outstanding as of the beginning of each proforma
reporting period.
The
retained earnings of GTA is transferred to additional paid in capital of
Pernix.
(b)
|
This
adjustment represents the elimination of incremental merger costs and the
compensation and benefits of Michael C. Pearce who, pursuant to the
merger agreement, will be the chairman of the board of directors of the
combined company instead of the chief executive officer offset by an
estimated increase in legal and accounting professional fees and rent
expense.
|
(c)
|
Zinterests,
L.L.C. is a Louisana limited liability company formed on June 23,
2009 of which the members are the stockholders of Pernix prior to the
merger with GTA. Two pieces of improved real estate, one located in
Gonzales Louisana and one located in Magnolia, Texas that both house
certain operations of Pernix were transferred from Pernix to Zinterests,
L.L.C. with such transfer being recorded on August 13, 2009.
Effective August 15, 2009, Pernix entered in to a month to month
lease with Zinterests, L.L.C. for each of these properties. The total
combined monthly rent of both facilities is $4,000. This entry reverses
the depreciation and amortization associated with building and land
transferred to Zinterests, L.L.C. and records the rent expense under the
leases and the related impact on the net income of
Pernix.
|
(d)
|
For
purposes of determining the estimated income tax expense for adjustments
reflected in the unaudited proforma combined and consolidated statement of
operations, a combined U.S. Federal and state statutory rate of
approximately 36.0% has been used. Deferred tax assets at December 31,
2009 consist primarily of inventory reserves, sales returns and allowances
and accrued Medicaid rebates. The effective tax rate of the combined
company could be significantly different than the rates assumed for
purposes of preparing the unaudited proforma combined and consolidated
financial statements for a variety of factors, including post-merger
activities. Due to the limitations that will be imposed on the use of
GTA’s net operating loss carryforwards the Company only recognized a tax
benefit of approximately $756,000 in deferred tax assets resulting from
recognition of approximately $2.2 million of its $85 million in net
operating loss carryforwards..
|
(e)
|
Michael C.
Pearce, received the equivalent of six months of salary and benefits,
approximately $102,000, upon his termination pursuant to his employment
agreement following the Merger. This amount along with his accrued
vacation and the $250,000 balance of the broker fee due to Velocity Health
are reflected as payments at
closing.
|
.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The
Stockholders and Board of Directors
Pernix
Therapeutics Holdings, Inc.
Magnolia,
Texas
We have
audited the accompanying combined and consolidated balance sheets of Pernix
Therapeutics, Inc. and Gaine, Inc. (collectively, the “Company”) as
of December 31, 2009 and 2008, and the related combined and consolidated
statements of income, equity, and cash flows for the years then ended. The
Company’s financial statements for the year ended December 31, 1008 include
Macoven Pharmaceuticals, LLC. As discussed in Note 1 to the combined
and consolidated financial statements, as of July 13, 2009, Macoven is no longer
consolidated in the Company’s financial statements. These combined and
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these combined and
consolidated financial statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the combined
and consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the combined and consolidated financial statements referred to above
present fairly, in all material respects, the combined and consolidated
financial position of the Company at December 31, 2009 and 2008, and the
results of their combined and consolidated operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Note 17 to the combined and consolidated financial statements,
the Company restated its 2008 financial statements for certain errors
in the application of accounting principles.
/s/
Cherry, Bekaert & Holland, L.L.P.
Charlotte,
North Carolina
March 5,
2010
PERNIX
THERAPEUTICS, INC.
COMBINED
AND
CONSOLIDATED BALANCE
SHEETS
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,578,476 |
|
|
$ |
4,874,296 |
|
Accounts
receivable
|
|
|
3,836,279 |
|
|
|
2,401,023 |
|
Inventory,
net
|
|
|
1,081,970 |
|
|
|
1,520,928 |
|
Prepaid
expenses and other current assets
|
|
|
1,983,797 |
|
|
|
457,216 |
|
Total
current assets
|
|
|
11,480,522 |
|
|
|
9,253,463 |
|
Property
and equipment, net
|
|
|
139,456 |
|
|
|
273,323 |
|
Other
assets:
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,409,337 |
|
|
|
1,179,379 |
|
Other
long-term assets
|
|
|
383,333 |
|
|
|
— |
|
Assets
held for sale
|
|
|
— |
|
|
|
778,679 |
|
Total
assets
|
|
$ |
13,412,648 |
|
|
$ |
11,484,844 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
436,663 |
|
|
$ |
70,795 |
|
Accrued
personnel expense
|
|
|
560,657 |
|
|
|
909,391 |
|
Accrued
allowances
|
|
|
6,795,542 |
|
|
|
3,736,826 |
|
Other
accrued expenses
|
|
|
243,578 |
|
|
|
326,130 |
|
Total
current liabilities
|
|
|
8,036,440 |
|
|
|
5,043,142 |
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, no par value; 300 and 1,000 shares authorized; 200
shares
issued and outstanding at December 31, 2009 and 2008
|
|
|
— |
|
|
|
— |
|
Additional
paid-in capital
|
|
|
997,979 |
|
|
|
— |
|
Retained
earnings
|
|
|
4,308,491 |
|
|
|
6,331,210 |
|
Total
stockholders’ equity – Pernix Therapeutics, Inc.
|
|
|
5,306,470 |
|
|
|
6,331,210 |
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
69,738 |
|
|
|
110,492 |
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
5,376,208 |
|
|
|
6,441,702 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
13,412,648 |
|
|
$ |
11,484,844 |
|
See
accompanying notes to combined and consolidated financial
statements.
PERNIX
THERAPEUTICS, INC.
COMBINED
AND
CONSOLIDATED STATEMENTS OF
INCOME
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
27,930,352 |
|
|
$ |
20,655,807 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
5,436,818 |
|
|
|
4,873,117 |
|
Selling
expenses
|
|
|
4,742,605 |
|
|
|
4,340,655 |
|
General
and administrative expense
|
|
|
6,388,212 |
|
|
|
3,709,299 |
|
Research
and development expense
|
|
|
711,780 |
|
|
|
166,671 |
|
Royalties
expense
|
|
|
1,223,825 |
|
|
|
— |
|
Depreciation
and amortization expense
|
|
|
210,785 |
|
|
|
154,583 |
|
Gain
on disposal
|
|
|
— |
|
|
|
(68,121
|
) |
Impairment
of intangible assets
|
|
|
— |
|
|
|
172,222 |
|
Total
costs and expenses
|
|
|
18,714,025 |
|
|
|
13,348,426 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
9,216,327 |
|
|
|
7,307,381 |
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
19,587 |
|
|
|
7,134 |
|
Other
income
|
|
|
2,036 |
|
|
|
295,550 |
|
Total
other income, net
|
|
|
21,623 |
|
|
|
302,684 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and non-controlling interest
|
|
|
9,237,950 |
|
|
|
7,610,065 |
|
Provision
for income taxes
|
|
|
39,000 |
|
|
|
112,593 |
|
Net
income before non-controlling interest
|
|
|
9,198,950 |
|
|
|
7,497,472 |
|
|
|
|
|
|
|
|
|
|
Net
income attributable to non-controlling interest
|
|
|
(40,754
|
) |
|
|
45,834 |
|
|
|
|
|
|
|
|
|
|
Net
income attributable to controlling interest
|
|
$ |
9,239,704 |
|
|
$ |
7,451,638 |
|
See
accompanying notes to combined and consolidated financial
statements.
PERNIX
THERAPEUTICS, INC.
COMBINED
AND CONSOLIDATED
STATEMENTS OF
EQUITY
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
|
|
|
Non-
Controlling
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
606 |
|
|
|
1,039,294 |
|
|
$ |
(2,750,000
|
) |
|
$ |
4,085,711 |
|
|
$ |
186,744 |
|
|
$ |
2,562,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
— |
|
|
|
— |
|
|
|
(875,000
|
) |
|
|
— |
|
|
|
— |
|
|
|
(875,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance
of Treasury Stock
|
|
|
— |
|
|
|
— |
|
|
|
99,000 |
|
|
|
— |
|
|
|
— |
|
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,842,125
|
) |
|
|
— |
|
|
|
(2,842,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of ownership
in
Gaine to Pernix
|
|
|
— |
|
|
|
122,086 |
|
|
|
— |
|
|
|
— |
|
|
|
(122,086
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of treasury stock
|
|
|
(406 |
) |
|
|
(1,161,580
|
) |
|
|
3,526,000 |
|
|
|
(2,364,014
|
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of $1 par value
common
stock to $0 par
value
common stock
|
|
|
(200 |
) |
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,451,638 |
|
|
|
45,834 |
|
|
|
7,497,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,331,210 |
|
|
$ |
110,492 |
|
|
$ |
6,441,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of land and
buildings
to affiliate
|
|
|
— |
|
|
|
316,979 |
|
|
|
— |
|
|
|
(1,310,000
|
) |
|
|
— |
|
|
|
(993,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation
of Macoven
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(496,823
|
) |
|
|
— |
|
|
|
(496,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,455,600
|
) |
|
|
— |
|
|
|
(9,455,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
— |
|
|
|
681,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
681,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,239,704 |
|
|
|
(40,754
|
) |
|
|
9,198,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
— |
|
|
$ |
997,979 |
|
|
$ |
— |
|
|
$ |
4,308,491 |
|
|
$ |
69,738 |
|
|
$ |
5,376,208 |
|
See
accompanying notes to combined and consolidated financial
statements.
PERNIX
THERAPEUTICS, INC.
COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,198,950 |
|
|
$ |
7,497,472 |
|
Adjustments
to reconcile net income to
net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
210,785 |
|
|
|
154,583 |
|
Provision
for allowance for returns
|
|
|
859,801 |
|
|
|
463,612 |
|
Impairment
of intangibles
|
|
|
— |
|
|
|
172,222 |
|
Stock
compensation expense
|
|
|
681,000 |
|
|
|
— |
|
Gain
on disposition of equipment
|
|
|
— |
|
|
|
(68,121
|
) |
Gain
on extinguishment of accounts payable
|
|
|
— |
|
|
|
(289,300
|
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,650,858
|
) |
|
|
(238,731
|
) |
Inventory
|
|
|
579,012 |
|
|
|
76,849 |
|
Prepaid
expenses and other assets
|
|
|
(1,709,378
|
) |
|
|
(261,319
|
) |
Other
assets – long term
|
|
|
(383,333
|
) |
|
|
— |
|
Accounts
payable
|
|
|
389,464 |
|
|
|
(381,248
|
) |
Accrued
expenses
|
|
|
1,767,629 |
|
|
|
1,082,074 |
|
Net
cash provided by operating activities
|
|
|
9,943,072 |
|
|
|
8,208,093 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of equipment
|
|
|
— |
|
|
|
206,077 |
|
Asset
acquisition of BROVEX
|
|
|
(450,000
|
) |
|
|
— |
|
Purchase
of intangible assets
|
|
|
(170,277
|
) |
|
|
(260,000
|
) |
Purchase
of equipment and payments for construction in progress
|
|
|
(112,183
|
) |
|
|
(190,790
|
) |
Net
cash used in investing activities
|
|
|
(732,460
|
) |
|
|
(244,713
|
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
— |
|
|
|
(292,580
|
) |
Distributions
to stockholders
|
|
|
(9,455,600
|
) |
|
|
(2,842,125
|
) |
Deconsolidation
of Macoven
|
|
|
(50,832
|
) |
|
|
— |
|
Purchase
of treasury stock
|
|
|
— |
|
|
|
(875,000
|
) |
Reissuance
of treasury stock
|
|
|
— |
|
|
|
99,000 |
|
Net
cash used in financing activities
|
|
|
(9,506,432
|
) |
|
|
(3,910,705
|
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(295,820
|
) |
|
|
4,052,675 |
|
Cash
and cash equivalents, beginning of year
|
|
|
4,874,296 |
|
|
|
821,621 |
|
Cash
and cash equivalents, end of year
|
|
$ |
4,578,476 |
|
|
$ |
4,874,296 |
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest
paid during the period
|
|
$ |
— |
|
|
$ |
14,454 |
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Distribution
of property including gain of approximately $317,000 recognized in
additional paid-in-capital
|
|
|
1,310,000 |
|
|
|
— |
|
Deconsolidation
of Macoven
|
|
|
445,991 |
|
|
|
— |
|
Retirement
of treasury stock
|
|
|
— |
|
|
|
3,526,000 |
|
Transfer
of ownership in Gaine to Pernix
|
|
|
— |
|
|
|
122,086 |
|
See
accompanying notes to combined and consolidated financial
statements.
PERNIX
THERAPEUTICS, INC.
NOTES
TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Note
1.
|
Organization
and Merger
|
Pernix
Therapeutics, Inc. (“Pernix” or the “Company”) is a specialty pharmaceutical
company focused on developing and commercializing branded pharmaceutical
products to meet unmet medical needs primarily in pediatrics. Pernix’s sales
force promotes products in approximately 30 states.
On
May 29, 2008, the three individual owners of Pernix transferred their 50%
ownership interest in Gaine, Inc. (“Gaine”) to Pernix. Gaine is a patent and
license holding company located in Gainesville, Georgia. Pernix has exclusive
rights to certain products developed through the patents and licenses held by
Gaine and Gaine’s single source of income is in the form of royalties paid by
Pernix. Pernix considers Gaine a controlled entity and accordingly includes
Gaine’s financial statements within Pernix’s consolidated financial
statements.
Macoven
Pharmaceuticals, LLC (“Macoven”) was organized in November 2008 as a
wholly-owned subsidiary of Pernix for the purpose of launching generic drugs,
including authorized generic equivalents of Pernix’s branded products. Macoven
had no substantial operations in 2008. In January 2009, Pernix transferred
a 40% interest in Macoven to certain other individuals. On July 13, 2009,
Pernix distributed its remaining 60% interest in Macoven to a limited liability
company owned by the stockholders of Pernix (in proportion to their respective
ownership interests in Pernix). As of July 13, 2009, Macoven is no longer
consolidated because it became owned 60% by the stockholders of Pernix (in
proportion to their ownership of Pernix), 20% by Pernix’s Executive Vice
President of Operations and 20% by an officer of Macoven.
On
October 6, 2009, the Company entered into an Agreement and Plan of Merger
with Golf Trust of America, Inc. (“GTA”). At the closing of the merger on March
9, 2010, a wholly owned subsidiary of GTA merged with Pernix and GTA issued
20,900,000 shares of its common stock to the Company’s stockholders,
representing approximately 84% of the combined company’s outstanding common
stock on a fully diluted basis. As a result of the Merger, (i) Pernix
became a wholly owned subsidiary of GTA, (ii) the President of Pernix was
appointed President and Chief Executive Officer of the combined company and
(iii) the combined company’s Board was reconstituted, with three Board members
selected by Pernix and two directors of GTA retained.
For the
year ended December 31, 2009, Pernix made distributions totaling approximately
$9.5 million, representing Pernix’s stockholders income tax obligations related
to Pernix’s 2009 income. Effective January 1, 2010, Pernix elected to
be taxed as a corporation.
Note
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation and Combination
The
combined and consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) and include the accounts of Gaine, a controlled entity and its
wholly-owned subsidiary as of December 31, 2008, Macoven. Transactions
between and among the Company and its consolidated subsidiary and combined
affiliate company are eliminated. In accordance with GAAP, management determined
that Macoven should not be consolidated subsequent to July 13, 2009
following Pernix’s distribution of its remaining interest in Macoven to its
stockholders.
Under the
consolidation method, an affiliated company’s results of operations are
reflected within the combined and consolidated statement of operations. Earnings
or losses attributable to other stockholders of a consolidated company are
recognized as non-controlling interest in the Company’s combined and
consolidated statement of operations.
Management’s
Estimates and Assumptions
The
preparation of combined and consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 combined and consolidated financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates. The Company reviews all significant estimates affecting
the combined and consolidated financial statements on a recurring basis and
records the effect of any necessary adjustments prior to their issuance.
Significant estimates of the Company include: allowance for doubtful accounts
receivable, returns on product sales, depreciation, amortization, the accrual
for sales commissions and the accrual for Medicaid rebates.
Financial
Instruments, Credit Risk Concentrations and Economic Dependency
The
financial instruments that potentially subject the Company to concentrations of
credit risk are cash, cash equivalents and accounts receivable and notes
receivable. The Company’s cash and cash equivalents are maintained with banks
with federally insured deposits, and balances may at times exceed federally
insured limits.
The
Company relies on certain materials used in its development and manufacturing
processes, some of which are procured from a single source. Pernix partners with
third parties to manufacture all of its products and product candidates. Most of
Pernix’s manufacturing agreements are not subject to long-term agreements and
generally may be terminated by either party without penalty at any time. Changes
in the price of raw materials and manufacturing costs could adversely affect
Pernix’s gross margins on the sale of its products. Changes in Pernix’s mix of
products sold could also affect its costs of product sales.
Trade
accounts receivable are unsecured and are due primarily from wholesalers and
distributors that sell to individual pharmacies. The Company continually
evaluates the collectibility of accounts receivable and maintains allowances for
potential losses when necessary. The Company primarily sells to three major
customers. See Note 11.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. The Company maintains cash deposits
with banks with federally insured deposits, and balances may at times exceed
federally insured limits. As of December 31, 2009 and 2008, the Company had
balances of approximately $4,328,000 and $4,624,000, respectively, in excess of
federally insured limits.
Property,
Equipment and Depreciation
Property
and equipment are stated at cost. Depreciation is computed over the estimated
useful lives of the assets using the straight-line method. Generally, the
Company assigns the following estimated useful lives to these
categories:
|
Service
Life
|
Buildings
|
39
years
|
Machinery
and equipment
|
5-7
years
|
Furniture
and fixtures
|
5-7
years
|
Vehicles
|
5
years
|
Computer
software
|
3
years
|
Maintenance
and repairs are charged against earnings when incurred. Additions and
improvements that extend the economic useful life of the asset are capitalized.
The cost and accumulated depreciation of assets sold or retired are removed from
the respective accounts, and any resulting gain or loss is reflected in current
earnings.
The
Company reviews long-lived assets, such as property and equipment, and purchased
intangible assets subject to amortization, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. This analysis is highly
subjective. If property and equipment are considered to be impaired,
the impairment to be recognized equals the amount by which the carrying value of
the asset exceeds its fair market value.
Assets
Held for Sale
In 2008,
the Company reclassified its office and warehouse facility in Magnolia, Texas
and the related land to “Assets held for sale.” The assets held for sale are
being carried at the lower of their carrying amount or fair value less the cost
to sell. In 2009, the Company distributed these assets as well as another office
and warehouse building to its stockholders. As of December 31, 2009, the
Company leases certain of these assets from an affiliate of the
stockholders which, pursuant to GAAP, is not a consolidated entity.
Intangible
Assets
Intangible
assets, such as patents, product licenses and product rights that are considered
to have a definite useful life, are amortized on a straight-line basis over the
shorter of their economic or legal useful life which ranges from three to
fifteen years.
Accounts
Receivable
Accounts
receivable result primarily from sales of pharmaceutical products. Credit is
extended based on the customer’s financial condition, and generally collateral
is not required. The Company ages its accounts receivable using the
corresponding sale date of the transaction and considers accounts past due based
on terms agreed upon in the transaction, which is generally 30 days. Current
earnings are charged with an allowance for doubtful accounts based on experience
and evaluation of the individual accounts. Write-offs of doubtful accounts are
charged against this allowance once the amount is determined to be uncollectible
by management. Recoveries of trade receivables previously written off are
recorded when recovered. At December 31, 2009 and 2008, management
evaluated the need for an allowance and determined no allowance was
necessary.
Product
Returns
Consistent
with industry practice, the Company offers contractual return rights that allow
customers to return products. On average, product returns are approximately
eighteen months following purchase. The Company adjusts its estimate of product
returns if it becomes aware of other factors that it believes could
significantly impact its expected returns. These factors include the shelf life
of the product shipped, actual and historical return rates for expired lots, the
remaining time to expiration of the product and the forecast of future sales of
the product, as well as competitive issues such as new product entrants and
other known changes in sales trends. The Company evaluates this reserve on a
quarterly basis, assessing each of the factors described above, and adjusts the
reserve accordingly. See Note 13.
Revenue
Recognition
The
Company records revenue from product sales when the goods are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed and determinable. At the time of sale, estimates for a
variety of sales deductions, such as sales rebates, discounts and incentives,
Medicaid rebates and product returns are recorded. Costs associated with sales
revenues are recognized when the related revenues are recognized. Gross product
sales are subject to a variety of deductions that are generally estimated and
recorded in the same period that the revenues are recognized. The Company
records provisions for Medicaid and contract rebates based upon its actual
experience ratio of rebates paid and actual prescriptions during prior
periods.
|
|
2009
|
|
|
2008
|
|
Gross
product sales
|
|
$ |
38,210,595 |
|
|
$ |
26,310,204 |
|
Collaboration
revenue
|
|
|
291,569 |
|
|
|
— |
|
Sales
discounts
|
|
|
(2,937,791
|
) |
|
|
(1,878,787
|
) |
Sales
returns allowance
|
|
|
(2,809,897
|
) |
|
|
(1,985,000
|
) |
Medicaid
rebates
|
|
|
(4,824,124
|
) |
|
|
(1,790,610
|
) |
Net
sales
|
|
$ |
27,930,352 |
|
|
$ |
20,655,807 |
|
Inventories
Inventory
is valued at the lower of cost or market, with cost determined by using the
specific identification method. An allowance for slow-moving, obsolete, or
declines in the value of inventory is determined based on management’s
assessments.
Economic
Dependency
The
Company purchases all of its merchandise inventory from outside manufacturers.
For the year ended December 31, 2008, approximately 89% of the
inventory received was from one supplier. In 2009, the Company
expanded its available suppliers. For the year ended December 31,
2009, approximately 85% of the inventory received was from three primary
suppliers, allocated 29%, 22% and 34% among these three suppliers.
Freight
The
Company includes freight costs for outgoing shipments in selling
expenses. Outgoing freight costs were approximately $129,000 and
$88,000 for the years ended December 31, 2009 and 2008,
respectively.
Research and Development
Costs
Research
and development costs are expensed as incurred in connection with the Company’s
internal programs for the development of products. Pernix either expenses
research and development costs as incurred or will pay manufacturers a prepaid
research and development fee which is amortized. These costs are related to the
testing of current products’ durability and packaging. Costs incurred in
connection with these programs for the years ended December 31, 2009 and
2008 were approximately $712,000 and $167,000, respectively.
Segment
Reporting
The
Company is engaged solely in the business of marketing and selling
pharmaceutical products. Accordingly, the Company’s business is classified in a
single reportable segment, the sale and marketing of prescription products.
Prescription products include a variety of branded pharmaceuticals primarily in
pediatrics.
Income
Taxes
Pernix
elected to be taxed as an S Corporation effective January 1, 2002. As such,
taxable earnings and losses after that date were included in the personal income
tax returns of the Company’s stockholders. Accordingly, Pernix was subject to
certain “built-in” gains tax for the difference between the fair value and tax
reporting bases of assets at the date of conversion to an S Corporation, if the
assets were sold (and a gain was recognized) within ten years following the date
of conversion. Pernix’s exposure to built-in gains was limited. Effective
January 1, 2010, Pernix made an election to be taxed as a
corporation. As a result of this election, income taxes are accounted
for using the asset and liability method pursuant to Accounting Standards
Codification (“ASC”) Topic 740-Income Taxes. Deferred taxes
are recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to the difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. Pernix will
recognize future tax benefits to the extent that realization of such benefits is
more likely than not.
Macoven
is a limited liability company wholly owned by Pernix as of December 31,
2008. For the fiscal year ended December 31, 2008, Macoven was disregarded
for federal tax purposes and its activities are reported as part of Pernix’s
income tax returns. Following the distribution by Pernix of its remaining
ownership interest in Macoven to its stockholders on July 13, 2009, Macoven was
no longer consolidated in the Company’s financial statements.
Gaine is
taxed as a corporation for income tax purposes. Accordingly, income taxes for
this subsidiary are accounted for using the asset and liability method pursuant
to ASC Topic 740, “Accounting for Income Taxes”. Deferred taxes are
recognized for the tax consequences of “temporary differences” by applying
enacted statutory tax rates applicable to future years to the difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
recognizes future tax benefits to the extent that realization of such benefits
is more likely than not. Deferred income taxes were not material as of
December 31, 2009 and 2008.
Treasury
Stock
Treasury
stock is accounted for using the cost method. When treasury stock is reissued,
the value is computed and recorded using a weighted-average basis. All treasury
stock was retired in 2008.
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
Recent
Accounting Pronouncements
Disclosures
about Fair Value Measurements
In
January 2010, the Financial Accounting Standards Board (FASB) issued ASU
No. 2010-06, Improving
Disclosures About Fair Value Measurements (“ASU 2010-06”),
which requires new disclosures about recurring or nonrecurring fair value
measurements including significant transfers into and out of Level 1 and Level 2
fair value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. ASU 2010-06 is effective for annual reporting periods beginning
after December 15, 2009, except for Level 3 reconciliation disclosures
which are effective for annual periods beginning after December 15, 2010.
We do not expect the adoption of ASU 2010-06 to have a material impact on the
Company’s consolidated financial statements. See Note 3 for more
details.
Fair
Value Measurements
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at
Fair Value (“ASU 2009-05”), which amends the guidance for
measuring the fair value of liabilities included in FASB ASC Topic 820, Fair Value Measurements
and Disclosure (“ASC 820”). The update reinforces that fair
value of a liability is the price that would be paid to transfer the liability
in an orderly transaction between market participants at the measurement date.
Additionally, the update clarifies how the price of an identical or similar debt
security that is traded or the price of the liability when it is traded as an
asset should be considered in estimating the fair value of the issuer’s
liability and that the reporting entity must consider its own credit risk in
measuring the liability’s fair value. Effective September 30, 2009, the
Company adopted the provisions of ASU 2009-05 for all liabilities measured at
fair value, which are being applied prospectively. This ASU did not change the
Company’s valuation techniques or impact the amounts or classifications recorded
in the Company’s combined and consolidated financial statements.
In
September 2006, the FASB issued a statement which establishes the
authoritative definition of fair value, sets out a framework for measuring fair
value, and expands the required disclosures about fair value measurement. The
provisions of the statement related to financial assets and liabilities as well
as non-financial assets and liabilities carried at fair value on a recurring
basis were adopted prospectively on January 1, 2008 and did not have a
material impact on the Company’s consolidated financial statements. Effective
January 1, 2009, the Company adopted the provisions of this statement for
non-financial assets and liabilities measured at fair value on a non-recurring
basis, which are being applied prospectively. The adoption of this statement did
not have a material impact on the Company’s combined and consolidated financial
statements. The relevant disclosures required by ASC 820 are included in Note
3.
The
Hierarchy of Generally Accepted Accounting Principles
In June
2009, the FASB issued a statement that establishes the FASB ASC as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The statement modified the GAAP hierarchy to include
only two levels of GAAP: authoritative and nonauthoritative. All guidance
contained in the ASC carries an equal level of authority. The provisions of this
statement allow for rules and interpretive releases of the SEC under authority
of federal securities laws to also serve as sources of authoritative GAAP for
SEC registrants. The provisions became effective for Pernix on
September 30, 2009. The only impact to the Company’s combined and
consolidated financial statements was to revise references to accounting
pronouncements from those of the precodification standards to the references
used in the codified hierarchy of GAAP.
Consolidation
of Variable Interest Entities
In
June 2009, the FASB issued a statement which amends certain requirements
for interests in a VIE. Among other matters, the statement requires a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a VIE; amends the consideration of related party relationships in
the determination of the primary beneficiary of a VIE; amends certain guidance
for determining whether an entity is a VIE, which may change an entity’s
assessment of which entities with which it is involved are VIEs; requires
continuous assessments of whether an entity is the primary beneficiary of a VIE;
and requires enhanced disclosures about an entity’s involvement with a VIE. The
provisions of this statement became effective for Pernix on January 1,
2010, and are being applied retrospectively to all periods presented. The
adoption of this statement did not have a material impact on the Company’s
combined and consolidated financial statements.
Subsequent
Events
In
May 2009, the FASB issued a statement which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The provisions of this statement, located within FASB ASC Topic 855, Subsequent
Events (“ASC 855”), require disclosure of the date through
which an entity has evaluated subsequent events, which for Pernix is the date
the financial statements were issued. Effective June 30, 2009, the Company
adopted the provisions of this new statement, which are being applied
prospectively. The adoption of this statement did not have a material impact on
the Company’s combined and consolidated financial statements. The relevant
disclosures required by this new statement are included in Note 18.
Note
3.
|
Fair
Value Measurement
|
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The fair value hierarchy prescribed by the
accounting literature contains three levels as follows:
Level
1—
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level
2—
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
Level
3—
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination of fair
value requires significant management judgment or
estimation.
|
In
addition, ASC 820 requires the Company to disclose the fair value for financial
assets on both a recurring and non-recurring basis.
The
carrying value of cash and cash equivalents, accounts receivable, other assets
and trade accounts payable approximate fair value due to the short-term nature
of these instruments. As of December 31, 2009 and 2008, the
Company had approximately $4,236,000 and $1,673,000, respectively,
invested in an overnight repurchase account which is classified as Level
2.
Note
4.
|
Asset
Acquisition
|
On
June 1, 2009, the Company completed an asset acquisition of all rights to
the BROVEX product lines including related trademarks and inventory for $450,000
in cash paid at closing.
The
following summarizes the estimated fair values of the acquired assets at the
date of acquisition:
Inventories
|
|
$
|
211,000
|
|
Intangible
assets – trade name
|
|
|
239,000
|
|
Total
|
|
$
|
450,000
|
|
The
Company often enters into collaborative arrangements to develop and
commercialize drug candidates. Collaborative activities might include research
and development, marketing and selling (including promotional activities and
physician detailing), manufacturing, and distribution. These collaborations
often require milestone and royalty or profit share payments, contingent upon
the occurrence of certain future events linked to the success of the asset in
development, as well as expense reimbursements or payments to the third party.
Revenues related to products sold by the Company pursuant to these arrangements
are included in net product sales, while other sources of revenue (e.g.,
royalties and profit share payments) are included in collaboration and other
revenue. Operating expenses for costs incurred pursuant to these arrangements
are reported in their respective expense line item, net of any payments made to
or reimbursements received from our collaboration partners. Each collaboration
is unique in nature, and our more significant arrangements are discussed below
the following table:
|
December
31,
|
|
|
2009
|
|
2008
|
|
Net
product sales
|
$ |
27,638,783 |
|
$ |
20,655,807 |
|
Collaboration
and other revenue
|
|
291,569 |
|
|
— |
|
Net
Sales
|
$ |
27,930,352 |
|
$ |
20,655,807 |
|
Macoven
Pharmaceuticals, LLC
On
July 27, 2009, the Company and Macoven entered into an agreement whereby
the Company granted Macoven a non-exclusive license to develop, market and sell
generic products based on the Company’s branded products. The initial term of
the agreement is 18 months, and is automatically renewable for successive twelve
month terms unless terminated by either party. Pursuant to the terms of the
agreement, the Company paid Macoven a one-time development fee of $1,500,000.
This fee is being amortized over the 18-month term of the agreement. The
unamortized balance of the fee of $1,083,333 is included as $1,000,000 in
current assets and $83,333 in long-term assets. The Company has the exclusive
rights to 100% of the net proceeds from sales of generic equivalents of the
Company’s branded products. Additionally, Pernix is entitled to 10% of Macoven’s
proceeds from sales of generics that are not based on Pernix products to the
extent Macoven retains Pernix to distribute and/or market any such products. In
the third quarter of 2009, Macoven launched its first Pernix-based generic
product, Pyril DM, an authorized generic based on Pernix’s ALDEX DM product and
will pay Pernix approximately $260,000, representing 100% of the net proceeds
from sales of this product plus administrative fees for the period July 27,
2009 to December 31, 2009. This revenue is recorded as collaboration
revenue included in net sales.
Co-promotion
agreements
The
Company seeks to enter into co-promotion agreements to enhance its promotional
efforts and sales of its products. The Company may enter into co-promotion
agreements whereby it obtains rights to market other parties’ products in return
for certain commissions or percentages of revenue on the sales Pernix
generates. Alternatively, Pernix may enter into co-promotion agreements with
respect to its products that are not aligned with its product focus or when
Pernix lacks sufficient sales force representation in a particular geographic
area. As of December 31, 2009, Pernix had entered into three
co-promotion agreements to market other parties’ products. To date, these
agreements have not contributed to a material part of Pernix’s net sales but may
in the future. The revenue from these agreements is recorded as
collaboration revenue included in net sales.
Note
6.
|
Accounts
Receivable
|
Accounts
receivable consist of the following:
|
December
31,
|
|
|
2009
|
|
2008
|
|
Trade
accounts receivable
|
$ |
3,963,852 |
|
|
$ |
2,496,167 |
|
Less
allowance for discounts
|
|
(127,573
|
) |
|
|
(95,144
|
) |
|
$ |
3,836,279 |
|
|
$ |
2,401,023 |
|
The
Company typically requires customers to remit payments within 30 days. The
Company offers wholesale distributors a prompt payment discount as an incentive
to remit payment within the first 30 days after the invoice date. This discount
is generally between 2% and 7%. Because the Company’s 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 the sale, and the Company applies earned discounts at the time of payment.
The Company adjusts the accrual periodically to reflect actual experience.
Accounts receivable is stated net of estimated discounts. The Company’s
management evaluates accounts receivable to determine if a provision for an
allowance for doubtful accounts is appropriate. As of December 31, 2009 and
2008, no receivables were outstanding for longer than 90 days. As of
December 31, 2009 and 2008, the net amount of accounts receivable was
considered collectible and no allowance for doubtful accounts has been
recorded. The Company estimates an allowance for returns on
outstanding customer invoices that considers product that was ordered but
subsequently returned, primarily due to shipping damage, prior to payment of the
invoice.
Inventories
consist of the following:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Purchased
finished goods
|
|
$ |
1,081,970 |
|
|
$ |
1,520,928 |
|
Purchased
samples
|
|
|
591,880 |
|
|
|
285,437 |
|
|
|
|
1,673,850 |
|
|
|
1,806,365 |
|
Less
allowance for samples inventory
|
|
|
(591,880
|
) |
|
|
(285,437
|
) |
|
|
$ |
1,081,970 |
|
|
$ |
1,520,928 |
|
Note
8.
|
Property,
Plant & Equipment
|
Property
and equipment consists of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Land
|
|
$ |
— |
|
|
$ |
71,078 |
|
Buildings
|
|
|
— |
|
|
|
179,363 |
|
Equipment
|
|
|
182,185 |
|
|
|
158,503 |
|
Furniture
and fixtures
|
|
|
24,596 |
|
|
|
24,596 |
|
Computer
software and website
|
|
|
88,500 |
|
|
|
— |
|
|
|
|
295,281 |
|
|
|
433,540 |
|
Less
accumulated depreciation
|
|
|
(155,825
|
) |
|
|
(160,217
|
) |
|
|
$ |
139,456 |
|
|
$ |
273,323 |
|
Depreciation
expense amounted to approximately $32,000 and $43,000 for the years ended
December 31, 2009 and 2008, respectively.
The
Company no longer owns any real property. In July 2009, Pernix distributed
all of its real property, consisting of a 5,000 square-foot office facility and
a 7,200 square-foot warehouse facility in Magnolia, TX and a 1,000 square-foot
office facility and a 2,500 square-foot warehouse facility in Gonzales, LA to
its stockholders. At the time of the distribution the aggregate estimated value
of the two properties was approximately $1,310,000. Each stockholder of Pernix
contributed his or her interests in these two properties to a limited liability
company wholly-owned by the stockholders of Pernix (in proportion to their
respective ownership interests in Pernix) that, in turn, leased both properties
back to Pernix. The term of each lease is month to month and may be terminated
by either party without penalty. As of December 31, 2009, Pernix pays
rent of $2,500 and $1,500 per month for the Texas and Louisiana facilities,
respectively. The Company believes these amounts reflect market rates that are
as favorable to Pernix as could be obtained with unrelated third parties, and
expects that its current facilities are sufficient to meet its needs into the
foreseeable future.
Note
9.
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expenses and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
Prepaid
expenses
|
|
$ |
119,123 |
|
|
$ |
16,847 |
|
Deposits
on inventory
|
|
|
506,596 |
|
|
|
440,369 |
|
Deferred
taxes
|
|
|
61,000 |
|
|
|
— |
|
Due
from collaboration arrangements (see Note 5)
|
|
|
297,078 |
|
|
|
— |
|
Current
unamortized research and development fees related to Macoven contract (see
Note 5)
|
|
|
1,000,000 |
|
|
|
— |
|
Total
|
|
$ |
1,983,797 |
|
|
$ |
457,216 |
|
Note
10.
|
Employee
Compensation and Benefits
|
The
Company participates in a 401(k) plan (the “Plan”), which covers substantially
all full-time employees. The Plan provides for the payment of the employee’s
vested portion of his/her Plan balance upon termination, retirement, disability,
or death. The Plan is funded by employee contributions and discretionary
matching contributions determined by management. At the Company’s discretion, it
may match up to 100 percent of each employee’s contribution, but not
greater than the first 6 percent of the employee’s individual salary. There
is a six-month waiting period from date of hire to participate in the Plan.
Employees are 100 percent vested in employee and employer contributions.
Contribution expense for the years ended December 31, 2009 and 2008 was
approximately $226,000 and $167,000, respectively.
Employment
Agreements
The
Company entered into a three-year employment agreement with its President on
June 1, 2008 pursuant to which its President receives an annual base salary
of $264,000 (which was subsequently increased to $295,000), and is eligible to
receive bonus payments in such amounts as the board of directors may determine.
In the event the President terminates this agreement prior to May 31, 2011,
or the Company terminates the agreement for cause, the President is required to
pay the Company a termination fee equal to 10% of his annual base salary, plus
10% of the aggregate amount of bonus payments received by him under the terms of
the agreement. The agreement also provides that the President is entitled to an
amount equal to the unpaid portion of his annual base salary, less all required
deductions, if his employment is terminated without cause and that he is subject
to a non-compete clause for two years following termination of
employment.
In
December 2008, Pernix entered into an employment agreement with the Vice
President of Operations (the “VP”) that continued through December 31,
2009, and automatically renews for one year terms thereafter unless otherwise
terminated by either party pursuant to the terms of the agreement. Under the
agreement, the VP receives an annual base salary of $200,000 (which was
subsequently increased to $208,000 effective January 1, 2010). The
agreement also requires the Company to pay the VP a bonus ranging from 50% to
100% of his annual base salary for the 2009 fiscal year. In December 2009, the
Company awarded the VP a bonus equal to 100% of his then-annual base salary, of
$200,000. The VP is entitled to one year’s base salary, as well as health
insurance for one year, if his employment is terminated without
cause.
Stock
Compensation Expense
The stock
compensation of $681,000 is related to a stock transaction in January 2009
at a discount to fair value between one outside stockholder and certain officers
of Pernix.
The
Company’s customers consist of drug wholesalers, retail drug stores, mass
merchandiser and grocery store pharmacies in the United States. The Company
primarily sells products directly to drug wholesalers, which in turn, distribute
the products to retail drug stores, mass merchandisers and grocery store
pharmacies. The following tables list all of the Company’s customers that
individually comprise greater than 10% of total gross product sales and their
aggregate percentage of the Company’s total gross product sales for the
years ended December 31, 2009 and 2008, and all customers that comprise
more than 10% of total accounts receivable and such customers’
aggregate percentage of the Company’s total accounts receivable as of the
years ended December 31, 2009 and 2008:
Gross
Product Sales
|
|
For
the years ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cardinal
Health, Inc.
|
|
|
37% |
|
|
|
36% |
|
McKesson
Corporation
|
|
|
32% |
|
|
|
33% |
|
Morris
& Dickson
|
|
|
13% |
|
|
|
14% |
|
Total
|
|
|
82% |
|
|
|
83% |
|
Accounts
Receivable
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cardinal
Health, Inc.
|
|
|
17% |
|
|
|
36% |
|
McKesson
Corporation
|
|
|
62% |
|
|
|
33% |
|
Morris
& Dickson
|
|
|
10% |
|
|
|
14% |
|
Total
|
|
|
89% |
|
|
|
83% |
|
Note
12.
|
Intangible
Assets
|
Intangible
assets consist of the following:
|
|
|
December 31,
|
|
|
Life
|
|
2009
|
|
|
2008
|
|
Patent
|
12
years
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
Product
licenses and rights – Kiel technology
|
15
years
|
|
|
700,000 |
|
|
|
600,000 |
|
Product
license - Ubiquinone
|
3
years
|
|
|
— |
|
|
|
260,000 |
|
Non-compete
- Ubiquinone
|
2
years
|
|
|
250,000 |
|
|
|
260,000 |
|
Trademark
rights - Brovex
|
Infinite
|
|
|
238,758 |
|
|
|
— |
|
|
|
|
|
1,688,758 |
|
|
|
1,360,000 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
|
(279,421
|
) |
|
|
(180,621
|
) |
|
|
|
$ |
1,409,337 |
|
|
$ |
1,179,379 |
|
Patents
Gaine
entered into a patent assignment with the original owners of a U.S. patent for
an active pharmaceutical ingredient that the Company expects to use in four of
its product candidates. Gaine paid $500,000 for the ownership of this
patent.
Product
Licenses
The
Company acquired rights to certain products incorporating a patented drug
delivery technology owned by Kiel pursuant to a development agreement dated
November 2006. Pursuant to the 2006 development agreement, Kiel agreed to
develop certain products using the Kiel technology, including ALDEX AN and
PEDIATEX TD, and granted Gaine an exclusive, worldwide license to manufacture
and market these products at its expense. Gaine, in turn, licensed these
products to Pernix.
The term
of this license is 15 years. As consideration for the license and development of
these products, Gaine paid Kiel an aggregate fee of $800,000. During
2008, the Company deemed one of the products covered under the development
agreement with Kiel to be unmarketable and accordingly, at December 31,
2008, the Company recognized an impairment loss of approximately
$172,000.
In
September 2008, the Company acquired a license to market and sell
Ubiquinone 58b 90 mg quick dissolve/chewable medical food tablets
(“Ubiquinone”), which Pernix has branded as QUINZYME. As consideration for the
license, the Company paid a licensing fee of $260,000, $25,000 of which was
payable upon execution of the agreement, $25,000 of which was payable on the
date the Company’s Ubiquinone products were first shipped from the manufacturer,
and thereafter $10,000 per month for 21 months. Additionally, certain minimum
royalty payments were required based on the volume of sales by the Company. The
initial term of the license was three years. On October 27, 2009, the
Company executed a cancellation and settlement agreement related to a license
agreement for the Company’s QUINZYME line. Pursuant to the agreement, the
Company paid a one-time settlement fee of $250,000. In consideration for this
amount, the licensor agreed not to sell, develop or cause to be developed any
ubiquinone products (the active ingredient in Pernix’s QUINZYME line) for a
period of two years. No further payments will be due under the former
agreement.
See Note
4 for discussion regarding the acquisition of the Brovex trademark.
Amortization
expense amounts to approximately $179,000 and $112,000 for the years ending
December 31, 2009 and 2008, respectively.
Estimated
amortization expense related to intangible assets for each of the five
succeeding years and thereafter is as follows:
Year
ending December 31,
|
|
Amount
|
|
2010
|
|
$ |
219,000 |
|
2011
|
|
|
198,000 |
|
2012
|
|
|
94,000 |
|
2013
|
|
|
94,000 |
|
2014
|
|
|
94,000 |
|
Thereafter
|
|
|
472,000 |
|
|
|
$ |
1,171,000 |
|
Note
13.
|
Accrued
Allowances
|
The
Company’s customers may return products due to product expiration and product
replacement. On average, products are returned approximately 18 months following
purchase. Returns allowance is estimated based on historical
experience.
Certain
vendors have negotiated contracted discounts that are based on sales volumes.
These discounts are paid quarterly.
Accrued allowances consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
returns allowance
|
|
$
|
3,975,000
|
|
|
$
|
2,385,333
|
|
Accrued
contracted vendor discounts
|
|
|
519,542
|
|
|
|
613,914
|
|
Accrued
Medicaid rebates
|
|
|
2,301,000
|
|
|
|
737,579
|
|
Total
|
|
$ |
6,795,542
|
|
|
$ |
3,736,826
|
|
Note
14.
|
Commitments
and Contingencies
|
Licenses
and Patents
On
January 30, 2009, Pernix and Kiel memorialized their then existing oral
licensing arrangement pursuant to which Kiel granted the Company an exclusive
license without geographic limitation to use Kiel’s patented drug delivery
technology and related intellectual property, or “Kiel technology,” to
manufacture and market the ALDEX CT, ALDEX D, ALDEX DM and Z-COF-8DM products in
exchange for royalty fees. The agreement may be terminated by either party at
any time after January 30, 2011 without cause upon 30 days written notice
to the other party.
The
patents covering the Kiel technology expire in 2026 and 2027.
For a
description of the Company’s other patent and license agreements, see Note
12.
Service
Agreements
·
|
The
Company receives data packages on a monthly basis from a third party
provider. The Company is obligated to pay for these services in advance on
a quarterly basis. Pernix is contracted to pay approximately $16,000
quarterly for these services until the contract expires on
February 28, 2011.
|
·
|
The
Company utilizes a third-party warehousing and order processing service
provider that handles receipt and shipping of goods, return processing,
product recalls, as well as additional services. In addition to the
payment of weekly fees based on services rendered, Pernix paid
the third party a one-time implementation fee of approximately $11,000,
which is to be amortized over two years. Additionally, the third-party
will be used to service various reporting requirements which has an agreed
upon fee of $5,000.
|
Purchase
Commitments
As of December 31, 2009, the Company
has open purchase orders, net of deposits, of approximately
$1,267,000.
See Note
8 regarding certain leases of the Company.
Uninsured
Liabilities
The
Company is exposed to various risks of losses related to torts: theft of, damage
to, and destruction of assets; errors and omissions; injuries to employees; and
natural disasters for which the Company maintains a general liability insurance
with limits and deductibles that management believes prudent in light of the
exposure of the Company to loss and the cost of the insurance.
Other
The
Company is subject to various claims and litigation arising in the ordinary
course of business. In the opinion of management, the outcome of such matters
will not have a material effect on the financial position or results of
operations of the Company.
The
components of income tax expense, relating primarily to the operations of Gaine
and state income taxes relating to Pernix, consist of the
following:
|
|
Year
ending December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$ |
(37,900 |
) |
|
$ |
95,931 |
|
State
|
|
|
95,500 |
|
|
|
16,662 |
|
|
|
|
57,600 |
|
|
|
112,593 |
|
Deferred
Provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(16,600 |
) |
|
|
— |
|
State
|
|
|
(2,000 |
) |
|
|
— |
|
|
|
|
(18,600 |
) |
|
|
— |
|
|
|
$ |
39,000 |
|
|
$ |
112,593 |
|
The
effective income tax expense differs from that which would be determined by
applying statutory income tax rates to the earnings before taxes of Gaine due to
the impact of state income taxes and non-deductible expenses.
Deferred
tax assets of $18,100 consist of differences in the carrying value of intangible
assets for book and tax.
Note
16.
|
Stockholders’
Equity
|
On
January 1, 2008, Pernix repurchased 140 shares of its common stock for
$875,000 under a stock repurchase plan previously authorized by the Board of
Directors.
On
January 1, 2008, Pernix also amended its Articles of Incorporation to
reduce the number of authorized shares of its common stock from 1,000 to 300,
and reduced the par value of its common stock from $1.00 to no par value. On
April 1, 2008, Pernix issued 9 shares of treasury stock for $99,000 to
three employees.
In 2008,
the Board declared and paid the following distributions:
·
|
$1,225
per share declared on February 29, 2008 and paid on May 1, 2008
representing a total distribution of
$233,975;
|
·
|
$3,650
per share declared and paid on April 3, 2008 representing a total
distribution of $1,208,150; and,
|
·
|
$7,000
per share declared and paid on December 1, 2008 representing a total
distribution of $1,400,000.
|
In 2008,
Pernix retired 409 shares of treasury stock and the cost of the treasury stock
amounting to $3,526,000 was allocated to capital stock, additional paid in
capital and retained earnings.
In 2009,
the Board declared and paid the following distributions:
·
|
$15,538
per share declared and paid on March 3, 2009 representing a total
distribution of $3,107,600;
|
·
|
$5,000
per share declared and paid on April 17, 2009 representing a total
distribution of $1,000,000; and,
|
·
|
$10,000
per share declared and paid on June 22, 2009 representing a total
distribution of $2,000,000.
|
·
|
$16,740
per share declared on December 2, 2009 and paid on December 7, 2009,
representing a total distribution of
$3,348,000.
|
Subsequent
to the originally issued financial statements, audited by our former auditors,
we identified and made the following adjustments and reclassifications in our
combined and consolidated financial statements:
·
|
The
combined and consolidated financial statements have been restated to
include Gaine. See Note 1.
|
·
|
In
addition to the inclusion of Gaine, the most significant adjustments and
reclassifications are as follows:
|
·
|
Correction
of an error for improperly recording sales returns and allowances which
had a net income impact for the year ended December 31, 2008 of
approximately $452,000.
|
·
|
Correction
of an error to properly record Medicaid rebate payable which had a net
income impact for the year ended December 31, 2008 of approximately
$34,000.
|
·
|
Correction
of an error in recording license purchase agreement to intangible assets
and accrued expenses of approximately $260,000 for the year ended
December 31, 2008.
|
·
|
Correction
of an error to reclass shareholder advances of approximately $2,842,000 to
dividends for the year ended December 31,
2008.
|
·
|
Correction
of error for certain prepaid expenses that were incorrectly expensed which
had a net income impact of approximately $373,000 for the year ended
December 31, 2008.
|
·
|
Reclassification
of Medicaid rebate expense to net sales from operating expenses of
approximately $1,791,000 for the year ended December 31,
2008.
|
·
|
Reclassification
of vendor rebates and discounts to accrued expenses from accounts
receivable of approximately $614,000 for the year ended December 31,
2008.
|
·
|
Reclassification
of sales discounts to sales from cost of sales of approximately $709,000
for the year ended December 31,
2008.
|
·
|
Certain
other adjustments, reclassifications and eliminating entries which were
immaterial individually and in the
aggregate.
|
Combined
and Consolidated Balance Sheets
The
following table sets forth the combined and consolidated balance sheet for the
Company as of the date indicated, showing previously issued amounts and
restatement amounts giving effect to the restatement adjustments described above
and other immaterial adjustments, reclassifications and
eliminations.
|
|
As
of December 31, 2008
|
|
|
|
Previously
Issued
|
|
|
Adjustments
|
|
|
As
restated
|
|
|
Balance
sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,874,296 |
|
|
$ |
— |
|
|
$ |
4,874,296 |
|
Accounts
receivable, net
|
|
|
1,768,394 |
|
|
|
632,629 |
|
|
|
2,401,023 |
|
Inventory,
net
|
|
|
1,520,928 |
|
|
|
— |
|
|
|
1,520,928 |
|
Prepaid
expenses and other current assets
|
|
|
232,887 |
|
|
|
224,330 |
|
|
|
457,217 |
|
Advances
to stockholders
|
|
|
2,842,125 |
|
|
|
(2,842,125
|
) |
|
|
— |
|
Property
and equipment, net
|
|
|
273,323 |
|
|
|
— |
|
|
|
273,323 |
|
Intangible
assets, net
|
|
|
978,333 |
|
|
|
201,045 |
|
|
|
1,179,378 |
|
Note
receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Assets
held for sale
|
|
|
778,679 |
|
|
|
— |
|
|
|
778,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
13,268,965 |
|
|
$ |
(1,784,121 |
) |
|
$ |
11,484,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,799,921 |
|
|
$ |
3,243,221 |
|
|
$ |
5,043,142 |
|
Current
and long-term debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stockholders
equity
|
|
|
11,281,936 |
|
|
|
(4,950,726
|
) |
|
|
6,331,210 |
|
Noncontrolling
interests
|
|
|
187,108 |
|
|
|
(76,616
|
) |
|
|
110,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
13,268,965 |
|
|
$ |
(1,784,121 |
) |
|
$ |
11,484,844 |
|
Combined
and Consolidated Statements of Operations
The
following table shows the combined and consolidated statement of operations for
the fiscal year indicated, showing previously issued amounts and restated
amounts giving effect to the restatement adjustments described above and other
immaterial adjustments, reclassifications and eliminations.
|
|
Year
Ended December 31, 2008
|
|
|
|
Previously
Issued
|
|
|
Adjustments
|
|
|
As
restated
|
|
Statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
22,859,248 |
|
|
$ |
(2,965,280 |
) |
|
$ |
19,893,968 |
|
Cost
of sales
|
|
|
4,695,060 |
|
|
|
(675,282
|
) |
|
|
4,019,778 |
|
Operating
expenses
|
|
|
10,976,690 |
|
|
|
(2,409,882
|
) |
|
|
8,566,808 |
|
Other
income (expense), net
|
|
|
316,738 |
|
|
|
(14,055
|
) |
|
|
302,683 |
|
Provision
for income taxes
|
|
|
(112,593
|
) |
|
|
— |
|
|
|
(112,593
|
) |
Net
income attributable to noncontrolling interests
|
|
|
102,780 |
|
|
|
(56,946
|
) |
|
|
45,834 |
|
Net
income attributable to controlling interests
|
|
$ |
7,288,863 |
|
|
$ |
162,775 |
|
|
$ |
7,451,638 |
|
Note
18.
|
Subsequent
Events
|
Asset
Purchase Agreement Sciele Pharma, Inc.
On
January 8, 2010, Pernix entered into an asset purchase agreement with Sciele
Pharma, Inc. to acquire substantially all of Sciele Pharma’s assets and rights
relating to CEDAX, a prescription antibiotic used to treat mild to moderate
infections of the throat, ear and respiratory tract, for an aggregate purchase
price of $6.1 million. The closing is subject to a number of customary closing
conditions and contingencies, including obtaining all necessary third party
consents to Sciele Pharma’s assignment of its rights under certain manufacturing
agreements and intellectual property licenses to Pernix. Pernix expects to fund
its acquisition of the CEDAX assets using existing cash and cash equivalents and
cash flows provided by existing operations. The acquisition is expected to close
during the first quarter of 2010. The Company retained VelocityHealth
Securities, Inc. to provide financial advisory and investment bank services to
them in connection with the acquisition of CEDAX for a fee of $100,000 of which
$50,000 was paid on February 12, 2010.
Merger
with Golf Trust of America
Effective
March 9, 2010, pursuant to an Agreement and Plan of Merger dated October 6, 2009
(the “Merger Agreement”), by and among Golf Trust of America, Inc. (currently
known as Pernix Therapeutics Holdings, Inc.), a Maryland corporation
(“Registrant”), GTA Acquisition, LLC, a Louisiana limited liability company
(“Transitory Subsidiary”) and Pernix, Pernix merged with and into Transitory
Subsidiary, with Transitory Subsidiary surviving the merger, and became a
wholly-owned subsidiary of the Registrant (the “Merger”). The
acquisition was treated as a reverse acquisition for accounting purposes, and
the business of Pernix became the business of the Registrant as a result
thereof.
On March
8, 2010, the Registrant announced that its board of directors unanimously
approved a reverse split of its common stock at a ratio of one share for each
two shares outstanding immediately prior to the reverse split. At the
closing of the Merger and after giving effect to the reverse split, each
outstanding share of Pernix common stock was converted into 104,500 shares of
the Registrant’s common stock. Upon consummation of the Merger, the
stockholders of Pernix received an aggregate of 20,900,000 shares of the
Registrant’s common stock, representing approximately 84% of the aggregate
common stock of the Registrant outstanding.
SIGNATURE
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.
|
PERNIX
THERAPEUTICS HOLDINGS, INC. |
|
|
|
|
|
Dated: March
15, 2010
|
By:
|
/s/ Cooper Collins |
|
|
|
Cooper
Collins |
|
|
|
President
and Chief Executive Officer |
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger By and Among Golf Trust of America, Inc., GTA
Acquisition, LLC and Pernix Therapeutics, Inc. dated as of October 6, 2009
(previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
on October 7, 2009, and incorporated herein by
reference)
|
|
|
|
|
|
Articles
of Incorporation, as currently in effect
|
|
|
|
|
|
Bylaws,
as currently in effect
|
|
|
|
|
|
2009
Stock Incentive Plan
|
|
|
|
10.2
|
|
Pharmaceuticals
Agreement dated as of July 27, 2009, by and between Pernix Therapeutics,
Inc. and Macoven Pharmaceuticals, L.L.C.
|
|
|
|
|
|
Employment
and Non-Compete Agreement, dated December 31, 2008, by and between Pernix
Therapeutics, Inc. and Michael Venters
|
|
|
|
|
|
Employment
Non-Compete Agreement, dated June 1, 2008, by and between Pernix
Therapeutics, Inc. and Cooper Collins
|
|
|
|
10.5
|
|
Form
of Merger Partner Stockholder Agreement (previously filed as Exhibit A to
Exhibit 10.1 to our Current Report on Form 8-K filed on October 7, 2009,
and incorporated herein by reference)
|
|
|
|
|
|
Letter
from BDO Seidman to the SEC, dated March 12, 2010
|
|
|
|
|
|
Subsidiaries
of the Company
|
|
|
|
|
|
Consent
of Cherry, Bekaert & Holland, L.L.P.
|
|
|
|
|
|
Cowen
and Company Healthcare Conference Presentation Slides dated March 10,
2010
|