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LANTHEUS MEDICAL IMAGING, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results
of operations should be read together with "Item 6-Selected Financial Data" and
the consolidated financial statements and the related notes included in Item 8
of this annual report. This discussion contains forward-looking statements,
based on current expectations and related to future events and our future
financial performance, that involve risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those set forth under "Item 1A-Risk
Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a global leader in developing, manufacturing and distributing
innovative diagnostic medical imaging agents and products that assist clinicians
in the diagnosis of cardiovascular diseases such as coronary artery disease,
congestive heart failure and stroke, peripheral vascular disease and other
diseases. We were founded in 1956 as New England Nuclear Corporation and
purchased by E. I. du Pont de Nemours and Company in 1981. We were subsequently
acquired by BMS, as part of its acquisition of DuPont Pharmaceuticals in 2001.
On January 8, 2008, with the financial sponsorship of Avista, we purchased the
medical imaging business from BMS for an aggregate purchase price of $518.7
million, which is now known as LMI.
Our current marketed products are used by nuclear physicians, cardiologists,
radiologists, internal medicine physicians, technologists and sonographers
working in a variety of clinical settings. We sell our products to
radiopharmacies, hospitals, clinics, group practices, integrated delivery
networks, group purchasing organizations and, in certain circumstances,
wholesalers. In addition to our marketed products, we have three products in
clinical and pre-clinical development including our lead Phase 3 product,
flurpiridaz F 18, an MPI agent, 18F LMI1195, a cardiac neuronal imaging agent,
and BMS 753951 for the identification of vascular plaque. We expect ongoing
investment in our clinical programs and research and development to remain an
important component of our business strategy.
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We market our products globally and have operations in the United States,
Puerto Rico, Canada and Australia and distribution relationships in Europe, Asia
Pacific and Latin America.
Our Products
Our principal products include the following:
Cardiolite is a technetium-based radiopharmaceutical imaging agent used in
MPI procedures to detect coronary artery disease using SPECT. Cardiolite was
approved by the FDA in 1990, and its market exclusivity expired in July 2008.
TechneLite is a technetium-based generator which provides the essential
nuclear material used by radiopharmacies to radiolabel Cardiolite and other
technetium-based radiopharmaceuticals used in nuclear medicine procedures.
TechneLite uses Moly as its main active ingredient.
DEFINITY is an ultrasound contrast agent used in ultrasound exams of the
heart, also known as echocardiography exams. DEFINITY consists of
perflutren-containing lipid microspheres and is indicated in the United States
for use in patients with suboptimal echocardiograms to assist in the imaging of
the left ventricular chamber and left endocardial border of the heart in
ultrasound procedures. We launched DEFINITY in 2001, and its last patent in the
United States will currently expire in 2021 and in numerous foreign
jurisdictions in 2019.
In the United States, our nuclear imaging products, including Cardiolite and
TechneLite, are primarily distributed through over 350 radiopharmacies that are
controlled by or associated with Cardinal, UPPI, Triad and GE Healthcare. A
small portion of our nuclear imaging product sales in the United States are made
through our direct sales force to hospitals and clinics that maintain their own
in-house radiopharmaceutical capabilities. Sales of our contrast agents,
including DEFINITY, are made through our direct sales force of approximately 85
representatives. Outside the United States, we own five radiopharmacies in
Canada and two radiopharmacies in each of Puerto Rico and Australia. We also
maintain a direct sales force in each of these countries. In the rest of the
world, we rely on third-party distributors to market, distribute and sell our
nuclear imaging and contrast agent products, either on a country-by-country
basis or on a multi-country regional basis.
The following table sets forth our revenue derived from our principal
products:
Year Ended December 31,
(dollars in thousands) 2011 % 2010 % 2009 %
Cardiolite $ 65,316 18 $ 77,422 22 $ 119,304 33
TechneLite 131,241 37 122,044 34 112,910 31
DEFINITY 68,503 19 59,968 17 42,942 12
Other 91,232 26 94,522 27 85,055 24
Total revenues $ 356,292 100 $ 353,956 100 $ 360,211 100
Key Factors Affecting Our Results
Our business and financial performance have been, and continue to be,
affected by the following:
Inventory Supply
We currently rely on BVL for sole source manufacturing of DEFINITY,
Neurolite and certain TechneLite accessories. We also rely on BVL for a majority
of our Cardiolite product supply. In July 2010, BVL temporarily shutdown the
facility where it manufactures products for a number of customers, including us,
in order to upgrade the facility to meet certain regulatory requirements. In
anticipation of this shutdown, BVL manufactured for us additional inventory of
these products to meet
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our expected needs during the shutdown period which was anticipated to end in
March 2011. As the shutdown and re-inspection periods have been longer than
anticipated by BVL and ourselves, we could not meet all of the demand for
certain products during the second half of 2011, resulting in an overall revenue
decline over the prior period. We can give no assurances as to when BVL will be
able to successfully manufacture and distribute product. If BVL is not able to
provide us with adequate product supply for a prolonged period of time, we will
have limited Cardiolite product supply. We also procure Cardiolite from a
second-source manufacturer which could help mitigate the limited product supply,
and in February 2012, entered into a five-year manufacturing and supply
agreement for DEFINITY with JHS. Based on our current projections, we believe
that we have sufficient DEFINITY inventory until early in the second quarter of
2012. The inventory of Neurolite previously supplied to us by BVL has now been
exhausted. We are pursuing new manufacturing relationships to establish and
secure additional long-term or alternative suppliers of Cardiolite, and
Neurolite and DEFINITY, but we are uncertain of the timing as to when these
arrangements could provide meaningful quantities of product. In addition, if BVL
is not able to provide us adequate product supply for a further prolonged period
of time, we will need to implement additional expense reduction and other
operating and strategic initiatives. See "Item 1A-Risk Factors-Our dependence
upon third parties for the manufacture and supply of a substantial portion of
our products could prevent us from delivering our products to our customers in
the required quantities, within the required timeframe, or at all, which could
result in order cancellations and decreased revenues."
Global Moly Supply
Historically, our largest supplier of Moly, our highest volume raw material,
has been Nordion, which has relied on the NRU reactor in Chalk River, Ontario.
This reactor was off-line from May 2009 until August 2010 due to a heavy water
leak in the reactor vessel. With the return to service of the NRU reactor, we
have seen increased sales in TechneLite for the year ended December 31, 2011 as
compared to the prior year.
In response to the global Moly shortage and to minimize the risk of any
potential future supply disruption, we took several steps to diversify and
balance our global supply of Moly, including expanding our sourcing of Moly to
include NTP in South Africa, IRE in Belgium and ANSTO in Australia. We are also
pursuing additional sources of Moly from potential new producers around the
world to further augment our current supply. In addition, we are exploring a
number of alternative Moly projects with existing reactors and technologies as
well as new technologies.
During the period the NRU reactor was offline, instability in the global
supply of Moly and supply shortages resulted in substantial volatility in the
cost of Moly in comparison to historical costs. We were able to pass some of
these Moly cost increases on to our customers through our customer contracts.
Additionally, the instability in the global supply of Moly has resulted in Moly
producers requiring, in exchange for fixed Moly prices, supply minimums in the
form of take-or-pay obligations. With less Moly, we manufactured less TechneLite
and fewer generators for radiopharmacies and hospitals to make up unit doses of
Cardiolite, resulting in decreased sales of TechneLite and Cardiolite in favor
of other diagnostic modalities that do not use Moly during the period the NRU
reactor was offline.
Demand for TechneLite
Following the global Moly supply challenge, we have experienced reduced
demand for TechneLite generators from pre-shortage levels even though volume has
increased in absolute terms from shortage levels following the return of our
normal Moly supply in August 2010. Although, we do not know if Technetium demand
will ever return to pre-shortage levels, we believe we will experience some
increase in sales of TechneLite generators.
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We believe that TechneLite unit volume has not returned to pre-shortage
levels for a number of reasons, including: (i) changing staffing and utilization
practices in radiopharmacies, which have resulted in an increased number of unit
doses of Technetium-based radiopharmaceuticals being made from available amounts
of Technetium; (ii) shifts to alternative diagnostic imaging modalities during
the Moly supply shortage, which have not returned to Technetium-based
procedures; and (iii) decreased amounts of Technetium being used in unit-doses
of Technetium-based radiopharmaceuticals due to growing concerns about patient
radiation dose exposure. We also believe that there has been an overall decline
in the MPI study market because of decreased levels of patient studies during
the Moly shortage period that have not returned to pre-shortage levels and
industry-wide cost-containment initiatives that have resulted in a transition of
location in which imaging procedures are performed from free standing imaging
centers to the hospital setting. We expect these factors will continue to affect
Technetium demand in the future. Additionally, our ability to meet the demand
for TechneLite may be impacted by the BVL shutdown. See "-Inventory Supply."
Cardiolite Competitive Pressures
Cardiolite's market exclusivity expired in July 2008. In September 2008, the
first of several competing generic products to Cardiolite was launched. With
continued pricing pressure from generic competitors, we also sell our Cardiolite
product in the form of a generic sestamibi while at the same time continuing to
sell branded Cardiolite throughout the MPI segment. We believe this strategy of
selling branded as well as generic sestamibi allows us to maintain total segment
share by having multiple sestamibi offerings that are attractive in terms of
brand, as well as price.
In addition to pricing pressure due to generics, Cardiolite has also faced a
moderate decline in the MPI segment due to a change in professional society
appropriateness guidelines, on-going reimbursement pressures, the limited
availability of Moly during the NRU reactor shutdown, the limited availability
of Cardiolite during BVL outage and the increase in use of other diagnostic
modalities as a result of a shift to more available imaging agents and
modalities. Despite these trends, we believe our share of the MPI segment only
decreased from approximately one-half to one-third, prior to the BVL-related
supply challenges. During 2011, we have seen our share of the MPI segment
decline to just over one-quarter. We believe these decreases were limited due to
continued brand awareness, loyalty to the agent within the cardiology community
and our strong relationships with our distribution partners.
Growth of DEFINITY
We believe the market opportunity for our contrast agent, DEFINITY, remains
quite significant. As we better educate the physician and healthcare provider
community about the benefits and risks of this product, we believe we will
experience further penetration of suboptimal echocardiograms. Sales of DEFINITY
have continually increased quarter over quarter since June 2008, when we were
able to modify the boxed warning on DEFINITY. Unit sales of DEFINITY had
decreased substantially in late 2007 and early 2008 as a result of an FDA
request in October 2007 that all manufacturers of ultrasound contrast agents add
a boxed warning to their products to notify physicians and patients about
potentially serious safety concerns or risks posed by the products. However, in
May 2008, the boxed warning was modified by the FDA in response to the
substantial advocacy efforts of prescribing physicians. Since then, DEFINITY
sales have continually increased quarter over quarter. In October 2011, we
received FDA approval of further modifications to the DEFINITY label, including:
further relaxing the boxed warning; eliminating the sentence in the Indication
and Use section "The safety and efficacy of DEFINITY with exercise stress or
pharmacologic stress testing have not been established" (previously added in
October 2007 in connection with the imposition of the box warning); and
including summary data from the post-approval CaRES (Contrast echocardiography
Registry for Safety Surveillance) safety registry and the post-approval
pulmonary hypertension study. DEFINITY is
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currently the only echocardiography contrast agent able to benefit from these
label modifications. If BVL continues to remain shutdown, however, we may be
unable to manufacture DEFINITY until such time as our second source manufacturer
can commercially produce DEFINITY. See "-Inventory Supply."
Ablavar
Prior to the issuance of our June 30, 2011 financial statements, we
performed an analysis of our expected future sales based on an updated sales
forecast using actual results through June 30, 2011 and forecasted sales of our
Ablavar product. Based on the results of this analysis we recorded an inventory
write-down to cost of goods sold of $13.5 million of Ablavar inventory, which
represented the cost of Ablavar finished good product and API that we did not
believe we would be able to sell prior to its expiration. We also evaluated our
expected sales forecast for Ablavar in consideration of our supply agreement for
API. Based on the updated sales forecast, coupled with the aggregate six-year
shelf life of API and finished goods, we believed that we would not be able to
sell all of the committed supply. As a result, in the second quarter, we also
recorded a reserve of $1.9 million for the loss associated with the portion of
the committed purchases of Ablavar product that we did not believe we would be
able to sell prior to expiry. In addition, we determined that the write down of
Ablavar inventory represented an event that warranted assessment of the Ablavar
intangible asset for its recoverability and concluded that the asset was not
recoverable and prior to the issuance of our June 30, 2011 financial statements
we recorded in cost of goods sold in the U.S. segment an impairment charge of
$23.5 million to adjust the carrying value to its fair value of zero. Both the
inventory write-down and the intellectual property asset impairment are recorded
as cost of goods sold in the accompanying statements of comprehensive (loss)
income. Prior to the issuance of our December 31, 2011 financial statements, we
assessed our Ablavar inventory balance at December 31, 2011 considering our
third and fourth quarter results, as well as results subsequent to December 31,
2011, against our current forecast of projected sales and $11.1 of remaining
purchase commitments. Based upon this analysis, we recorded an additional
inventory write-down in the fourth quarter to cost of goods sold of
$12.3 million of Ablavar inventory, which represented the cost of Ablavar
finished good product and API that we did not believe we would be able to sell
prior to its expiration. We also evaluated our expected sales forecast for
Ablavar in consideration of our supply agreement for API. Based on this
analysis, contemplated with the aggregate six-year shelf life of API and
finished goods, we believe that we will not be able to sell all of the committed
supply. As a result, in the fourth quarter, we also recorded to cost of goods
sold a reserve of $3.7 million for the loss associated with the portion of the
committed purchases of Ablavar product that we do not believe we will be able to
sell prior to expiry. After giving effect to these adjustments, as of
December 31, 2011, we have a total of $12.2 million of Ablavar inventory on hand
and approximately $11.1 million of remaining committed Ablavar purchase
obligations. In the event that we do not meet our sales expectations for Ablavar
or cannot sell the product we have committed to purchase prior to its
expiration, we could incur additional inventory losses and/or losses on our
purchase commitments.
In October 2011, LMI entered into Amendment No. 2 to the Supply Agreement
dated as of April 6, 2009 between LMI and Mallinckrodt. The Ablavar Agreement
provides for the manufacture and supply by Mallinckrodt of Ablavar API and
finished drug product for LMI. Among other things, Amendment No. 2 (i) extends
the term of the Ablavar Agreement from September 30, 2012 until September 30,
2014, (ii) reduces the amount of API Mallinckrodt is obligated to supply to LMI
and LMI is obligated to purchase from Mallinckrodt over the term of the Ablavar
Agreement and (iii) increases the amount of finished drug product Mallinckrodt
is obligated to supply to LMI and LMI is obligated to purchase from Mallinckrodt
over the term of the Ablavar Agreement. As a result of Amendment No. 2, the
aggregate future purchase obligations of LMI under the Ablavar Agreement were
reduced from approximately $33.8 million to approximately $20.9 million. As of
December 31, 2011, our remaining obligation under this agreement is
approximately $11.1 million.
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Increases in Research and Development Expenses
To compete successfully in the marketplace, we must make substantial
investments in new product development. As a result, research and development
expenses are a key factor that has historically affected our results and will
continue to do so in the future. We expect that research and development
expenses will fluctuate depending primarily on the timing and outcomes of
clinical trials, related manufacturing initiatives and the results of our
decisions based on these outcomes. We expect to incur substantial additional
expenses over the next several years for clinical trials related to our product
development candidates, including flurpiridaz F 18, 18F LMI1195 and BMS 753951.
We also expect manufacturing expenses for some programs included in research and
development expenses to increase as we support our manufacturing infrastructure
for later stages of clinical development.
Operating Results
The following have impacted our results in the year ended December 31, 2011:
º •
º the establishment of a valuation allowance against our deferred tax
assets in the amount of $102.7 million;
º • º recording of an impairment charge related to the Ablavar intangible
asset of $23.5 million, write-down of Ablavar inventory of
approximately $25.8 million and recording of a reserve for expected
losses on firm purchase commitments of approximately $5.6 million;
º •
º increase of interest expense as a result of our issuance of additional
debt in March 2011 to approximately $37.7 million in 2011;
º •
º limited supply of Neurolite and Cardiolite product inventory as a
result of the BVL shutdown and on-going return to service;
º •
º costs of product recalls associated with product manufactured by BVL;
º • º continued increase in sales of TechneLite generators to the market
following the return of a normal Moly supply in August 2010;
º •
º DEFINITY's continued growth in sales;
º •
º continued generic competition to Cardiolite;
º •
º limited Ablavar revenues to offset costs related to the launch and
commercialization of the product; and
º • º action taken on June 30, 2011 to reduce our work force in an effort to
reduce costs and increase operating efficiency.
For 2012, we believe these challenges will be partially mitigated as a
result of the expected continued increase in DEFINITY sales on a year-over-year
basis, assuming we are able to obtain adequate DEFINITY supply, and the return
of a sustained Moly supply resulting in increased unit volume of TechneLite as
compared to the period during when the NRU reactor was offline. In addition,
despite the slower than anticipated market acceptance of Ablavar, we believe
that with further education of its benefits and reimbursement, market acceptance
of the product will increase in the future.
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Years Ended December 31, 2011, 2010 and 2009
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
Revenues
Net product revenues $ 345,762 $ 345,747 $ 352,303 $ 15
- % $ (6,556 ) (2) %
License and other
revenues 10,530 8,209 7,908 2,321 28 301 4
Total revenues 356,292 353,956 360,211 2,336 1 (6,255 ) (2 )
Cost of goods sold 255,466 204,006 184,844 51,460
25 19,162 10
Loss on firm purchase
commitment 5,610 - - 5,610 100 - -
Total cost of goods
sold 261,076 204,006 184,844 57,070 28 19,162 10
Gross profit 95,216 149,950 175,367 (54,734 ) (37 ) (25,417 ) (14 )
Operating expenses
General and
administrative
expenses 32,057 30,042 35,430 2,015 7 (5,388 ) (15 )
Sales and marketing
expenses 38,689 45,384 42,337 (6,695 ) (15 ) 3,047 7
Research and
development expenses 40,945 45,130 44,631 (4,185 ) (9 ) 499 1
Total operating
expenses 111,691 120,556 122,398 (8,865 ) (7 ) (1,842 ) (2 )
Operating (loss)
income (16,475 ) 29,394 52,969 (45,869 ) (156 ) (23,575 ) (45 )
Interest expense (37,658 ) (20,395 ) (13,458 ) (17,263 ) 85 (6,937 ) 51
Loss on early
extinguishment of debt - (3,057 ) - 3,057 (100 ) (3,057 ) 100
Interest income 333 179 73 154 86 106 145
Other income
(expense), net 1,429 1,314 2,720 115 9 (1,406 ) (52 )
(Loss) income before
income taxes (52,371 ) 7,435 42,304 (59,806 ) (804 ) (34,869 ) (82 )
Provision for income
taxes 84,098 2,465 21,952 81,633 3,312 (19,487 ) (89 )
Net (loss) income $ (136,469 ) $ 4,970 $ 20,352 $ (141,439 )
(2,846 )% $ (15,382 ) (76 )%
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Comparison of the Years Ended December 31, 2011, 2010, and 2009
Revenues
Revenues are summarized as follows:
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
U.S.
Cardiolite $ 39,214 $ 50,408 $ 91,934 $ (11,194 ) (22 )% $ (41,526 ) (45 )%
TechneLite 114,833 108,262 103,312 6,571 6 4,950 5
DEFINITY 67,442 58,846 42,053 8,596 15 16,793 40
Other currently
marketed products 36,346 39,021 31,571 (2,675 ) (7 ) 7,450 24
Total U.S. net product
revenues 257,835 256,537 268,870 1,298 1 (12,333 ) (5 )
License and other
revenues 10,530 8,209 7,908 2,321 28 301 4
Total U.S. revenues $ 268,365 $ 264,746 $ 276,778 $ 3,619 1 % $ (12,032 ) (4 )%
International
Cardiolite $ 26,101 $ 27,014 $ 27,370 $ (913 ) (3 )% $ (356 ) (1 )%
TechneLite 16,408 13,782 9,598 2,626 19 4,184 44
DEFINITY 1,061 1,122 889 (61 ) (5 ) 233 26
Other currently
marketed products 44,357 47,292 45,576 (2,935 ) (6 ) 1,716 4
Total International
net product revenues $ 87,927 $ 89,210 $ 83,433 $ (1,283 ) (1 ) $ 5,777 7
Net product revenues $ 345,762 $ 345,747 $ 352,303 $ 15 - % $ (6,556 ) (2 )%
License and other
revenues 10,530 8,209 7,908 2,321 28 301 4
Total revenues $ 356,292 $ 353,956 $ 360,211 $ 2,336 1 % $ (6,255 ) (2 )%
Total revenues increased $2.3 million, or 1%, to $356.3 million in the year
ended December 31, 2011, as compared to $354.0 million in the year ended
December 31, 2010. U.S. segment revenue increased $3.6 million, or 1%, to
$268.4 million in the same period, as compared to $264.7 million in the prior
year. This increase in the U.S. segment over the prior year is primarily driven
by increased sales of DEFINITY, due to the increase in the number of contrast
studies performed, TechneLite, which was impacted from May 2009 until August
2010 by a global Moly shortage as a result of the NRU reactor outage and Xenon,
primarily due to price increases. Offsetting these increases were lower Thallium
revenues primarily due to customers returning to technetium-based studies
following the return of a normal Moly supply and lower Cardiolite and Neurolite
revenues primarily due to the BVL supply shortage and continued generic pressure
for Cardiolite.
The International segment revenues decreased $1.3 million, or 1%, to
$87.9 million in the year ended December 31, 2011, as compared to $89.2 million
in the year ended December 31, 2010. The decrease was primarily driven by a
decrease in Thallium revenues as customers returned to technetium-based studies
following the return of a normal Moly supply, as well as a decrease in
Cardiolite and Neurolite revenues as a result of the recent product recall and
supply issues, resulting in stock outs of product in certain international
markets. Offsetting these decreases was the impact of favorable foreign currency
exchange of approximately $4.2 million and higher TechneLite revenues due to an
increase in global Moly availability following the return of a normal Moly
supply.
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Total revenues decreased $6.2 million, or 2%, to $354.0 million in the year
ended December 31, 2010, as compared to $360.2 million in the year ended
December 31, 2009. U.S. segment revenue decreased $12.0 million, or 4%, to
$264.7 million in the same period, as compared to $276.8 million in the prior
year. This decrease was primarily due to the continued impact from the
expiration of Cardiolite's market exclusivity in July 2008 and subsequent
introduction of generic competition which began in September 2008, as well as
the decrease in available Moly due to the global Moly supply shortage caused by
the NRU reactor which was off-line from May 2009 until August 2010. As a result,
unit volume and average selling price decreased by 32% and 13%, respectively, in
the year ended December 31, 2010 as compared to the year ended December 31,
2009. In addition, we experienced an increase in customer rebates due to new
rebate contracts entered in to in 2010.
These decreases were offset, in part, by an increase in TechneLite sales due
to a 19% price increase related to the additional Moly surcharge and
distribution costs, offset by 14% lower unit volume caused by the decrease in
available Moly due to the global Moly supply shortage and lower demand from what
we believe are changing staffing and utilization practices in radiopharmacies,
which have resulted in an increased number of unit doses of technetium-based
radiopharmaceuticals being made from available amounts of technetium caused by
the global Moly supply shortage. The Moly supply shortage also resulted in an
increase in Thallium sales due to a 38% increase in volume due to its
substitution for technetium-based studies. In addition, we realized an increase
in DEFINITY sales primarily due to a 39% volume increase and 1% price increase
as a result of continued market penetration since the June 2008 relaunch
following a modification of the boxed warning in May 2008 and an increase in
Xenon sales primarily due to 26% higher pricing and 15% higher volume from new
customers.
The International segment revenues increased $5.8 million, or 7%, to
$89.2 million in the year ended December 31, 2010, as compared to $83.4 million
in the year ended December 31, 2009. This increase was primarily due to
favorable currency exchange of approximately $6.2 million offset, in part, by
lower product volume due to the decrease in available Moly caused by the global
Moly supply shortage.
Rebates and Allowances
Estimates for rebates and allowances represent our estimated obligations
under contractual arrangements with third parties. Rebate accruals and
allowances are recorded in the same period the related revenue is recognized,
resulting in a reduction to product revenue and the establishment of a liability
which is included in accrued expenses. These rebates result from
performance-based offers that are primarily based on attaining contractually
specified sales volumes and growth, Medicaid rebate, programs for certain
products, administration fees of group purchasing organizations and certain
distributor related commissions. The calculation of the accrual for these
rebates and allowances is based on an estimate of the third party's buying
patterns and the resulting applicable contractual rebate or commission rate(s)
to be earned over a contractual period.
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An analysis of the amount of, and change in, reserves is summarized as
follows:
(in thousands) Rebates Allowances Total
Balance, as of January 1, 2009 $ 7,972 $ 97 $ 8,069
Current provisions relating to sales in current year 1,996 471 2,467
Adjustments relating to prior years estimate (1,586 ) - (1,586 )
Payments/credits relating to sales in current year (1,579 ) (430 ) (2,009 )
Payments/credits relating to sales in prior years (6,376 ) (97 ) (6,473 )
Balance, as of December 31, 2009 427 41 468
Current provisions relating to sales in current year 3,072 555 3,627
Adjustments relating to prior years estimate - - -
Payments/credits relating to sales in current year (2,171 ) (454 ) (2,625 )
Payments/credits relating to sales in prior years (418 ) (41 ) (459 )
Balance, as of December 31, 2010 910 101 1,011
Current provisions relating to sales in current year 3,672 474 4,146
Adjustments relating to prior years estimate (116 ) - (116 )
Payments/credits relating to sales in current year (2,617 ) (441 ) (3,058 )
Payments/credits relating to sales in prior years (493 ) (101 ) (594 )
Balance, as of December 31, 2011 $ 1,356 $ 33 $ 1,389
The accrual for rebates and allowances was approximately $1.4 million and
$0.9 at December 31, 2011 and December 31, 2010, respectively. The increase in
the accrual resulted principally from the full year impact in 2011 of the
addition of contracts with rebate rights signed in the second half of 2010. In
October 2010, we entered into a Medicaid Drug Rebate Agreement for certain of
our products, which did not have a material impact on our results of operations
in 2010 or 2011. If the demand for these products through the Medicaid program
increases in the future, our rebates associated with this program could increase
and could have a material impact on future results of operations.
Costs of Goods Sold
Cost of goods sold consists of manufacturing, distribution, definite lived
intangible asset amortization and other costs related to our commercial
products. In addition, it includes the write off of excess and obsolete
inventory.
Cost of goods sold is summarized as follows:
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change(dollars in thousands) 2011 2010 2009 $ % $ %
United States $ 206,450 $ 148,454 $ 128,692 $ 57,996 39 % $ 19,762 15 %
International 54,626 55,552 56,152 (926 ) (2 ) (600 ) (1 )
Total Cost of Goods Sold $ 261,076 $ 204,006 $ 184,844 $ 57,070 28 % $ 19,162 10 %
Total cost of goods sold increased $57.1 million, or 28%, to $261.1 million
in the year ended December 31, 2011, as compared to $204.0 million in the year
ended December 31, 2010. U.S. segment cost of goods sold increased approximately
$58.0 million, or 39%, to $206.5 million in same period, as compared to
$148.5 million in the prior year period. International segment cost of goods
sold decreased $0.9 million, or 2%, to $54.6 million for the same period, as
compared to $55.5 million in the prior year period.
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For the year ended December 31, 2011 as compared to the same period for
2010, the primary contributing factors to the increase in the U.S. segment cost
of goods sold relate to charges resulting from an assessment of future Ablavar
sales, on-hand inventory shelf-life, committed supply and an impairment of the
Ablavar patent portfolio intangible asset. The total costs included in cost of
goods sold of the inventory reserve, the loss contract reserve and the
intangible impairment was $54.9 million for the year ended December 31, 2011, as
compared to a $10.9 million write-off of Ablavar inventory in 2010, an increase
of $44.0 million. The U.S. segment also incurred higher costs as we produced
more TechneLite after the return to normal Moly supply following the outage of
the NRU reactor in Chalk River, Ontario. Increases in Thallium and Gallium costs
also occurred as a result of lower International segment volume, the effect of
which burdens the U.S. segment with a greater share of manufacturing overhead
expenses. Similarly, we also experienced higher Neurolite manufacturing cost due
primarily to lower International segment volume as a direct result of the longer
than expected BVL shutdown and product recall, the effect of which burdens the
U.S. segment with more cost due to lower absorption. These increases were
partially offset by a decrease for amortization of intangible customer
relationships.
Cost of goods sold in our International segment decreased primarily due to
lower Neurolite volume as a result of the longer than expected BVL outage and
product recall. We also experienced lower Thallium cost due to lower volumes
resulting from customers switching to technetium-based studies and lower third
party and other product cost due to favorable mix and lower material costs.
These decreases were partially offset primarily by higher manufacturing costs in
our radiopharmacies.
Total cost of goods sold increased $19.2 million, or 10%, to $204.0 million
in the year ended December 31, 2010, as compared to $184.8 million in the year
ended December 31, 2009. U.S. segment cost of goods sold increased
$19.8 million, or 15%, to $148.5 million in same period, as compared to
$128.7 million in the prior year period. International segment cost of goods
sold decreased $0.6 million, or 1%, to $55.5 million for the same period, as
compared to $56.1 million in the prior year period.
For the year ended December 31, 2010 as compared to the same period for
2009, the increase in the U.S. segment cost of goods sold was primarily due to
higher material costs for TechneLite and higher Thallium product cost as a
result of the global Moly supply shortage, an increase in Ablavar cost primarily
related to the $10.9 million inventory write-down of Ablavar finished good
product which we did not believe we would be able to utilize prior to its
expiration and an increase in the cost of Xenon driven by increased volume. This
was offset, in part, by a decrease of amortization of intangible customer
relationships and capitalized software and a decrease in distribution and other
overhead costs.
The decrease in the International segment cost of goods sold was due to
lower costs driven by lower volumes as a result of the global Moly supply
shortage offset by higher material costs for available product and lower
amortization related to intangible customer relationships.
Gross Profit
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
United States $ 61,915 $ 116,292 $ 148,086 $ (54,377 ) (47 )% $ (31,794 ) (21 )%
International 33,301 33,658 27,281 (357 ) (1 ) 6,377 23
Total Gross Profit $ 95,216 $ 149,950 $ 175,367 $ (54,734 ) (37 )% $ (25,417 ) (14 )%
Total gross profit decreased $54.7 million, or 37%, to $95.2 million in the
year ended December 31, 2011, as compared to $150.0 million in the year ended
December 31, 2010. U.S. segment gross profit decreased $54.4 million, or 47%, to
$61.9 million, as compared to $116.3 million in the
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prior year period. International segment gross profit decreased $0.4 million, or
1%, to $33.3 million for the same period, as compared to $33.7 million in the
prior year period.
Gross profit in the U.S. segment decreased primarily due to the
$44.0 million incremental expense in 2011 arising from the Ablavar inventory,
loss contract reserves and intangible asset impairment previously discussed. We
also experienced a decrease in Cardiolite and Neurolite profit relating to
revenue loss from the longer than anticipated BVL outage and product recall,
coupled with higher manufacturing costs arising from unabsorbed capacity due
primarily to the inability to supply product as a result of the longer than
expected BVL shutdown. A decrease in Thallium profit also occurred due to
customers sourcing product from competitors and higher manufacturing cost. These
decreases were partially offset by an increase in DEFINITY profit as demand
continues to increase as well as higher profit from Xenon due to an increase in
price.
Gross profit in our International segment decreased largely due to a
decrease in Thallium gross profit due to lower volume as customers returned to
technetium-based studies. We also experienced increased manufacturing costs in
our radiopharmacies and a decrease in Cardiolite gross profit relating to the
longer than anticipated BVL outage. These decreases were partially offset by an
increase in TechneLite gross profit following the return to normal Moly supply
and an increase in third party and other products profit due to lower material
costs, favorable mix and higher revenues from fluorodeoxyglucose ("FDG"), a PET
imaging cancer agent, and generic sestamibi.
Total gross profit decreased $25.4 million, or 14%, to $150.0 million in the
year ended December 31, 2010, as compared to $175.4 million in the year ended
December 31, 2009. U.S. segment gross profit decreased $31.8 million, or 21%, to
$116.3 million, as compared to $148.1 million in the prior year period.
International segment gross profit increased $6.4 million, or 23%, to
$33.7 million for the same period, as compared to $27.3 million in the prior
year period.
Gross profit in the U.S. segment decreased primarily due to the expense
arising from the Ablavar inventory reserves previously discussed. Gross profit
was also negatively affected by decreased price and volume reductions associated
with the expiration of Cardiolite's market exclusivity, along with reductions in
TechneLite and Thallium margins as a result of the global Moly supply shortage.
These decreases were offset primarily by increased gross profit associated with
increased DEFINITY volume as a result of a continued demand ramp up from the
June 2008 relaunch, a reduction in amortization related to intangible customer
relationships and capitalized software and an increase in Xenon gross profit due
to higher volumes and price.
The increase in the International segment gross profit was primarily
attributable to a change in product mix between Cardiolite, TechneLite and
Thallium as a result of the global Moly supply shortage, offset, in part by
favorable exchange rates.
General and Administrative
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
United States $ 29,415 $ 27,193 $ 33,244 $ 2,222 8 % $ (6,051 ) (18 )%
International 2,642 2,849 2,186 (207 ) (7 ) 663 30
Total General and
Administrative $ 32,057 $ 30,042 $ 35,430 $ 2,015 7 % $ (5,388 ) (15 )%
General and administrative expenses consist of salaries and related costs
for personnel in executive, finance, legal, information technology and human
resource functions. Other costs in general and administrative include
professional fees for information technology services, external legal fees,
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consulting and accounting services as well as bad debt expense, and certain
facility and insurance costs; including director and officer liability
insurance.
Total general and administrative expenses increased $2.0 million, or 7%, to
$32.1 million in the year ended December 31, 2011, as compared to $30.0 million
in the year ended December 31, 2010. In the U.S. segment, general and
administrative expenses increased $2.2 million, or 8%, to $29.4 million, as
compared to $27.2 million in the prior year period. The increase primarily
related to legal expenses for a business interruption insurance claim, as well
as higher salaries and benefits for additional experienced personnel. These
increases were partly offset by lower professional services fees driven by cost
containment initiatives.
For the year ended December 31, 2011, general and administrative expenses in
the International segment decreased $0.2 million or 7%, to $2.6 million as
compared to $2.8 million in the prior year period. This decrease was primarily
driven by lower recruitment fees and bad debt expense.
Total general and administrative expenses decreased $5.4 million, or 15%, to
$30.0 million in the year ended December 31, 2010, as compared to $35.4 million
in the year ended December 31, 2009. In the U.S. segment, general and
administrative expenses decreased $6.0 million, or 18%, to $27.2 million, as
compared to $33.2 million in the prior year period. General and administrative
expenses in the U.S. segment decreased primarily due to: non-recurring external
consulting in 2009 related to our infrastructure cost improvement initiative;
lower salary, benefits and employee related expenses primarily driven by changes
in attainment of performance related compensation; and lower information
technology external contractor and service expenses primarily for non-recurring
business transition activities in 2009 as well as cost control efforts in 2010.
International segment general and administrative expenses increased
$0.6 million, or 30%, to $2.8 million for the same period, as compared to
$2.2 million in the prior year period. The increase was attributable to
increased bad debt reserves, recruitment fees and other expenses.
Sales and Marketing
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
United States $ 34,040 $ 40,762 $ 37,873 $ (6,722 ) (16 )% $ 2,889 8 %
International 4,649 4,622 4,464 27 1 158 4
Total Sales and Marketing $ 38,689 $ 45,384 $ 42,337 $ (6,695 )
(15 )% $ 3,047 7 %
Sales and marketing expenses consist primarily of salaries and related costs
for personnel in field sales, marketing, business development, and customer
service functions. Other costs in sales and marketing expense include the
development and printing of advertising and promotional material, professional
services, market research, and sales meetings.
Total sales and marketing expenses decreased $6.7 million, or 15%, to
$38.7 million in the year ended December 31, 2011, as compared to $45.4 million
in the year ended December 31, 2010. In the U.S. segment, sales and marketing
expense decreased $6.7 million, or 16%, to $34.0 million in the same period, as
compared to $40.8 million in the prior year. The decrease related primarily to
the discontinued use of a contracted sales force supporting Ablavar, as part of
a sales force reorganization in the fourth quarter of 2010. Compensation costs
were lower due to a non-recurring reduction of stock compensation expense
resulting from an expired liability award. Other decreases, driven by cost
containment initiatives, include market research primarily related to Ablavar
and lower professional services. These decreases were partly offset by increased
variable incentive compensation for the sales force. As a percentage of net
revenue in the U.S. segment, sales and marketing expenses were 13% and 15% for
the years ended December 31, 2011 and 2010, respectively.
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For the year ended December 31, 2011, the International segment sales and
marketing expense remained relatively flat. As a percentage of net revenue,
sales and marketing expenses in the International segment were 5% for each of
the years ended December 31, 2011 and 2010.
Total sales and marketing expenses increased $3.1 million, or 7%, to
$45.4 million in the year ended December 31, 2010, as compared to $42.3 million
in the year ended December 31, 2009. In the U.S. segment, sales and marketing
expenses increased $2.9 million, or 8%, to $40.8 million, as compared to
$37.9 million in the prior year period. International segment sales and
marketing expenses increased $0.2 million, or 4%, to $4.6 million for the same
period, as compared to $4.4 million in the prior year period.
Sales and marketing expenses in the U.S. segment increased primarily due to
a contract sales force hired in the fourth quarter of 2009 to support the
launch, advertising, promotion and sales of Ablavar. Other increases associated
with marketing development initiatives for flurpiridaz F 18 and other potential
products were offset by lower advertising and other promotion costs related to
DEFINITY, due to the delay of new agency selection and cost control efforts. As
a percentage of net revenue in the U.S. segment, sales and marketing expenses
were 15% and 13% for the years ended December 31, 2010 and 2009, respectively.
Sales and marketing expenses in the International segment increased
primarily due to market research related to product opportunities in foreign
markets. As a percentage of net revenue, sales and marketing expenses in the
International segment were 5% for each of the years ended December 31, 2010 and
2009.
Research and Development
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
United States $ 40,387 $ 44,639 $ 43,535 $ (4,252 ) (10 )% $ 1,104 3 %
International 558 491 1,096 67 14 (605 ) (55 )
Total Research and
Development $ 40,945 $ 45,130 $ 44,631 $ (4,185 ) (9 )% $ 499 1 %
Total research and development expense decreased $4.2 million, or 9%, to
$40.9 million for the year ended December 31, 2011, as compared to $45.1 million
in the year ended December 31, 2010. In the U.S. segment, research and
development expense decreased $4.3 million, or 10%, to $40.3 million, as
compared to $44.6 million in the prior year period. In the International
segment, research and development expenses increased $0.1 million, or 14%, to
$0.6 million, as compared to $0.5 million in the prior year period.
The decrease in research and development expense in the U.S. segment was
primarily due to the timing of clinical activity related to our flurpiridaz F 18
program. During the first half of 2011, we were primarily in the planning and
preparation stage for our flurpiridaz F 18 Phase 3 trial. At the end of the
second quarter we enrolled our first patient and continued to actively enroll
patients and activate sites during the second half of 2011. In 2010, we had
costs related to multiple clinical trials, principally, the flurpiridaz F 18
Phase 2 clinical trial and our DEFINITY Phase 4 clinical trial. These clinical
trial expenses were offset, in part, by the closure and final true-up of our
Cardiolite Pediatrics clinical trial. This reduction of clinical activity in
2011 resulted in lower costs related to drug products, lab supplies, clinical
site monitoring and consultants. Additionally, we had a decrease in personnel
related costs resulting from a work force reduction in June 2011, fewer
independent medical education grants and lower regulatory filing fees as the
2010 results include a one-time fee to the FDA for a supplemental New Drug
Application, or sNDA, for our DEFINITY product.
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Research and development expenses in the International segment remained
relatively consistent for 2011 as compared to 2010.
Total research and development expenses increased $0.5 million, or 1%, to
$45.1 million in the year ended December 31, 2010, as compared to $44.6 million
in the year ended December 31, 2009. U.S. segment sales and marketing expenses
increased $1.1 million, or 3%, to $44.6 million, as compared to $43.5 million in
the prior year period. International segment sales and marketing expenses
decreased $0.6 million, or 55%, to $0.5 million for the same period, as compared
to $1.1 million in the prior year period.
Research and development expenses in the U.S. segment increased primarily
due to new employees hired during the second half of 2009 to support clinical
programs, including medical liaison support for Ablavar, additional
pharmacovigilance services and product support, and increased regulatory fees
primarily related to our sNDA filing for DEFINITY stress indication and our
annual product registration fee to the European Medicines Agency. These
increases in expenses were offset, in part, by a reduction in clinical trial
costs resulting from the completion of our Cardiolite long-term follow up study,
the completion of a DEFINITY Phase 4 study, and the completion of patient
enrollment in our flurpiridaz F 18 Phase 2 clinical trial in the second quarter
of 2010.
Research and development expenses in the International segment decreased
primarily due to lower regulatory service cost in the European market.
Our research and development expenses related to our Flurpiridaz F 18
program for 2010 consisted primarily of costs related to the completion of our
Phase 2 and the planning of our Phase 3 clinical trials. We commenced our
Phase 3 trials in the second quarter of 2011 and expect to incur additional
expenses related to our Phase 3 trials in 2012.
Other Income (Expense), Net
2011 compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
Interest expense $ (37,658 ) $ (20,395 ) $ (13,458 ) $ (17,263 ) 85 % $ (6,937 ) 51 %
Loss on early
extinguishment of debt - (3,057 ) - 3,057 (100 ) (3,057 ) 100
Interest Income 333 179 73 154 86 106 145
Other Income, Net 1,429 1,314 2,720 115 9 (1,406 ) (52 )
Total Other Expense,
net $ (35,896 ) $ (21,959 ) $ (10,665 ) $ (13,937 ) 63 % $ (11,294 ) 106 %
Interest Expense
For the year ended December 31, 2011 compared to the same period in 2010,
interest expense increased to $37.7 million from $20.4 million, as a result of
the issuance of $150 million of New Notes. See Note 10, "Financing Arrangements"
in our accompanying consolidated financial statements.
Interest expense was $20.4 million in the year ended December 31, 2010
compared to $13.5 million in the year ended December 31, 2009, an increase of
$6.9 million, or 51%. This increase was due to the interest related to our
Existing Notes.
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Interest Income
For the year ended December 31, 2011 compared to the same period in 2010,
interest income increased to $0.3 million from $0.2 million, primarily as a
result of an increase in cash in interest bearing accounts.
Interest income was $0.2 million in the year ended December 31, 2010
compared to $0.1 million in the year ended December 31, 2009, an increase of
$0.1 million, or 145%. This change was due to increased cash balances in
interest bearing savings accounts.
Other Income, net
For the year ended December 31, 2011 compared to the same period in 2010,
other income, net increased by $115,000 primarily as a result of an increase in
the amount of income recognized related to our tax indemnification agreement
with BMS offset slightly by foreign currency exchange.
Other income, net in the year ended December 31, 2010 was $1.3 million
compared to $2.7 million in the year ended December 31, 2009. The decrease was
primarily attributable to changes in the amount of income recognized related to
our tax indemnification agreement with BMS, as well as changes in exchange
rates, primarily between the British Pound and U.S. Dollar currencies, in 2010
as compared to 2009.
Provision for Income Taxes
2011compared 2010 compared
to 2010 to 2009
December 31, Change Change Change Change
(dollars in thousands) 2011 2010 2009 $ % $ %
Provision for income taxes $ 84,098 $ 2,465 $ 21,952 $ 81,633 3,312 % $ (19,487 ) (89 )%
For the year ended December 31, 2011 compared to the same period in 2010,
provision for income taxes increased, due primarily to the increase in valuation
allowance.
We have generated domestic pre-tax losses for the past two years. This loss
history coupled with uncertainties surrounding our ability to obtain sustained
product supply demonstrates negative evidence concerning our ability to utilize
our gross deferred tax assets. In order to overcome the presumption of recording
a valuation allowance against our net deferred tax assets, we must have
sufficient positive evidence that we can generate sufficient taxable income to
utilize these deferred tax assets within the carryover or forecast period.
Although we have no history of expiring net operating losses or other tax
attributes, our pre-tax loss of $52.4 million in 2011, the cumulative loss
incurred over the three-year period ended December 31, 2011, and the uncertainty
regarding product supply issues, management determined that all of the net U.S.
deferred tax assets are not more likely than not recoverable. As a result of
this analysis, we have recorded a valuation allowance in the amount of
$102.7 million in 2011.
Our tax rate is affected by recurring items, such as tax rates in foreign
jurisdictions, which we expect to be fairly consistent in the near term. It is
also affected by discrete events that may not occur in any given year, but are
not consistent from year to year. The provision for income taxes was $84.1
million for the year ended December 31, 2011, $2.5 million for the year ended
December 31, 2010 and $22.0 million for the year ended December 31, 2009. The
decrease in tax for 2010 compared to 2009 was attributable primarily to a
decrease in pre tax income. Our effective tax rates for the years ended
December 31, 2011, 2010, and 2009 were, 160.7%, 33.1%, and 51.9%, respectively.
The effective tax rate was lower than the statutory rate in 2011 due to the
increase in the valuation allowance, the foreign tax rate differential, research
credits, and the affect of uncertain tax provisions. The effective tax rate was
lower than the statutory rate in 2010 due to the foreign tax rate differential,
the utilization of net operating losses, research credits, an adjustment to the
tax rate applied to net state deferred tax
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assets and adjustments to prior years tax returns. The excess of our effective
tax rate over the statutory rate in 2009 results primarily from uncertain tax
positions and the impact of changing the tax rate on state deferred taxes.
Undistributed earnings of various foreign subsidiaries aggregated $14.1 million,
$9.5 million and $6.5 million at December 31, 2011, 2010, and 2009,
respectively. As of December 31, 2011, we do not believe that we will reinvest
approximately $13.0 million of earnings in three of our foreign subsidiaries,
and have recorded a related tax provision of $5.9 million.
Liquidity and Capital Resources
Cash Flows
The following table provides information regarding our cash flows:
% Change
Year Ended December 31, 2011 2010
Compared Compared
2011 2010 2009 to 2010 to 2009
(dollars in thousands) Cash provided by (used in):
Operating activities $ 22,420 $ 26,317 $ 95,783 (15 )% (73 )%
Investing activities (7,694 ) (8,550 ) (38,351 ) (10 )% (78 )%
Financing activities (6,991 ) (17,550 ) (49,102 ) (60 )% (64 )%
Net Cash Provided by Operating Activities
Cash provided by operating activities is primarily driven by our earnings
and changes in working capital. The decrease in cash provided by operating
activities for the year ended December 31, 2011 as compared to 2010 was
primarily driven by lower revenues due to the supply challenges as a result of
the recent recall and prolonged BVL outage, offset, in part, by a contract
amendment with Covidien which decreased our 2011 purchase commitments of Ablavar
product.
The decrease in cash provided by operating activities for 2010 as compared
to 2009 was primarily driven by decreased cash receipts associated with customer
receivables at the end of 2010 and increased expenditures for inventory
purchases associated with manufacturing of Ablavar, which was launched in
January 2010.
Net Cash Used in Investing Activities
Our primary uses of cash in investing activities are for the purchase of
property and equipment and the acquisition of product rights. Net cash used in
investing activities in 2011 and 2010 reflected the purchase of property and
equipment for $7.7 million and $8.3 million, respectively. In addition, in 2010
and 2009, investing activities used $0.2 million and $29.5 million,
respectively, of cash for the acquisition of the rights to a MRA agent, now
known as Ablavar.
Net Cash Used in Financing Activities
Our primary historical uses of cash in financing activities are principal
payments on our then existing term loan and line of credit. On May 10, 2010 and
March 21, 2011 we issued $250.0 million and $150.0 million, respectively, of our
Notes and paid associated financing costs, paid outstanding principal on the
term loan and issued dividends to Holdings. Net cash used in 2011 and 2010
primarily represents the results of these activities as well as the draw down
and repayment in 2011 of $10.0 million on our line of credit. Net cash used in
financing activities in 2009 reflected aggregate principal payments on our term
loan of $49.1 million and proceeds from the draw down on our line of credit of
$28.0 million offset by payments on our line of credit of $28.0 million.
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Since 2010, our primary source of cash flows from financing activities has
been the proceeds from the issuance of the Notes. Going forward, we expect our
primary source of cash flows from financing activities to be further issuances
of securities or other financing arrangements into which we may enter. Our
primary historical uses of cash in financing activities are principal payments
on our term loan and line of credit as well as dividends to Holdings, our
parent. See "-External Sources of Liquidity."
External Sources of Liquidity
On May 10, 2010, LMI issued $250.0 million in aggregate principal amount of
9.750% Senior Notes due in 2017, or the Restricted Notes, at face value, net of
issuance costs of $10.1 million, under the indenture, dated as of May 10, 2010.
The net proceeds were used to repay $77.9 million due under LMI's outstanding
credit agreement and to issue a $163.8 million dividend to Holdings. Holdings
utilized the dividend to repay a $75.0 million demand note and to repurchase
$90.0 million of Holdings' Series A Preferred Stock at the accreted value. The
$75.0 million Demand Note was issued in June 2009, was payable on demand and had
an interest rate equal to the greater of the prime rate plus 2.25% or LIBOR plus
5.0%; the interest rate at December 31, 2009 was 5.5%. On February 2, 2011, LMI
consummated an exchange offer where LMI exchanged $250.0 million aggregate
principal amount of our Restricted Notes for an equal principal amount of 9.750%
Senior Notes due 2017, or the Exchange Notes and, together with the Restricted
Notes, the Existing Notes, that were registered under the Securities Act, with
substantially identical terms in all respects.
On March 21, 2011, LMI issued an additional $150.0 million in aggregate
principal amount of our New Restricted Notes at face value, net of issuance
costs of $4.9 million, under the indenture, dated as of May 10, 2010, as
supplemented by the First Supplemental Indenture, dated as of March 14, 2011,
and the Second Supplemental Indenture, dated as of March 21, 2011, or together,
the Indenture. The net proceeds were used to fund a $150.0 million dividend to
Holdings. Holdings utilized the dividend to repurchase all of the remaining
Holdings' Series A Preferred Stock at the accreted value of approximately
$44 million and to issue an approximate $106 million dividend to our common
securityholders. On May 10, 2011, LMI consummated an exchange offer where LMI
exchanged $150.0 million aggregate principal amount of New Restricted Notes for
an equal principal amount of 9.750% Senior Notes due 2017, or the New Exchange
Notes and, together with the New Restricted Notes, the New Notes, registered
under the Securities Act, with substantially identical terms in all respects.
The Existing Notes and the New Notes, or together, the Notes mature on
May 15, 2017. Interest on the Notes accrues at a rate of 9.750% per year and is
payable semiannually in arrears on May 15 and November 15 commencing on
November 15, 2010 for the Notes issued on May 10, 2010 and May 15, 2011 for the
Notes issued on March 21, 2011. Our annual interest expense has increased from
$24.4 million to $39.0 million as a result of the March 21, 2011 issuance of
Notes.
In connection with the Restricted Notes issuance, LMI entered into a
revolving facility (the "Facility") for total borrowings up to $42.5 million
with the ability to request the lenders to increase the Facility by an
additional amount of up to $15.0 million at the discretion of the lenders. In
March 2011, LMI received the consent of the lenders under the Facility to amend
the agreement to allow us to use the net proceeds of the March 2011 issuance as
described above. The amendment also increased the consolidated total leverage
ratio to accommodate the New Notes issuance and decreased the consolidated
interest coverage ratio to accommodate the associated increase in semiannual
interest payments. Additionally, the amendment adjusted the effective interest
rate of borrowings thereunder. The amendment was consummated concurrently with
the consummation of the New Notes issuance. Interest on the Facility will be at
either LIBOR plus 3.75% or the Reference Rate (as defined in the agreement) plus
2.75%. The Facility expires on May 10, 2014, at which time all outstanding
borrowings are due and payable. At December 31, 2011, LMI had $42.5 million of
borrowing availability under the Facility.
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On January 26, 2012, we executed an amendment to the Facility to change the
financial covenants. See "-Revolving Credit Facility Financial Covenants Per
Amendment." Also, on February 3, 2012, we entered into a Standby Letter of
Credit for up to $4.4 million relating to our decommissioning liability, which
expires February 2, 2013. The letter of credit decreases the borrowing
availability under the Facility by $4.4 million.
The Notes and the Facility contain affirmative and negative covenants, as
well as restrictions on the ability of LMI, Lantheus Intermediate and its
subsidiaries to: (i) incur additional indebtedness or issue preferred stock;
(ii) repay subordinated indebtedness prior to its stated maturity; (iii) pay
dividends on, repurchase or make distributions in respect of its capital stock
or make other restricted payments; (iv) make certain investments; (v) sell
certain assets; (vi) create liens; (vii) consolidate, merge, sell or otherwise
dispose of all or substantially all of our assets; and (viii) enter into certain
transactions with our affiliates. The Notes contain customary events of default
provisions, including payment default and cross-acceleration for non-payment of
any outstanding indebtedness, where such indebtedness exceeds $10.0 million. The
Facility also contains customary default provisions and we are required to
comply with financial covenants in the Facility including a total leverage ratio
and interest coverage ratio, beginning with the quarter ended September 30,
2010, as well as limitations on the amount of capital expenditures.
The financial ratios are determined by the Company's EBITDA (as defined in
the Facility), or the Facility EBITDA. The total leverage ratio is the financial
covenant that is currently the most restrictive, which requires Lantheus
Intermediate and its Subsidiaries (as defined in the Facility) to maintain a
leverage ratio as defined in the table below:
Revolving Credit Facility Financial Covenants (Prior to Amendment)
Period Total Leverage Ratio Interest Coverage Ratio
Q1 2011 5.50 to 1.00 1.75 to 1.00
Q2 2011 5.50 to 1.00 1.75 to 1.00
Q3 2011 5.25 to 1.00 1.75 to 1.00
Q4 2011 5.00 to 1.00 2.00 to 1.00
Q1 2012 4.75 to 1.00 2.00 to 1.00
Q2 2012 4.50 to 1.00 2.15 to 1.00
Q3 2012 4.50 to 1.00 2.15 to 1.00
Q4 2012 4.25 to 1.00 2.25 to 1.00
Q1 2013 4.25 to 1.00 2.25 to 1.00
Q2 2013 4.25 to 1.00 2.25 to 1.00
Q3 2013 4.25 to 1.00 2.25 to 1.00
Thereafter 3.75 to 1.00 2.25 to 1.00
On January 26, 2012, we executed an amendment to the Facility which changed
the financial covenants. We incurred approximately $0.2 million in fees
associated with this amendment. The revised financial covenants are displayed in
the table below.
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Revolving Credit Facility Financial Covenants Per Amendment
Period Total Leverage Ratio Interest Coverage Ratio
Q4 2011 5.00 to 1.00 2.00 to 1.00
Q1 2012 6.80 to 1.00 1.40 to 1.00
Q2 2012 7.55 to 1.00 1.30 to 1.00
Q3 2012 6.70 to 1.00 1.40 to 1.00
Q4 2012 5.50 to 1.00 1.80 to 1.00
Q1 2013 4.60 to 1.00 2.00 to 1.00
Q2 2013 4.60 to 1.00 2.10 to 1.00
Q3 2013 4.25 to 1.00 2.15 to 1.00
Q4 2013 4.25 to 1.00 2.15 to 1.00
Q1 2014 3.75 to 1.00 2.25 to 1.00
Thereafter 3.75 to 1.00 2.25 to 1.00
As of December 31, 2011, we were in compliance with all applicable financial
covenants. As of December 31, 2011 and the date hereof, there were no amounts
outstanding under the Facility. On February 3, 2012, we entered into a Standby
Letter of Credit for up to $4.4 million which expires February 2, 2013. The
letter of credit decreases the borrowing availability under the Facility by $4.4
million. If BVL is not able to provide us adequate product supply for a further
prolonged period of time, we will need to implement certain expense reduction
and other operating and strategic initiatives beginning in the second quarter of
2012. If we are not successful in those initiatives, we could, at some time in
the future, be in non-compliance with one or more of the financial ratio
covenants in the Facility. If this were to occur, we would seek either an
additional amendment to our Facility or a waiver of the appropriate financial
covenants to eliminate such potential default. There can be no assurance that we
would be able to obtain an amendment or waiver from our lenders. See
"Item 1A-Risk Factors-We may not be able to generate sufficient cash flow to
meet our debt service obligations."
On March 20, 2012, pursuant to our new contractual relationship with BVL, we
terminated the 2008 Agreement and entered into the Settlement Agreement, the
Transition Services Agreement and the Manufacturing and Service Contract. In the
Settlement Agreement, BVL and we agreed to a broad mutual waiver and release for
all matters that occurred prior to the date of the Settlement Agreement, a
covenant not to sue and a settlement payment for us in the amount of
$30,000,000. We intend to use the proceeds from the BVL settlement for working
capital purposes.
We may from time to time repurchase or otherwise retire our debt and take
other steps to reduce our debt or otherwise improve our balance sheet. These
actions may include open market repurchases of any Notes outstanding,
prepayments of our term loans or other retirements or refinancing of outstanding
debt. The amount of debt that may be repurchased or otherwise retired, if any,
would be decided upon at the sole discretion of our Board of Directors and will
depend on market conditions, trading levels of our debt from time to time, our
cash position and other considerations.
Funding Requirements
Our future capital requirements will depend on many factors, including:
º •
º the effect of the BVL shutdown and our ability to have product
manufactured at alternative manufacturing sites;
º •
º the level of product sales of our currently marketed products and any
additional products that we may market in the future;
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º •
º the scope, progress, results and costs of development activities for
our current product candidates and whether we obtain one or more
partners to help share such development costs;
º • º the costs, timing and outcome of regulatory review of our product
candidates;
º •
º the number of, and development requirements for, additional product
candidates that we pursue;
º •
º the costs of commercialization activities, including product
marketing, sales and distribution and whether we obtain one or more
partners to help share such commercialization costs;
º •
º the costs and timing of establishing manufacturing and supply
arrangements for clinical and commercial supplies of our product
candidates and products;
º •
º the extent to which we acquire or invest in products, businesses and
technologies;
º •
º the extent to which we choose to establish collaboration,
co-promotion, distribution or other similar arrangements for our
marketed products and product candidates;
º •
º the legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims
and defending against product liability, regulatory compliance or
other claims;
º • º the cost of interest on any additional borrowings which we may incur
under our financing arrangements.
If BVL is not able to provide us adequate product supply for a further
prolonged period of time, we will need to implement certain expense reduction
and other operating and strategic initiatives, as further described in Note 2 of
the consolidated financial statements included in Item 8 of this annual report.
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, sale/leasebacks or other financing alternatives, to the extent
such transactions are permissible under the covenants of the Notes and the
Facility. Additional equity or debt financing, or corporate collaboration and
licensing arrangements, may not be available on acceptable terms, if at all. If
any of the transactions require a waiver under the covenants in the Notes and
the Facility, which could result in additional expenses associated with
obtaining the amendment or waiver, we will seek to obtain such a waiver to
remain in compliance with the covenants of the Notes and the Facility. However,
we cannot assure you that such a waiver would be granted, or that additional
capital will be available on acceptable terms, if at all.
Our only committed external source of funds is borrowing availability under
the Facility. As of December 31, 2011, we had $42.5 million of borrowing
capacity under the Facility, and there were no amounts outstanding thereunder.
On February 3, 2012, we entered into a Standby Letter of Credit for up to
$4.4 million which expires February 2, 2013. The letter of credit decreases the
borrowing availability under the Facility by $4.4 million. Based on our current
operating plans, we believe that our existing cash and cash equivalents, results
of operations and borrowing capacity under the Facility will be sufficient to
continue to fund our liquidity requirements for at least the next twelve months.
As of December 31, 2011, we had $40.6 million of cash and cash equivalents.
In addition, we have included $1.6 million, $3.2 million and $1.5 million in
accounts payable related to our purchases of property, plant and equipment at
December 31, 2011, 2010 and 2009, respectively.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities
under agreements with third parties and exclude contingent contractual
liabilities for which we cannot reasonably predict
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future payment, including contingencies related to potential future development,
financing, certain suppliers, contingent royalty payments and/or scientific,
regulatory, or commercial milestone payments under development agreements. The
following table summarizes our contractual obligations as of December 31, 2011:
Payments Due by Period
Less than 1 - 3 3 - 5 More than
Total 1 Year Years Years 5 Years
(dollars in thousands) Debt obligations (principal) $ 400,000 $ - $ - $
- $ 400,000
Interest on debt obligations 214,500 39,000 78,000 78,000 19,500
Operating leases(1) 4,311 956 1,768 815 772
Purchase obligations(2) 125,822 59,176 66,646 - -
Asset retirement obligation 4,868 - - - 4,868
Other long-term liabilities(3) 34,564 - - - 34,564
Total contractual obligations $ 784,065 $ 99,132 $ 146,414 $ 78,815 $ 459,704
--------------------------------------------------------------------------------
º (1)
º Operating leases include minimum payments under leases for our facilities
and certain equipment. See "Item 2-Properties."
º (2)
º Purchase obligations include fixed or minimum payments under manufacturing
and service agreements with Covidien and other third-parties.
º (3)
º Due to the uncertainty related to the timing of the reversal of uncertain
tax positions, the liability is not subject to fixed payment terms and the
amount and timing of payments, if any, which we will make related to this
liability, are not known.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet arrangements,
including structured finance, special purpose entities or variable interest
entities.
Effects of Inflation
We do not believe that inflation has had a significant impact on our
revenues or results of operations since inception. We expect our cost of product
sales and other operating expenses will change in the future in line with
periodic inflationary changes in price levels. Because we intend to retain and
continue to use our property and equipment, we believe that the incremental
inflation related to the replacement costs of such items will not materially
affect our operations. However, the rate of inflation affects our expenses, such
as those for employee compensation and contract services, which could increase
our level of expenses and the rate at which we use our resources. While our
management generally believes that we will be able to offset the effect of
price-level changes by adjusting our product prices and implementing operating
efficiencies, any material unfavorable changes in price levels could have a
material adverse affect on our financial condition, results of operations and
cash flows.
Recent Accounting Standards
In September 2011, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update, or ASU, No. 2011-08, Testing Goodwill for
Impairment, or ASU 2011-08. Under this guidance, an entity has the option to
first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If the entity
determines that it is more likely than not
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that the carrying value of a reporting unit is less than its fair value, then
performing the two-step impairment test is unnecessary. The amendments are
effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011. The implementation of the amended
accounting guidance will have no material impact on our consolidated financial
position and results of operations.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive
Income (Topic 220). This guidance, effective retrospectively for the interim and
annual periods beginning on or after December 15, 2011 (early adoption is
permitted), requires presentation of total comprehensive income, the components
of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but
consecutive statements. The adoption of this guidance did not have a material
impact upon our financial position and results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with GAAP. These financial statements require us to make
estimates and judgments that affect our reported assets and liabilities,
revenues and expenses, and other financial information. Actual results may
differ materially from these estimates under different assumptions and
conditions. In addition, our reported financial condition and results of
operations could vary due to a change in the application of a particular
accounting standard.
We believe the following represent our critical accounting policies and
estimates used in the preparation of our financial statements.
Revenue Recognition
Our revenue is generated from the sales of our diagnostic imaging agents to
wholesalers, distributors, radiopharmacies and directly to hospitals and
clinics. We recognize revenue when evidence of an arrangement exists, title has
passed, substantially all the risks and rewards of ownership have transferred to
the customer, the selling price is fixed or determinable and collectability is
reasonably assured. For transactions for which revenue recognition criteria have
not yet been met, the respective amounts are recorded as deferred revenue until
such point in time when criteria are met and revenue can be recognized. Revenue
is recognized net of reserves, which consist of allowances for returns and sales
rebates. The estimates of these allowances are based on historical sales volumes
and mix and require assumptions and judgments to be made in order to make such
estimates. In the event that the sales mix is different from our estimates, we
may be required to pay higher or lower total price adjustments than we
previously estimated. Any changes to these estimates are recorded in the current
period. In 2011, 2010 and 2009, these changes in estimates were not material to
our results.
Revenue arrangements with multiple elements are divided into separate units
of accounting if certain criteria are met, including whether the delivered
element has stand-alone value to the customer. Supply or service transactions
may involve the charge of a nonrefundable initial fee with subsequent periodic
payments for future products or services. The up-front fees, even if
nonrefundable, are earned (and revenue is recognized) as the products and/or
services are delivered and performed over the term of the arrangement.
Inventory
Inventories include material, direct labor and related manufacturing
overhead, and are stated at the lower of cost or market determined on a
first-in, first-out basis. We record inventory when we take delivery and title
to the product. Any commitment for product ordered but not yet received is
included as purchase commitments in our contractual obligations table. We assess
the recoverability of inventory
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to determine whether adjustments for impairment are required. Inventory that is
in excess of future requirements is written down to its estimated net realizable
value-based upon estimates of forecasted demand for our products. The estimates
of demand require assumptions to be made of future operating performance and
customer demand. If actual demand is less than what has been forecasted by
management, additional inventory write downs may be required.
Goodwill, Intangibles and Long-Lived Assets
Goodwill is not amortized but the carrying value is tested annually for
impairment at October 31, as well as whenever events or changes in circumstances
suggest that the carrying amount may not be recoverable. We perform this test by
comparing the fair value of the reporting unit containing goodwill to its
carrying value, including goodwill. If the fair value exceeds the carrying
value, goodwill is not impaired. If the carrying value exceeds the fair value,
then we would calculate the potential impairment loss by comparing the implied
fair value of goodwill with the carrying value of the goodwill. If the implied
fair value of goodwill is less than the carrying value, then an impairment
charge would be recorded.
We completed our required annual impairment test for goodwill as of the
fourth quarter of 2011, 2010 and 2009 and determined that at each of those
periods the carrying amount of goodwill was not impaired. In each year, our fair
value, which includes goodwill, was substantially in excess of our carrying
value.
In addition, as a result of the continued supply challenges with BVL, we
performed an interim impairment test for goodwill as of December 31, 2011. The
interim impairment test did not indicate that there was any impairment as of
December 31, 2011.
We calculate the fair value of our reporting units using the income approach
which utilizes discounted forecasted future cash flows and the market approach
which utilizes fair value multiples of comparable publicly traded companies. The
discounted cash flows are based on our most recent long-term financial
projections and are discounted using a risk adjusted rate of return which is
determined using estimates of market participant risk-adjusted weighted average
costs of capital and reflects the risks associated with achieving future cash
flows. The market approach is calculated using the guideline company method,
where we use market multiples derived from stock prices of companies engaged in
the same or similar lines of business. There is not a quoted market price for
our reporting units or the company as a whole, therefore, a combination of the
two methods is utilized to derive the fair value of the business. We evaluate
and weigh the results of these approaches as well as ensure we understand the
basis of the results of these two methodologies. We believe the use of these two
methodologies ensures a consistent and supportable method of determining our
fair value that is consistent with the objective of measuring fair value. If the
fair value were to decline, then we may be required to incur material charges
relating to the impairment of those assets.
We test intangible and long-lived assets for recoverability whenever events
or changes in circumstances suggest that the carrying value of an asset or group
of assets may not be recoverable. We measure the recoverability of assets to be
held and used by comparing the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment equals the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Any
impairments are recorded as permanent reductions in the carrying amount of the
assets. As a result of the continued supply challenges with BVL, we tested
intangible and long-lived assets for recoverability as of December 31, 2011,
which included the most recently available information as to BVL's return to
service date and our technology transfer schedule for a certain product. The
analysis indicated that there was no impairment as of December 31, 2011.
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Accounting for Stock-Based Compensation
Our employees are eligible to receive awards from our 2008 Equity Plan (as
defined below). Our stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense over the
requisite service period, which generally represents the vesting period, and
includes an estimate of the awards that will be forfeited. We use the Black
Scholes valuation model for estimating the fair value on the date of grant of
stock options. The fair value of stock option awards is affected by the
valuation assumptions, including the volatility of market participants, expected
term of the option, risk-free interest rate and expected dividends as well as
the estimated fair value of our common stock. The fair value of our common stock
is determined by our Board of Directors at each award date. Any material change
to the assumptions used in estimating the fair value of the options could have a
material impact on our results of operations. When a contingent cash settlement
of vested options becomes probable, we reclassify the vested awards to a
liability and account for any incremental compensation cost in the period in
which the settlement becomes probable.
Income Taxes
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. The provision for income
taxes represents income taxes paid or payable for the current year plus the
change in deferred taxes during the year. Deferred taxes result from differences
between the financial and tax bases of our assets and liabilities. Deferred tax
assets and liabilities are measured using the currently enacted tax rates that
apply to taxable income in effect for the years in which those tax attributes
are expected to be recovered or paid, and are adjusted for changes in tax rates
and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized. The assessment of
whether or not a valuation allowance is required involves the weighing of both
positive and negative evidence concerning both historical and prospective
information with greater weight given to evidence that is objectively
verifiable. A history of recent losses is negative evidence that is difficult to
overcome with positive evidence. In evaluating prospective information there are
four sources of taxable income: reversals of taxable temporary differences,
items that can be carried back to prior tax years (such as net operating
losses), pre-tax income and tax planning strategies. Any tax planning strategies
that are considered must be prudent and feasible, and would only be undertaken
in order to avoid losing an operating loss carryforward. Adjustments to the
deferred tax valuation allowances are made in the period when such assessments
are made.
We have a tax indemnification agreement with BMS related to certain
contingent tax obligations arising prior to the acquisition of the business from
BMS. The tax obligations are recognized in liabilities and the tax
indemnification receivable is recognized within other noncurrent assets. The
changes in the tax indemnification asset are recognized within other income, net
in the statement of income, and the changes in the related liabilities are
recorded within the tax provision. Accordingly, as these reserves change,
adjustments are included in the tax provision while the offsetting adjustment is
included in other income. Assuming that the receivable from BMS continues to be
considered recoverable by us, there is no net effect on earnings related to
these liabilities and no net cash outflows.
The calculation of our tax liabilities involves certain estimates,
assumptions and the application of complex tax regulations in numerous
jurisdictions worldwide. Any material change in our estimates or assumptions, or
the tax regulations, may have a material impact on our results of operations.
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