The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
Background
We are a commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of novel therapies that improve neurological function in people with multiple sclerosis, or MS, spinal cord injury, or SCI, and other disorders of the nervous system.
Ampyra
General
Ampyra was approved by the FDA in January 2010 for the improvement of walking in people with MS. To our knowledge, Ampyra is the first and only product approved for this indication. Efficacy was shown in people with all four major types of MS (relapsing remitting, secondary progressive, progressive relapsing and primary progressive). Ampyra was made commercially available in the United States in March 2010. Net revenue for Ampyra was $66.3 million for the three-months ended June 30, 2012 and $51.8 million for the three-months ended June 30, 2011. As of May 2012, approximately 70% of all people with MS who were prescribed Ampyra received a first refill, and approximately 40% of all people with MS who were prescribed Ampyra received a sixth refill, consistent with previously reported trends.
Ampyra is marketed in the United States through our own specialty sales force and commercial infrastructure. We currently have approximately 90 sales representatives in the field calling on a priority target list of approximately 7,000 physicians. We also have established teams of Regional Scientific Managers, Regional Reimbursement Directors, and Managed Markets account managers who provide information and assistance to payers and physicians on Ampyra, and Market Development Managers who work collaboratively with field teams and corporate personnel to assist in the execution of the Company’s strategic initiatives.
Pursuant to our REMS approved by the FDA, Ampyra is distributed in the United States exclusively through: a limited network of specialty pharmacy providers that deliver the medication to patients by mail; Kaiser Permanente, which distributes Ampyra to patients through a closed network of on-site pharmacies; and ASD Specialty Healthcare, Inc. (an AmerisourceBergen affiliate), which is the exclusive specialty pharmacy distributor for Ampyra to the U.S. Department of Veterans Affairs, or VA. All of these customers are contractually obligated to hold no more than an agreed number of days of inventory, ranging from between 10 to 30 days.
We have contracted with a third party organization with extensive experience in coordinating patient benefits to run Ampyra Patient Support Services, or APSS, a dedicated resource that coordinates the prescription process among healthcare providers, people with MS, and insurance carriers. Processing of most incoming requests for prescriptions by APSS begins within 24 hours of receipt. Patients will experience a range of times to receive their first shipment based on the processing time for insurance requirements. As with any prescription product, patients who are members of benefit plans that have restrictive prior authorizations may experience delays in receiving their prescription.
Three of the largest national health plans in the U.S. – Aetna, United Healthcare and Cigna – have listed Ampyra in the lowest branded co-pay tier of their commercial preferred drug list or formulary.
License and Collaboration Agreement with Biogen Idec
Ampyra is marketed as Fampyra outside the U.S. by Biogen Idec International GmbH, or Biogen Idec, under a license and collaboration agreement that we entered into in June 2009. Biogen Idec now has approval for Fampyra across the entire European Union, Norway, Iceland, Canada, Australia and New Zealand. To date Biogen Idec has launched Fampyra in Germany, the United Kingdom, Denmark, Norway, Iceland, Canada, Australia and New Zealand. Launch in most of the remaining EU countries is expected by the end of 2012. Biogen Idec plans to submit regulatory filings for Fampyra in more than 30 countries in 2012. We received a $25 million milestone payment from Biogen Idec in 2011, which was triggered by Biogen Idec’s receipt of conditional approval from the European Commission for Fampyra. The next
expected milestone payment would be $15 million, due when ex-U.S. net sales exceed $100 million over four consecutive quarters.
Ampyra Development Programs
We believe there is potential for Ampyra to be applied to other indications within MS and also in other neurological conditions. For example, in December 2011, we initiated a Phase 2 proof-of-concept clinical study of dalfampridine in adults with cerebral palsy. The first phase of this proof-of-concept study is primarily to evaluate safety and tolerability prior to proceeding to a multi-dose cohort. We expect to announce results from this single-dose phase by the end of 2012. Also, in June 2012 we enrolled the first patient in a Phase 2 proof-of-concept trial of dalfampridine in post-stroke deficits, and we expect to announce initial study results in early 2013. This study is exploring the use of dalfampridine in patients who have experienced a stroke and who have stabilized with chronic neurologic deficits, which may include walking impairment and arm weakness. Over the first few months following a stroke, patients typically show some degree of spontaneous recovery of function, which may be enhanced by rehabilitation and physical therapy. This trial is targeting motor impairments that remain after such recovery. We also are providing grants for investigator-initiated studies looking for potential benefits on a range of functional deficits in MS and other neurological disorders.
Patent Update Related to Ampyra
On August 30, 2011, the United States Patent and Trademark Office, or USPTO, issued U.S. Patent No. US 8,007,826 with claims relating to methods to improve walking in patients with MS by administering 10 mg of sustained release 4-aminopyridine (dalfampridine) twice daily. Based on the USPTO’s final patent term adjustment calculation this patent will extend into 2027. This patent is listed in the Orange Book.
On August 10, 2011, we announced that the USPTO had allowed U.S. Patent Application No. 11/102,559 with claims relating to methods to improve walking, walking speed, lower extremity muscle tone and lower extremity muscle strength in patients with MS by administering 10 mg of sustained release 4-aminopyridine (dalfampridine) twice daily. Also in 2011, the European Patent Office, or EPO, granted the counterpart European patent with claims relating to, among other things, use of a sustained release aminopyridine composition, such as dalfampridine, to increase walking speed. In March 2012, Synthon B.V. and neuraxpharm Arzneimittel GmBH filed oppositions with the EPO challenging this granted European patent. We intend to vigorously defend the European patent, although the outcome of opposition proceedings is unpredictable. In light of the European oppositions, in April 2012, the Company requested further review by the USPTO of the U.S. patent application which was allowed but had not yet issued. After further review, the USPTO again allowed this patent application, but in July 2012 we filed a request for continued examination and the patent application is therefore subject to further review by the USPTO.
Zanaflex
Zanaflex Capsules and Zanaflex tablets are FDA-approved as short-acting drugs for the management of spasticity, a symptom of many central nervous system, or CNS, disorders, including MS and SCI. These products contain tizanidine hydrochloride, one of the two leading drugs used to treat spasticity. We launched Zanaflex Capsules in April 2005 as part of our strategy to build a commercial platform for the potential market launch of Ampyra. Combined net revenue of Zanaflex Capsules and Zanaflex tablets was $2.6 million for the three-months ended June 30, 2012 and $11.1 million for the three-months ended June 30, 2011. In February 2012, Apotex commercially launched a generic version of tizanidine hydrochloride capsules, and we also launched our own authorized generic version, which is being marketed by Watson Pharma. The commercial launch of these generic tizanidine hydrochloride capsules has caused a decline in sales of Zanaflex Capsules, and the launch of these generic versions and the potential launch of other generic versions is expected to cause the Company’s net revenue from Zanaflex Capsules to decline significantly in 2012 and beyond. In May 2012, we received a Paragraph IV Certification Notice from Mylan Laboratories Limited advising us that Mylan Laboratories has filed an Abbreviated New Drug Application for generic versions of the three dosage strengths of Zanaflex Capsules. We have since asked the FDA to delist from the Orange Book the patent against which Mylan Laboratories filed the Paragraph IV Certification Notice.
Research & Development Programs
Our lead research and development programs include three distinct therapeutic approaches to restoring neurologic and cardiac function and a fourth program, initiated in 2011, to develop an acute treatment for neurological trauma. We believe that these programs have broad applicability and have the potential to be first-in-class therapies. While our existing programs have been focused on MS and SCI, we believe they may be applicable across a number of CNS disorders, including stroke and TBI, because many of the mechanisms of tissue damage and repair are similar. In addition, we believe that some
of our research and development programs may have applicability beyond the nervous system, including in the field of cardiology.
Glial Growth Factor 2
We expect to announce preliminary results from a Phase 1 clinical trial of GGF2 in heart failure patients in the second half of 2012. If we are able to establish a proof of concept for treatment of heart failure through human clinical studies, we may decide to develop the product independently or to enter into a partnership, most likely with a cardiovascular-focused company.
Remyelinating Antibodies
We previously announced problems with a bioactivity assay that had delayed our filing of an IND for one of the remyelinating antibodies, rHIgM22, for the treatment of MS. During the second quarter of 2012, we successfully completed the qualification of the bioactivity assay and we are now preparing an IND for submission. In preparation for an IND filing, we worked with a contract manufacturer to complete the scale-up manufacturing and purification processes and completed formal preclinical safety and toxicity studies. The manufacturing data, clinical plans and preclinical safety profile will be subject to FDA review as part of an IND filing.
Chondroitinase Program
We are continuing research, which has been funded in part by federal and state grants, on the potential use of chondroitinases for the treatment of injuries to the brain and spinal cord, as well as other neurotraumatic indications. The chondroitinase program is in the research and translational development phase and has not yet entered formal preclinical development. We are exploring the possibility of obtaining additional research grants from the National Institutes of Health, or NIH, as well as potential partnerships with other companies to support our efforts.
AC 105
In June 2011, we entered into a License Agreement with Medtronic, Inc. and one of its affiliates, pursuant to which we acquired worldwide development and commercialization rights to certain formulations of magnesium with a polymer such as polyethylene glycol (which we refer to as AC105). Pursuant to the License Agreement, we paid Medtronic an upfront fee of $3 million and are obligated to pay up to an additional $32 million upon the achievement of specified regulatory and development milestones. If we commercialize AC105, we will also be obligated to pay a single-digit royalty on sales. We plan to study AC105 as an acute treatment for patients who have suffered neurological trauma, such as SCI and TBI. We expect to begin enrollment in a Phase 2 clinical trial in patients with acute SCI in the second half of 2012.
Relocation of Corporate Headquarters; Ardsley Lease
In July 2012, we relocated our corporate headquarters from Hawthorne, New York, to a facility in Ardsley, New York consisting of an aggregate of approximately 138,000 square feet of office and laboratory space. Base rent is initially $3.4 million per year, subject to a 2.5% annual increase. Our lease of the facility has a 15 year term, but we have options to extend the lease term for three additional five-year periods, and we may terminate the lease after 10 years, subject to payment of an early termination fee. We also have the right to lease up to approximately 120,000 additional square feet of space in additional buildings at the same location.
Outlook for 2012
Financial Guidance for 2012
We are providing the following guidance with respect to our 2012 financial performance. The following does not reflect any potential expenditures related to the Neuronex transaction described below.
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We expect 2012 net revenue from the sale of Ampyra to range from $255 million to $275 million.
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We expect combined net revenues from sales of Zanaflex Capsules (including from sales of authorized generic tizanidine hydrochloride under our agreement with Watson Pharma) and Zanaflex tablets, and royalty revenue from sales by Biogen Idec of Fampyra outside the U.S., of at least $25 million.
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Research and development expenses are expected to range from $50 million to $60 million, excluding share-based compensation charges. These expenses will include post-marketing studies for Ampyra, Phase 2 proof-of-concept studies in cerebral palsy and post-stroke deficits, and sponsorship of investigator-initiated studies of Ampyra.
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Selling, general and administrative expenses are expected to range from $145 million to $160 million, excluding share-based compensation charges. The principal factors affecting SG&A will be commercial and administrative costs related to Ampyra.
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We expect to be cash flow positive in 2012.
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The range of SG&A and R&D expenditures for 2012 are non-GAAP financial measures because they exclude share-based compensation charges. Non-GAAP financial measures are not an alternative for financial measures prepared in accordance with GAAP. However, we believe the presentation of these non-GAAP financial measures, when viewed in conjunction with actual GAAP results, provides investors with a more meaningful understanding of our projected operating performance because they exclude non-cash charges that are substantially dependent on changes in the market price of our common stock. We believe that non-GAAP financial measures that exclude share-based compensation charges help indicate underlying trends in our business, and are important in comparing current results with prior period results and understanding expected operating performance. Also, our management uses non-GAAP financial measures that exclude share-based compensation charges to establish budgets and operational goals, and to manage our business and to evaluate its performance.
Key 2012 Initiatives and Expected Developments
Our key initiatives and expected developments during 2012 are as follows:
Targeted Development Milestones
Our goals with respect to our development pipeline in 2012 are as follows:
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Our Phase 2 proof-of-concept clinical trial of dalfampridine in adults with cerebral palsy, which was commenced in December 2011, is ongoing. We expect to announce study results for the initial single-dose phase by the end of 2012.
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A Phase 2 proof-of-concept clinical trial of dalfampridine in patients with post stroke deficits began in the second quarter of 2012 and is ongoing. We expect to announce initial study results in early 2013.
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We expect to announce initial study results from our GGF2 Phase 1 clinical trial in heart failure patients in the second half of 2012.
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A Phase 2 clinical trial of AC105 in patients with acute SCI is expected to begin in the second half of 2012.
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Funding of investigator-initiated studies of Ampyra in MS, focused on a range of neurological functions and other neurological disorders, will be ongoing in 2012.
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A post-approval commitment study examining the use of a 5mg dose of Ampyra has completed enrollment. We expect to announce results of the study in August 2012.
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Neuronex Acquisition Agreement and Development of DZNS
On February 15, 2012, we entered into an agreement with Neuronex, Inc., which is preparing a 505(b)(2) type NDA for a proprietary nasal spray formulation of Diazepam, or DZNS, as a rescue treatment for certain epilepsy patients. Pursuant to the acquisition agreement, we made an upfront payment of $2 million upon signing the agreement and agreed to fund up to $1.2 million in research and development costs prior to closing. We paid $500,000 of the research and development funding commitment during the three-month period ended March 31, 2012, and we paid the remaining $700,000 of this commitment during the three-month period ended June 30, 2012. Also, in July 2012 we further agreed with Neuronex that we would fund up to an additional approximately $165,000 for specified development work relating to DZNS.
The closing is subject to a number of conditions including our satisfaction with the results of a meeting to be held with the FDA regarding Neuronex’s expected NDA filing. Following the pre-NDA meeting, we can, at our option, complete the acquisition by paying an additional $6.8 million in consideration. If we do not complete the transaction, other than as a result of a breach by Neuronex, Neuronex is entitled to retain all amounts previously paid by us as a break-up fee and we have no further obligations to Neuronex.
If we consummate the acquisition and the Neuronex product is approved by the FDA, additional potential payments would include up to $18 million to the former Neuronex equity holders in earnout payments upon the achievement of specified regulatory and manufacturing-related milestones and up to $105 million upon the achievement of specified sales milestones. The former Neuronex equity holders would also be entitled to receive milestone and royalty-like earnout payments from us based on worldwide net sales, ranging from the upper single digits to lower double digits.
In addition to the potential payments to former Neuronex equity holders, if we consummate the acquisition, we would be obligated to pay certain amounts to SK Biopharmaceuticals Co., Ltd. (“SK”), the licensor of the patent and other intellectual property and other rights relating to the DZNS product, under its license agreement with Neuronex. Pursuant to this license, Neuronex is obligated to pay SK up to $8 million upon the achievement of specified development milestones with respect to the DZNS product (including $1 million upon the FDA’s acceptance of the NDA for the DZNS product), and up to $3 million upon the achievement of specified sales milestones with respect to the DZNS product. Also, Neuronex is obligated to pay SK a tiered, mid-single digit royalty on net sales of DZNS products.
If the acquisition is completed, we will assume oversight and financial responsibility for Neuronex’s development and regulatory programs for diazepam nasal spray. We expect that these expenses would not exceed $8 million in 2012.
Results of Operations
Three-Month Period Ended June 30, 2012 Compared to June 30, 2011
Net Product Revenues
Ampyra
We recognize product sales of Ampyra following shipment of product to our network of specialty pharmacy providers, Kaiser and the specialty distributor to the VA. We recognized net revenue from the sale of Ampyra to these customers of $66.3 million and $51.8 million for the three-month periods ended June 30, 2012 and 2011, respectively. This net revenue of Ampyra reflects a 15% increase in our sale price effective January 3, 2012.
Discounts and allowances which are included as an offset in net revenue consists of allowances for customer credits, including estimated chargebacks, rebates, discounts and returns. Discounts and allowances are recorded following shipment of Ampyra tablets to our network of specialty pharmacy providers, Kaiser and the specialty distributor to the VA. Adjustments are recorded for estimated chargebacks, rebates, and discounts. Discounts and allowances also consist of discounts provided to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”). Payment of coverage gap discounts is required under the Affordable Care Act, the health care reform legislation enacted in 2010. Discounts and allowances may increase as a percentage of sales as we enter into managed care contracts or amend specialty pharmacy contracts in the future.
Zanaflex
We recognize product sales of Zanaflex Capsules and Zanaflex tablets using a deferred revenue recognition model where shipments to wholesalers are recorded as deferred revenue and only recognized as revenue when end-user prescriptions of the product are reported. We also recognize product sales on the transfer price of product sold for an authorized generic of Zanaflex Capsules launched during the three-month period ended June 30, 2012. We recognized net revenue from the sale of Zanaflex Capsules and Zanaflex tablets of $2.5 million for the three-month period ended June 30, 2012, as compared to $11.1 million for the three-month period ended June 30, 2011. The decrease was due to the commercial launch of generic versions of tizanidine hydrochloride capsules in February 2012. Net product revenues also include $288,000, which represents the sale of Zanaflex Capsules authorized generic product to Watson for the three-month period ended June 30, 2012. Generic competition has caused a decline in sales of Zanaflex Capsules and is expected to cause the Company’s net revenue from Zanaflex Capsules to decline significantly in 2012 and beyond.
Discounts and allowances, which are included as an offset in net revenue, consist of allowances for customer credits,
including estimated chargebacks, rebates, and discounts. Adjustments are recorded for estimated chargebacks, rebates, and discounts.
License Revenue
The Company recognized $2.3 million in license revenue for the three-month periods ended June 30, 2012 and 2011related to the $110.0 million received from Biogen Idec in 2009 as part of our collaboration agreement. We currently estimate the recognition period to be approximately 12 years from the date of the Collaboration Agreement.
Royalty Revenues
The Company recognized $2.5 million and $134,000 in royalty revenue for the three-month period ended June 30, 2012 and 2011, respectively related to ex-U.S. sales of Fampyra by Biogen Idec. Beginning on August 1, 2012 and for the remainder of 2012, Biogen will record Fampyra revenue from sales in Germany at a reduced price due to ongoing pricing discussions with the German Federal Joint Committee or G-BA. Until a final price is determined, Biogen will record revenue at a reduced price and we will record royalty revenue based on this reduced price. When pricing negotiations are finalized between Biogen and the G-BA, revenue for Fampyra as well as our royalty revenue will be reconciled retroactive to August 1, 2012.
The Company recognized $1.8 million in royalty revenue for the three-month period ended June 30, 2012 related to the authorized generic sale of Zanaflex Capsules which started in February 2012.
Cost of Sales
Ampyra
We recorded cost of sales of $12.9 million for the three-month period ended June 30, 2012 as compared to $10.1 million for the three-month period ended June 30, 2011. Cost of sales for the three-month period ended June 30, 2012 consisted primarily of $10.8 million in inventory costs related to recognized revenues. The cost of Ampyra inventory is based on a percentage of net product sales of the product in the quarter shipped to Acorda by Alkermes or our alternative manufacturer. Cost of sales for the three-month period ended June 30, 2012 also consisted of $1.9 million in royalty fees based on net sales, $147,000 in amortization of intangible assets, and $29,000 in period costs related to freight and stability testing.
Cost of sales for the three-month period ended June 30, 2011 consisted primarily of $8.9 million in inventory costs related to recognized revenues. Cost of sales for the three-month period ended June 30, 2011 also consisted of $1.1 million in royalty fees based on net sales, $82,000 in amortization of intangible assets, and $77,000 in period costs related to freight and stability testing.
Zanaflex
We recorded cost of sales of $359,000 for the three-month period ended June 30, 2012 as compared to $2.0 million for the three-month period ended June 30, 2011. Cost of sales for the three-month period ended June 30, 2012 consisted of $270,000 in inventory costs primarily related to recognized revenues, $66,000 in royalty fees based on net product shipments, and $22,000 in period costs related to packaging, freight and stability testing. Cost of sales also includes $288,000, which represents the cost of Zanaflex Capsules authorized generic product sold for the three-month period ended June 30, 2012.
Cost of sales for the three-month period ended June 30, 2011 consisted of $1.0 million in inventory costs primarily related to recognized revenues, $612,000 in royalty fees based on net product shipments, $321,000 in amortization of intangible assets, which is unrelated to either the volume of shipments or the amount of revenue recognized, and $26,000 in period costs related to freight and stability testing. Payments to and interest expense related to the PRF transaction discussed below in the section titled “Liquidity and Capital Resources” do not impact the Company’s cost of sales.
Cost of License Revenue
We recorded cost of license revenue of $158,000 and $159,000 for the three-month periods ended June 30, 2012 and 2011, respectively. Cost of license revenue represents the recognition of a portion of the deferred $7.7 million paid to Elan in 2009 in connection with the $110.0 million received from Biogen Idec as a result of our collaboration agreement.
Research and Development
Research and development expenses for the three-month period ended June 30, 2012 were $12.6 million as compared to $12.0 million for the three-month period ended June 30, 2011, an increase of approximately $626,000, or 5%. The increase was primarily due to an increase of $1.4 million in our life cycle management program for Ampyra and a $459,000 increase in Phase 1 GGF2 preclinical and clinical trial expenses. The increase was also due to an increase in overall research and development staff, compensation and related expenses of $797,000 to support the various research and development initiatives and a $700,000 charge for Neuronex expenses representing the remaining payment for research funding per the terms of the agreement we entered into with Neuronex during the first quarter of 2012. These increases were offset by a decrease attributable to the Medtronic AC105 license expense of $3.0 million during the same period in 2011.
Selling, General and Administrative
Sales and marketing expenses for the three-month period ended June 30, 2012 were $27.6 million compared to $23.4 million for the three-month period ended June 30, 2011, an increase of approximately $4.2 million, or 18%. The increase was attributable to an increase in overall marketing, selling, distribution, and market research expenses for Ampyra of $2.5 million. The increase was also related to an increase in overall compensation, benefits, and other selling expenses attributable to Ampyra of $1.9 million. These increases were partially offset by a decrease in selling, marketing, and distribution expenses for Zanaflex Capsules of $155,000 due to the introduction of generic competition in the marketplace.
General and administrative expenses for the three-month period ended June 30, 2012 were $16.6 million compared to $16.9 million for the three-month period ended June 30, 2011, a decrease of approximately $300,000, or 2%. This decrease was primarily related to a decrease in expenses related to the Zanaflex Capsule patent infringement litigation of $1.6 million offset by an increase in staff and compensation expenses to support the overall growth of the organization of $1.5 million.
Other Expense
Other expense was $233,000 for the three-month period ended June 30, 2012 compared to $1.1 million for the three-month period ended June 30, 2011, a decrease of approximately $910,000, or 80%. The decrease was primarily due to a decrease in interest expense of $920,000 principally related to the PRF revenue interest agreement due to a decrease in Zanaflex sales.
Provision for Income Taxes
We recorded a provision for income taxes of $280,000 and $62,000 for the three-month periods ended June 30, 2012 and 2011, respectively which represents Federal AMT and gross receipts taxes for certain states.
Six-Month Period Ended June 30, 2012 Compared to June 30, 2011
Net Product Revenues
Ampyra
We recognize product sales of Ampyra following shipment of product to our network of specialty pharmacy providers, Kaiser and the specialty distributor to the VA. We recognized net revenue from the sale of Ampyra to these customers of $123.6 million and $98.6 million for the six-month periods ended June 30, 2012 and 2011, respectively. This net revenue of Ampyra reflected a 7.5% increase in our sale price effective March 4, 2011 and a 15% increase in our sale price effective January 3, 2012.
Discounts and allowances which are included as an offset in net revenue consists of allowances for customer credits, including estimated chargebacks, rebates, discounts and returns. Discounts and allowances are recorded following shipment of Ampyra tablets to our network of specialty pharmacy providers, Kaiser and the specialty distributor to the VA.
Adjustments are recorded for estimated chargebacks, rebates, and discounts. Discounts and allowances also consist of discounts provided to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the “donut hole”). Payment of coverage gap discounts is required under the Affordable Care Act, the health care reform legislation enacted in 2010. Discounts and allowances may increase as a percentage of sales as we enter into managed care contracts in the future.
Zanaflex
We recognize product sales of Zanaflex Capsules and Zanaflex tablets using a deferred revenue recognition model where shipments to wholesalers are recorded as deferred revenue and only recognized as revenue when end-user prescriptions of the product are reported. We also recognize product sales on the transfer price of product sold for an authorized generic of Zanaflex Capsules launched during the six-month period ended June 30, 2012. We recognized net revenue from the sale of Zanaflex Capsules and Zanaflex tablets of $9.8 million for the six-month period ended June 30, 2012, as compared to $23.2 million for the six-month period ended June 30, 2011. The decrease was due to the commercial launch of generic versions of tizanidine hydrochloride capsules in February 2012. Net product revenues also include $1.4 million, which represents the sale of Zanaflex Capsules authorized generic product to Watson for the six-month period ended June 30, 2012. Generic competition has caused a decline in sales of Zanaflex Capsules and is expected to cause the Company’s net revenue from Zanaflex Capsules to decline significantly in 2012 and beyond.
Discounts and allowances, which are included as an offset in net revenue, consist of allowances for customer credits, including estimated chargebacks, rebates, and discounts. Adjustments are recorded for estimated chargebacks, rebates, and discounts.
License Revenue
The Company recognized $4.5 million in license revenue for the six-month periods ended June 30, 2012 and 2011 related to the $110.0 million received from Biogen Idec in 2009 as part of our collaboration agreement. We currently estimate the recognition period to be approximately 12 years from the date of the Collaboration Agreement.
Royalty Revenues
The Company recognized $4.3 million and $230,000 in royalty revenue for the six-month period ended June 30, 2012 and 2011, respectively related to ex-U.S. sales of Fampyra by Biogen Idec. Beginning on August 1, 2012 and for the remainder of 2012, Biogen will record Fampyra revenue from sales in Germany at a reduced price due to ongoing pricing discussions with the German Federal Joint Committee or G-BA. Until a final price is determined, Biogen will record revenue at a reduced price and we will record royalty revenue based on this reduced price. When pricing negotiations are finalized between Biogen and the G-BA, revenue for Fampyra as well as our royalty revenue will be reconciled retroactive to August 1, 2012.
The Company recognized $3.3 million in royalty revenue for the six-month period ended June 30, 2012 related to the authorized generic sale of Zanaflex Capsules which started in February 2012.
Cost of Sales
Ampyra
We recorded cost of sales of $23.2 million for the six-month period ended June 30, 2012 as compared to $19.8 million for the six-month period ended June 30, 2011. Cost of sales for the six-month period ended June 30, 2012 consisted primarily of $19.7 million in inventory costs related to recognized revenues. The cost of Ampyra inventory is based on a percentage of net product sales of the product in the quarter shipped to Acorda by Alkermes or our alternative manufacturer. Cost of sales for the six-month period ended June 30, 2012 also consisted of $3.1 million in royalty fees based on net sales, $294,000 in amortization of intangible assets, and $85,000 in period costs related to freight and stability testing.
Cost of sales for the six-month period ended June 30, 2011 consisted primarily of $17.4 million in inventory costs related to recognized revenues. Cost of sales for the six-month period ended June 30, 2011 also consisted of $2.0 million in royalty fees based on net sales, $307,000 in amortization of intangible assets, and $110,000 in period costs related to freight and stability testing.
Zanaflex
We recorded cost of sales of $1.4 million for the six-month period ended June 30, 2012 as compared to $4.3 million for the six-month period ended June 30, 2011. Cost of sales for the six-month period ended June 30, 2012 consisted of $898,000 in inventory costs primarily related to recognized revenues, $515,000 in royalty fees based on net product shipments, and $34,000 in period costs related to packaging, freight and stability testing. Cost of sales also includes $1.4 million, which represents the cost of Zanaflex Capsules authorized generic product sold for the six-month period ended June 30, 2012.
Cost of sales for the six-month period ended June 30, 2011 consisted of $2.1 million in inventory costs primarily related to recognized revenues, $1.4 million in royalty fees based on net product shipments, $641,000 in amortization of intangible assets, which is unrelated to either the volume of shipments or the amount of revenue recognized, and $93,000 in period costs related to freight and stability testing. Payments to and interest expense related to the PRF transaction discussed below in the section titled “Liquidity and Capital Resources” do not impact the Company’s cost of sales.
Cost of License Revenue
We recorded cost of license revenue of $317,000 for the six-month periods ended June 30, 2012 and 2011, respectively. Cost of license revenue represents the recognition of a portion of the deferred $7.7 million paid to Elan in 2009 in connection with the $110.0 million received from Biogen Idec as a result of our collaboration agreement.
Research and Development
Research and development expenses for the six-month period ended June 30, 2012 were $23.7 million as compared to $22.7 million for the six-month period ended June 30, 2011, an increase of approximately $943,000, or 4%. The increase was primarily due to a $3.2 million charge for Neuronex expenses representing a $2.0 million upfront payment plus a payment of $1.2 million for research funding per the terms of the agreement we entered into with Neuronex during the first quarter of 2012. The increase was also due to an increase in overall research and development staff, compensation and related expenses of $1.3 million to support the various research and development initiatives. The increase was also due to a $219,000 increase in Phase 1 GGF2 preclinical and clinical trial expenses. These were offset by a decrease attributable to the Medtronic AC105 license expense of $3.0 million during the same period in 2011 and a decrease of $1.6 million in preclinical expenses for the remyelinating antibodies program (rHIgM22).
Selling, General and Administrative
Sales and marketing expenses for the six-month period ended June 30, 2012 were $52.7 million compared to $45.8 million for the six-month period ended June 30, 2011, an increase of approximately $6.9 million, or 15%. The increase was attributable to an increase in overall marketing, selling, distribution, and market research expenses for Ampyra of $4.9 million. The increase was also related to an increase in overall compensation, benefits, and other selling expenses attributable to Ampyra of $2.2 million. These increases were partially offset by a decrease in selling, marketing, and distribution expenses for Zanaflex Capsules of $308,000 due to the introduction of generic competition in the marketplace.
General and administrative expenses for the six-month period ended June 30, 2012 were $30.3 million compared to $32.6 million for the six-month period ended June 30, 2011, a decrease of approximately $2.3 million, or 7%. This decrease was primarily related to a decrease in expenses related to the Zanaflex Capsule patent infringement litigation of $3.1 million, a gain on our put/call liability related to the PRF revenue interest agreement of $502,000 and a decrease in post-approval Ampyra technical work of $558,000. The overall decrease in general and administrative expenses was partially offset by an increase in staff, compensation and related expenses to support the overall growth of the organization of $2.7 million.
Other Expense
Other expense was $870,000 for the six-month period ended June 30, 2012 compared to $2.1 million for the six-month period ended June 30, 2011, a decrease of approximately $1.3 million, or 59%. The decrease was primarily due to a decrease in interest expense of $1.3 million principally related to the PRF revenue interest agreement due to a decrease in Zanaflex sales.
Provision for Income Taxes
We recorded a provision for income taxes of $651,000 and $179,000 for the six-month periods ended June 30, 2012 and 2011, respectively which represents Federal AMT and gross receipts taxes for certain states.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through private placements and public offerings of our common stock and preferred stock, payments received under our collaboration and licensing agreements, sales of Ampyra and Zanaflex Capsules, and, to a lesser extent, from loans, government grants and our financing arrangement with PRF.
We were cash flow positive in 2011 and, at June 30, 2012, we had $303.0 million of cash, cash equivalents and short-term and long-term investments, compared to $295.9 million at December 31, 2011. We expect to be cash flow positive in 2012. We believe that we have sufficient cash, cash equivalents, short-term and long-term investments on hand, in addition to cash expected to be generated from operations, to fund our business plan for the next twelve months, including our currently anticipated development pipeline activities in for the next twelve months and our anticipated payment commitments to Neuronex.
Our future capital requirements will depend on a number of factors, including the amount of revenue generated from sales of Ampyra and Zanaflex Capsules, the continued progress of our research and development activities, the amount and timing of milestone or other payments payable under collaboration, license and acquisition agreements, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, and the extent to which we acquire or in-license new products and compounds including the development costs relating to those products or compounds. To the extent our capital resources are insufficient to meet future operating requirements we will need to raise additional capital, reduce planned expenditures, or incur indebtedness to fund our operations. If we require additional financing in the future, we cannot assure you that it will be available to us on favorable terms, or at all.
Financing Arrangements
In January 1997, Elan International Services, Ltd. (EIS) loaned us an aggregate of $7.5 million pursuant to two convertible promissory notes to partly fund our research and development activities. On December 23, 2005, Elan transferred these promissory notes to funds affiliated with Saints Capital. As of June 30, 2012, $5.3 million of these promissory notes was outstanding, which amount includes accrued interest. The second of seven annual payments on this note was due and paid on the two year anniversary of Ampyra approval on January 22, 2012 and will continue to be paid annually until paid in full.
On December 23, 2005, we entered into a revenue interest assignment agreement with PRF, a dedicated healthcare investment fund, pursuant to which we assigned to PRF the right to a portion of our net revenues (as defined in the agreement) from Zanaflex Capsules, Zanaflex tablets and any future Zanaflex products including the authorized generic version of Zanaflex Capsules being sold by Watson effective in February 2012. To secure our obligations to PRF, we also granted PRF a security interest in substantially all of our assets related to Zanaflex. Our agreement with PRF covers all Zanaflex net revenues generated from October 1, 2005 through and including December 31, 2015, including the authorized generic version of Zanaflex Capsules revenue, unless the agreement terminates earlier. In November 2006, we entered into an amendment to the revenue interest assignment agreement with PRF. Under the terms of the amendment, PRF paid us $5.0 million in November 2006. An additional $5.0 million was due to us if net revenues during the fiscal year 2006 equaled or exceeded $25.0 million. This milestone was met and the receivable was reflected in our December 31, 2006 financial statements. Under the terms of the amendment, we repaid PRF $5.0 million on December 1, 2009 and an additional $5.0 million on December 1, 2010 since the net revenues milestone was met.
Under the agreement and the amendment, PRF is entitled to the following portion of Zanaflex net revenues:
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with respect to Zanaflex net revenues up to and including $30.0 million for each fiscal year during the term of the agreement, 15% of such net revenues;
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with respect to Zanaflex net revenues in excess of $30.0 million but less than and including $60.0 million for each fiscal year during the term of the agreement, 6% of such net revenues; and
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with respect to Zanaflex net revenues in excess of $60.0 million for each fiscal year during the term of the agreement, 1% of such net revenues.
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Notwithstanding the foregoing, once PRF has received and retained payments under the agreement that are at least 2.1 times the aggregate amount PRF has paid us under the agreement, PRF will only be entitled to 1% of Zanaflex net revenues. In connection with the transaction, we recorded a liability as of June 30, 2012, referred to as the revenue interest liability, of approximately $2.9 million. We impute interest expense associated with this liability using the effective interest rate method and record a corresponding accrued interest liability. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the life of the arrangement. The interest rate on this liability may vary during the term of the agreement depending on a number of factors, including the level of Zanaflex sales. We currently estimate that the imputed interest rate associated with this liability will be approximately 5.6%. Payments made to PRF as a result of Zanaflex sales levels will reduce the accrued interest liability and the principal amount of the revenue interest liability.
Upon the occurrence of certain events, including if we experience a change of control, undergo certain bankruptcy events, transfer any of our interests in Zanaflex (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement), transfer all or substantially all of our assets, or breach certain of the covenants, representations or warranties we make under the agreement, PRF may (i) require us to repurchase the rights we sold them at the “put/call price” in effect on the date such right is exercised or (ii) foreclose on the Zanaflex assets that secure our obligations to PRF. Except in the case of certain bankruptcy events, if PRF exercises its right, which we refer to as PRF’s put option, to cause us to repurchase the rights we assigned to it, PRF may not foreclose unless we fail to pay the put/call price as required. If we experience a change of control we have the right, which we refer to as our call option, to repurchase the rights we sold to PRF at the “put/call price” in effect on the date such right is exercised. The put/call price on a given date is the greater of (i) all payments made by PRF to us as of such date, less all payments received by PRF from us as of such date, and (ii) an amount that would generate an internal rate of return to PRF of 25% on all payments made by PRF to us as of such date, taking into account the amount and timing of all payments received by PRF from us as of such date. We have determined that PRF’s put option and our call option meet the criteria to be considered an embedded derivative and should be accounted for as such. Therefore, we recorded a net liability of $511,000 as of June 30, 2012 related to the put/call option to reflect its current estimated fair value. This liability is revalued on an as needed basis to reflect any changes in the fair value and any gain or loss resulting from the revaluation is recorded in earnings.
During any period during which PRF has the right to receive 15% of Zanaflex net revenues (as defined in the agreement), then 8% of the first $30.0 million in payments from Zanaflex sales we receive from wholesalers will be distributed to PRF on a daily basis. Following the end of each fiscal quarter, if the aggregate amount actually received by PRF during such quarter exceeds the amount of net revenues PRF was entitled to receive, PRF will remit such excess to us. If the amount of net revenues PRF was entitled to receive during such quarter exceeds the aggregate amount actually received by PRF during such quarter, we will remit such excess to PRF.
Investment Activities
At June 30, 2012, cash, cash equivalents, short-term and long-term investments were approximately $303.0 million, as compared to $295.9 million at December 31, 2011. Our cash and cash equivalents consist of highly liquid investments with original maturities of three months or less at date of purchase and consist of time deposits and investments in a Treasury money market fund and high-quality government bonds. Also, we maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances. As of June 30, 2012, our cash and cash equivalents were $64.7 million, as compared to $58.0 million as of December 31, 2011. Our short-term investments consist of US Treasury bonds with original maturities greater than three months and less than one year. The balance of these investments was $191.1 million as of June 30, 2012, as compared to $238.0 million as of December 31, 2011. Our long-term investments consist of US Treasury bonds with original maturities greater than one year. The balance of these investments was $47.1 million as of June 30, 2012, as compared to zero as of December 31, 2011.
Net Cash Provided by/(Used in) Operations
Net cash provided by (used in) operations was $15.4 million and $(9.4) million for the six-month periods ended June 30, 2012 and 2011, respectively. Cash provided by operations for the six-month period ended June 30, 2012 was primarily attributable to net income of $12.4 million principally resulting from license and royalty revenues, a non-cash share-based compensation expense of $9.8 million, amortization of net premiums and discounts on investments of $2.7 million and depreciation and amortization of $2.0 million. Cash provided by operations was partially offset by a net decrease of $4.7 million due to changes in working capital items primarily due to the payment of prepaid items during the six-month period
ended June 30, 2012 and a decrease in deferred product revenue of $1.6 million. These working capital decreases were partially offset by an increase in accounts payable and accrued expenses of $1.3 million. The offset to cash provided by operations was also attributable to a decrease in non-current portion of deferred license revenue of $4.5 million due to the amortization of the upfront collaboration payment received during the six-month period ended September 30, 2009, a decrease in the loss on our put/call liability of $519,000, and an increase in inventory held by the Company of $1.2 million.
Cash used in operations for the six-month period ended June 30, 2011 was primarily attributable to a net decrease of $13.5 million due to changes in working capital items primarily due to the payment of 2010 accruals during the six-month period ended June 30, 2011. It was also attributable to a decrease in the deferred license revenue of $4.5 million due to the amortization of the upfront collaboration payment received during the three-month period ended September 30, 2009, an increase in inventory held by the Company of $3.8 million, an increase in accounts receivable of $1.1 million resulting from an increase in Ampyra gross sales and the 7.5% price increase for Ampyra effective in March 2011 and a net loss of $957,000. Cash used in operations for the six-month period ended June 30, 2011 was offset by a non-cash share-based compensation expense of $8.8 million, amortization of net premiums and discounts on short-term investments of $3.5 million and depreciation and amortization of $2.2 million.
Net Cash Used in Investing
Net cash used in investing activities for the six-month period ended June 30, 2012 was $10.5 million, primarily due to $137.9 million in purchases of investments, purchases of intangible assets of $938,000 and purchases of property and equipment of $6.4 million, partially offset by $134.8 million in proceeds from maturities and sales of investments.
Net Cash Provided by Financing
Net cash provided by financing activities for the six-month period ended June 30, 2012 was $1.9 million, primarily due to $2.4 million in net proceeds from the issuance of common stock and exercise of stock options partially offset by $476,000 in repayments to PRF.
Contractual Obligations and Commitments
A summary of our minimum contractual obligations related to our major outstanding contractual commitments is included in our Annual Report on Form 10-K for the year ended December 31, 2011. Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. Under certain supply agreements and other agreements with manufacturers and suppliers, we are required to make payments for the manufacture and supply of our clinical and approved products. During the six-month period ended June 30, 2012, commitments related to the purchase of inventory consistent with our normal course of business increased as compared to December 31, 2011. As of June 30, 2012, we have inventory-related purchase commitments totaling approximately $6.6 million.
Under certain license agreements, we are required to pay royalties for the use of technologies and products in our R&D activities and in the commercialization of products. The amount and timing of any of the foregoing payments are not known due to the uncertainty surrounding the successful research, development and commercialization of the products.
Under certain license agreements, we are also required to pay license fees and milestones for the use of technologies and products in our R&D activities and in the commercialization of products. We have committed to make potential future milestone payments to third parties of up to approximately $64 million as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory or commercial milestones. Because the achievement of these milestones had not occurred as of June 30, 2012, such contingencies have not been recorded in our financial statements. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones. There is uncertainty regarding the various activities and outcomes needed to reach these milestones, and they may not be achieved. This also excludes any potential payments as part of the Neuronex transaction as these are not yet commitments to us until the transaction is consummated.
Critical Accounting Policies and Estimates
Our critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2011. As of June 30, 2012, our critical accounting policies have not changed materially from December 31, 2011.
Our financial instruments consist of cash equivalents, short-term and long-term investments, grants receivable, convertible notes payable, accounts payable, and put/call liability. The estimated fair values of all of our financial instruments approximate their carrying amounts at June 30, 2012.
We have cash equivalents, short-term and long-term investments at June 30, 2012, which are exposed to the impact of interest rate changes and our interest income fluctuates as our interest rates change. Due to the nature of our investments in money market funds and US Treasury bonds, the carrying value of our cash equivalents and investments approximate their fair value at June 30, 2012. At June 30, 2012, we held $303.0 million in cash, cash equivalents, short-term and long-term investments which had an average interest rate of approximately 0.06%.
We maintain an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity and to meet operating needs. Although our investments are subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of our investments and relatively short duration, interest rate risk is mitigated. We do not own derivative financial instruments. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative or other financial instruments.
Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”) we carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the second quarter of 2012, the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer. Based on that evaluation, these officers have concluded that, as of June 30, 2012, our disclosure controls and procedures were effective to achieve their stated purpose.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations, and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding disclosure.
Change in internal control over financial reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our chief executive officer and chief financial officer, concluded that there were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the effectiveness of controls
Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
PART II—OTHER INFORMATION
In August 2007, we received a Paragraph IV Certification Notice from Apotex Inc., advising that it had submitted an ANDA to the FDA seeking marketing approval for generic versions of Zanaflex Capsules. In response to the filing of the ANDA, in October 2007, we filed a lawsuit against Apotex in the U.S. District Court for the District of New Jersey asserting infringement of our U.S. Patent No. 6,455,557 relating to multiparticulate tizanidine compositions, including those sold by us as Zanaflex Capsules. The patent expires in 2021.
In November 2007, Apotex answered our complaint, asserting patent invalidity and non-infringement. Apotex also counterclaimed, seeking a declaratory judgment of patent invalidity and non-infringement. We denied those counterclaims. A bench trial was held in May 2011. On September 7, 2011, we announced that the Court had ruled against us in the litigation. The Court held that the claims of U.S. Patent No. 6,455,557 covering use of multiparticulate tizanidine compositions are invalid as not enabled and not infringed by Apotex. We appealed the decision to the U.S. Court of Appeals for the Federal Circuit. On June 11, 2012, the Federal Circuit affirmed the decision of the District Court. We do not intend to seek any further appeals of the decision. We also asked the FDA to delist from the Orange Book the patent that was held invalid.
On September 6, 2011, we filed a citizen petition with the FDA requesting that the FDA not approve Apotex’s ANDA because of public-safety concerns about Apotex’s proposed drug. On December 2, 2011, Apotex filed suit against us in the U.S. District Court for the Southern District of New York. In that suit, Apotex alleges, among other claims, that we engaged in anticompetitive behavior and false advertising in connection with the development and marketing of Zanaflex Capsules, including that the citizen petition we filed with the FDA delayed FDA approval of Apotex’s generic tizanidine capsules. On January 26, 2012, we moved to dismiss or stay Apotex’s suit. On February 3, 2012, the FDA denied the citizen petition that we filed and approved Apotex’s ANDA for a generic version of Zanaflex Capsules. On February 21, 2012, Apotex filed an amended complaint that incorporated the FDA action, but otherwise makes allegations similar to the original complaint. Requested judicial remedies include monetary damages, disgorgement of profits, recovery of litigation costs, and injunctive relief. We intend to defend ourselves vigorously in the litigation. We filed a motion to dismiss the amended complaint, and await further action by the Court.
Item 1 of Part II of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 includes prior updates to the litigation described above.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, as updated by the information in Item 1A of Part II of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012, and as further updated by this Item 1A, all of which could materially affect our business, financial condition or future results. The risks described or referred to herein are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Following is the restated text of individual risk factors with changes that have occurred since our publication of risk factors in our 2011 Annual Report and our update to the risk factors in our Quarterly Report for the quarter ended March 31, 2012.
Even though we have obtained marketing approval for Ampyra, the approval is subject to a REMS and post-marketing commitments, which may affect the success of Ampyra.
The marketing approval we received for Ampyra is subject to risk mitigation activities we must undertake in accordance with a risk evaluation and mitigation strategy, or REMS, a commitment to report all seizures we learn about in post-approval use to the FDA on an expedited basis, and requirements for potentially costly follow-up animal and clinical studies and analyses. The post-approval requirements impose burdens and costs on us. If the post-approval animal and clinical studies and analyses identify new safety concerns, or if our REMS and other measures are not effective in preventing or minimizing the prevalence of seizures or other serious safety risks, the approval of Ampyra could be further limited or withdrawn, or we might be required to undertake additional burdensome post-approval activities. In addition, failure to complete the required studies and meet our other post-approval commitments could lead to negative regulatory action at the FDA, which could include withdrawal of regulatory approval. Also, our Amypra marketing approval requirements include a
commitment to the FDA to conduct a trial to evaluate a 5mg twice daily dosing regimen, the results from which we expect to announce in August 2012. Although we do not expect a 5mg dose to be as efficacious as a 10mg dose, we cannot predict the results of this study or whether it will lead to the marketing of any new dosages of Ampyra and, if so, the impact on Ampyra revenues.
The FDA-approved product labeling for Ampyra is limited and may adversely affect market acceptance of Ampyra.
Ampyra was approved with an indicated use limited to improving walking in patients with MS and specifies that this was demonstrated by an increase in walking speed. The approved labeling also contains other limitations on use and warnings and contraindications for risks. If potential purchasers or those influencing purchasing decisions, such as physicians and pharmacists or third party payers, react negatively to Ampyra because of their perception of the limitations or safety risks in the approved product labeling, it may result in lower product acceptance and lower product revenues.
In addition, our promotion of Ampyra must reflect only the specific approved indication as well as other limitations on use, and disclose the safety risks associated with the use of Ampyra as set out in the approved product labeling. We must submit all promotional materials to the FDA at the time of their first use. If the FDA raises concerns regarding our promotional materials or messages, we may be required to modify or discontinue using them and provide corrective information to healthcare practitioners, and we may face other adverse enforcement action. For example, in June 2012 we received an untitled letter from the FDA stating that one of our Ampyra promotional videos does not comply with applicable law and is misleading because it overstates the efficacy of and minimizes important safety information associated with Ampyra. The FDA instructed us to immediately discontinue using the promotional video and any other promotional materials containing similar violations, and to submit a written response to their letter. In compliance with the FDA request, we submitted a written response and in July 2012 we discontinued use of the video and we have also suspended use of some other promotional material that we are evaluating in light of the untitled FDA letter.
If we or others identify previously unknown side effects of Ampyra, or known side effects are more frequent or severe than in the past, our business would be adversely affected and these events could lead to a significant decrease in sales of Ampyra or to the FDA’s withdrawal of marketing approval.
Based on our clinical trials, the side effects of Ampyra include seizures, urinary tract infection, trouble sleeping (insomnia), dizziness, headache, nausea, weakness, back pain, and problems with balance. However, if we or others identify previously unknown side effects, if known side effects are more frequent or severe than in the past, or if we or others detect unexpected safety signals for Ampyra or any products perceived to be similar to Ampyra, then in any of these circumstances:
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sales of Ampyra may be significantly decreased from projected sales;
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regulatory approvals for Ampyra may be restricted or withdrawn;
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we may decide to, or be required to, send product warning letters or field alerts to physicians, pharmacists and hospitals;
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reformulation of the product, additional preclinical or clinical studies, changes in labeling or changes to or reapprovals of manufacturing facilities may be required;
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our reputation in the marketplace may suffer; and
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government investigations and lawsuits, including class action suits, may be brought against us.
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Any of the above occurrences would harm or prevent sales of Ampyra and increase our expenses, which would impair our business.
Furthermore, since Ampyra is commercially available, it is being used in a wider population and in a less rigorously controlled environment than in clinical studies. Some patients exposed to Ampyra have reportedly experienced serious adverse side effects, including seizures. As a result, regulatory authorities, healthcare practitioners, third party payers or patients may perceive or conclude that the use of Ampyra is associated with serious adverse effects, which could result in harm to Ampyra sales and our profitability. For example, as part of an annual REMS review of Ampyra, in July 2012 the FDA issued a safety communication relating to seizures based on post-marketing data from March 2010 through March 2011.
These data showed no new safety signals related to seizure risk with Ampyra and are consistent with the data from clinical trials of Ampyra. However, the FDA safety updates and related changes that we are making to the Ampyra product labeling could change perceptions about Ampyra safety and therefore harm sales. We also constantly monitor adverse event reports for signals regarding potential additional adverse events, which could result in the need for further label changes, which might harm Ampyra sales.
Under FDA regulations and our REMS for Ampyra, we are required to monitor the safety of Ampyra and inform health care professionals about the risks of drug-associated seizures with Ampyra. We are required to document and investigate reports of adverse events, and to report them to the FDA in accordance with regulatory timelines based on their severity and expectedness. Failure to make timely safety reports and to establish and maintain related records could result in withdrawing of marketing authorization or other regulatory action, civil actions against us, or criminal penalties, any of which could harm our business. For example, in 2011 the FDA conducted an inspection focused primarily on our adverse event reporting system, including the timeliness of reporting of adverse events by our specialty pharmacies. Issues were identified on a September 2011 Form 483, and then in May 2012 we received a warning letter from the FDA regarding some of the issues identified in the inspection. The Form 483 and warning letter are discussed in further detail below in these risk factors.
If the specialty pharmacies that we rely upon to sell Ampyra in the U.S. fail to perform, our business may be adversely affected.
Our success in increasing sales of Ampyra will depend on the continued customer support efforts of our network of specialty pharmacies. A specialty pharmacy is a pharmacy that specializes in the dispensing of injectable, infused or certain other medications typically for complex or chronic conditions, which often require a high level of patient education and ongoing management. Specialty pharmacies are commonly used to dispense MS drugs, many of which are injectable. The use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:
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not provide us with accurate or timely information regarding their inventories, the number of patients who are using Ampyra, Ampyra adverse events, or Ampyra complaints;
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not effectively dispense or support Ampyra;
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reduce their efforts or discontinue dispensing or supporting Ampyra;
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not devote the resources necessary to dispense Ampyra in the volumes and within the time frames that we expect;
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be unable to satisfy financial obligations to us or others;
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not have the required licenses to distribute drugs; or
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In late 2010 and early 2011, we learned that two of the specialty pharmacies that dispense Ampyra failed to timely report to us some of the reports of adverse events that they received, which we believe was in violation of our contracts with them. Because the specialty pharmacies did not report these adverse events to us in a timely manner, while we reported them to the FDA, we did not report them in a timely manner. To our knowledge, no regulatory action has been taken against us or the specialty pharmacies involved by the FDA. However, if these specialty pharmacies continue to experience problems with adverse event reporting, and even if they do not, the FDA could take regulatory action against us and/or the specialty pharmacies. In 2011 the FDA conducted an inspection focused primarily on our adverse event reporting system, including reporting of adverse events by our specialty pharmacies. Issues were identified on a September 2011 Form 483, and in May 2012 we received a warning letter from the FDA regarding some of the issues identified in the inspection. The Form 483 and warning letter are discussed in further detail below in these risk factors.
We may incur significant liability if it is determined that we are promoting the “off-label” use of Ampyra or any other marketed drug.
Physicians may prescribe drug products for uses that are not described in the product’s labeling and that differ from
those approved by the FDA or, outside the U.S., other applicable regulatory agencies. Off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict promotion of a drug other than in accordance with labeling approved by the FDA or other applicable regulatory agency. Companies may not promote drugs for off-label uses. Accordingly, without FDA approval of Ampyra for use in any indications other than improving walking ability in people with MS, we may not promote Ampyra in the U.S. for these indications. The FDA and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. A company that is found to have engaged in off-label promotion may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.
Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other applicable regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange concerning their products. We engage in medical education activities and communicate with investigators and potential investigators regarding our clinical trials. Although we believe that all of our communications regarding our marketed products are in compliance with off-label promotion restrictions, the FDA or another regulatory or enforcement authority may disagree. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In June 2012 we received an untitled letter from the FDA stating that one of our Ampyra promotional videos does not comply with applicable law and is misleading because it overstates the efficacy of Ampyra and minimizes important risk information. This untitled FDA letter is discussed in further detail above in these risk factors.
The pharmaceutical industry is subject to stringent regulation and failure to obtain regulatory approval will prevent commercialization of our product candidates and, if we do not comply with FDA regulations if we obtain regulatory approval, approved products could be withdrawn from the market.
Our research, development, preclinical and clinical trial activities, as well as the manufacture and marketing of any products that we may successfully develop, are subject to an extensive regulatory approval process by the FDA and other regulatory agencies abroad. The process of obtaining required regulatory approvals for drugs is lengthy, expensive and uncertain. Any regulatory approvals may contain limitations on the indicated usage of a drug or, distribution restrictions, or may be conditioned on burdensome post-approval study or other requirements, including the requirement that we institute and follow a special risk management plan to monitor and manage potential safety issues, all of which may eliminate or reduce the drug's market potential. Additional adverse events that could impact commercial success, or even continued regulatory approval, might emerge with more extensive post-approval patient use. Post-market evaluation of a product could result in marketing restrictions or withdrawal from the market. In order to conduct clinical trials to obtain FDA approval to commercialize any product candidate, an investigational new drug, or IND, application must first be submitted to the FDA and must become effective before clinical trials may begin. Subsequently, if the product candidate is regulated as a drug, a new drug application, or NDA, must be submitted to the FDA and approved before commercial marketing may begin. The NDA must include the results of adequate and well-controlled clinical trials demonstrating, among other things, that the product candidate is safe and effective for use in humans for each target indication. If the product candidate, such as an antibody, is regulated as a biologic, a BLA must be submitted and approved before commercial marketing may begin. Of the large number of drugs in development, only a small percentage result in the submission of an NDA or BLA to the FDA, and even fewer are approved for commercialization. In addition, the manufacturing facilities used to produce the products must comply with current good manufacturing practices, or cGMPs, and must pass a pre-approval FDA inspection. Extensive submissions of preclinical and clinical trial data are required to demonstrate the safety, efficacy, potency and purity for each intended use. The FDA may refuse to accept our regulatory submissions for filing if they are incomplete.
Clinical trials are subject to oversight by institutional review boards and the FDA to ensure compliance with the FDA's good clinical practice requirements, as well as other requirements for the protection of clinical trial participants. We depend, in part, on third-party laboratories and medical institutions to conduct preclinical studies and clinical trials for our products and other third-party organizations to perform data collection and analysis, all of which must maintain both good laboratory and good clinical practices required by regulators. If any of those standards are not complied with in our clinical trials, the resulting data from the clinical trial may not be usable or we, an institutional review board or the FDA may suspend or terminate a trial, which would severely delay our development and possibly end the development of the product candidate.
In addition, we are subject to regulation under other state and federal laws, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and we may be subject to other local, state, federal and foreign regulations. We cannot predict the impact of those regulations on us, although they could impose significant restrictions on our business and we may have to incur additional expenses to comply with them.
We also are subject to periodic unannounced inspections by the FDA and other regulatory bodies related to other regulatory requirements that apply to drugs manufactured or distributed by us. If we receive a notice of inspectional observations or deficiencies from the FDA, we may be required to undertake corrective and preventive actions in order to address the FDA's concerns, which could be expensive and time-consuming to complete and could impose additional burdens and expenses on how we conduct the affected activities. For example, the FDA conducted two inspections beginning in July 2011. The first inspection focused on our REMS and the second inspection focused on our adverse event reporting system. The REMS inspection resulted in verbal comments pertaining to formalization of procedures and enhanced quality assurance responsibilities. The adverse event reporting inspection resulted in September 2011 FDA Form 483 focused primarily on timeliness of reporting, formalization and enhancement of certain procedures and processes, communication of Ampyra post-marketing commitments, and Acorda access to source documentation. Acorda provided the FDA with formal responses to the inspectional observations as well as to the verbal comments and commenced the process of implementing specific actions to address the FDA’s concerns and enhance our overall pharmacovigilance process. However, in May 2012 the FDA issued a written warning letter based on some of the issues identified in the 2011 inspections. The FDA warning letter identified some of the FDA’s observations as repeat observations from prior FDA inspections. We have responded to the warning letter, advising the FDA of the corrective actions we are taking to address all of the matters covered in the warning letter. However, the FDA may decide that our responses and corrective actions are not adequate and could take action against us, without further notice. Action by the FDA against us could require us to take further corrective actions or even that we stop marketing Ampyra and/or result in monetary fines, and any of such actions by the FDA could harm our business. In addition, although Ampyra was approved by the FDA on January 22, 2010, the FDA has not inspected our third-party suppliers’ drug product manufacturing sites in connection with that approval. The process validation efforts and manufacturing process at these sites could be inspected at a later date and the FDA might find what it considers to be deficiencies in the manufacturing process or process validation efforts, which could negatively impact the availability of product supply.
We and our third-party suppliers are generally required to maintain compliance with cGMPs and are subject to inspections by the FDA or comparable agencies in other jurisdictions to confirm such compliance. In addition, the FDA must approve any significant changes to our suppliers or manufacturing methods. If we or our third-party suppliers cannot demonstrate ongoing cGMP compliance, we may be required to withdraw or recall product and interrupt commercial supply of our products. Any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products as a result of a failure of our facilities or the facilities or operations of our third-party suppliers to pass any regulatory agency inspection could significantly impair our ability to develop and commercialize our products. Significant noncompliance could also result in the imposition of monetary penalties or other civil or criminal sanctions. Non-compliance could increase our costs, cause us to lose revenue, and damage our reputation.
Even if our suppliers or manufacturing methods are in compliance with applicable requirements, we may encounter problems with the manufacture of our products. To investigate and/or resolve these problems, we may be required to withdraw or recall product and interrupt commercial supply of our products. These events could increase our costs, cause us to lose revenue, and damage our reputation. We are required to submit field alert reports to the FDA if we learn of certain reported problems with our products, and we are required to investigate the causes of the reported problems. We filed several field alerts in 2011, with respect to both Zanaflex Capsules and Ampyra, related to two reports of empty Zanaflex Capsules, two reports of empty Ampyra bottles and two incidents related to Ampyra bottle labels. While the issues contributing to these field alerts have been identified and addressed and the field alerts have been closed, inspections in the future could lead to product recalls and interruption of supplies, which in turn could harm our business.
Our products and product candidates may not gain market acceptance among physicians, patients and the medical community, thereby limiting our potential to generate revenue.
Market acceptance of our products and product candidates depends on the benefits of our products in terms of safety, efficacy, convenience, ease of administration and cost effectiveness and our ability to demonstrate these benefits to physicians and patients. We believe market acceptance also depends on the pricing of our products and the reimbursement policies of government and third-party payers, as well as on the effectiveness of our sales and marketing activities. Physicians may not prescribe our products, and patients may determine, for any reason, that our products are not useful to them. For example, physicians may not believe that the benefits of Zanaflex Capsules outweigh their higher cost in relation to Zanaflex tablets or generic tizanidine hydrochloride tablets, or that the benefits of Ampyra are meaningful for patients. As described above in these risk factors, FDA-approved product labeling for Ampyra is limited and may harm its market acceptance. Also, if Ampyra is not listed on the preferred drug lists of third-party payers, or Ampyra is on the preferred drug list but subject to unfavorable limitations or preconditions or in disadvantageous positions on tiered formularies, our sales may suffer.
In the U.S., the federal government has provided significantly increased funding for comparative effectiveness research, which may compare our products with other treatments and may result in published findings that would, in turn, discourage use of our products by physicians and payments for our products by payers. Similar research is funded in other countries, including in Europe. The failure of any of our products or product candidates, once approved, to achieve market acceptance would limit our ability to generate revenue and would harm our results of operations.
If our products are approved in the EU, their success there will also depend largely on obtaining and maintaining government reimbursement because, in many European countries, patients will not use prescription drugs that are not reimbursed by their governments. In addition, negotiating prices with governmental authorities can delay commercialization by one year or more. Even if reimbursement is available, reimbursement policies may harm sales of our products and therefore our ability or that of our partners, such as Biogen Idec, to sell our products on a profitable basis. In response to the recent downturn in global economic conditions, governments in a number of international markets have announced or implemented austerity measures aimed at reducing healthcare costs to constrain the overall level of government expenditures. This includes Germany and other countries in the EU, where Biogen Idec has obtained approval for Fampyra. The measures vary by country and include, among other things, mandatory rebates and discounts, price reductions and suspensions on pricing increases on pharmaceuticals. These measures may harm net revenue from Biogen Idec sales of Fampyra and therefore the amount of the royalty we receive from Biogen Idec. For example, in August 2012 the German Joint Federal Committee (G-BA) publicly announced its final assessment of the additional benefit of Fampyra, giving Fampyra a rating of no added benefit compared to physiotherapy. Although the G-BA decision does not impact access to Fampyra for patients in Germany, it provides a comparator price range that will form the basis for Biogen Idec’s negotiation of a price for Fampyra in Germany with the Federal Association of Statutory Health Insurance Funds. The comparator price range is substantially lower than the current price of Fampyra in Germany. In addition, German prices are typically used by a number of other countries as a reference price, which therefore can negatively impact the price to be paid for reimbursement of Ampyra by other countries, particularly in the EU. A reduction in the amount of sales of Fampyra by Biogen Idec will reduce the amount of royalties Biogen Idec must pay us.
Several additional factors may limit the market acceptance of products, including:
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rate of adoption by healthcare practitioners;
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rate of a product’s acceptance by the target population,
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timing of market entry relative to competitive products,
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availability of alternative therapies,
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perceived advantages of alternative therapies,
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price of product relative to alternative therapies,
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extent of marketing efforts,
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unavailability of adequate reimbursement by third parties, and
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side effects or unfavorable publicity concerning the products or similar products.
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If market acceptance of our products in the U.S., EU, or other countries does not meet expectations, our revenues or royalties from product sales would suffer and this could cause our stock price to decline.
Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.
In March 2010, Congress enacted legislation known as the Patient Protection and Affordable Care Act (Affordable Care Act), which substantially changes the way that healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. This law contains a number of provisions, including provisions governing enrollment in federal healthcare programs, reimbursement changes, the increased use of comparative effectiveness research in healthcare decision-making, and enhancements to fraud and abuse requirements and enforcement, that will affect existing government healthcare programs and will result in the development of new programs.
A number of provisions contained in the Affordable Care Act may adversely affect our net revenue for our marketed products and any future products. The new law, among other things, increased the minimum basic Medicaid rebate for branded prescription drugs from 15.1% to 23.1% and requires pharmaceutical manufacturers to pay states rebates on prescription drugs dispensed to Medicaid managed care enrollees. In addition, the Affordable Care Act increased the additional Medicaid rebate on “line extensions” (such as extended release formulations) of solid oral dosage forms of branded products, revised the definition of average manufacturer price by changing the classes of purchasers included in the calculation, and expanded the entities eligible for discounted 340B pricing.
Beginning in 2011, the law required drug manufacturers to provide a 50% discount on prescriptions for branded products filled while the beneficiary is in the Medicare Part D coverage gap, also known as the “donut hole.” In addition, the Affordable Care Act imposes a significant annual fee on companies that manufacture or import branded prescription drug products. The fee (which is not deductible for federal income tax purposes) is based on the manufacturer’s market share of sales of branded drugs and biologics (excluding orphan drugs) to, or pursuant to coverage under, specified U.S. government programs.
The Affordable Care Act also includes substantial provisions affecting compliance. For example, beginning in January 2013, pharmaceutical manufacturers will be required to collect information on payments or other transfers of value made to healthcare providers during the calendar year. The collected information will have to be disclosed in reports that will be placed on a public database. Similarly, beginning in April 2012, pharmaceutical manufacturers were required to report samples of prescription drugs requested by and distributed to healthcare providers during the preceding calendar year. The law does not state whether these disclosures will be made publicly available. If we fail to provide these reports, or if the reports we provide are not accurate, we could be subject to significant penalties. In addition, the federal government has been given additional enforcement authority.
The federal anti-kickback statute was also amended as a part of the Affordable Care Act to provide that a violation of the federal anti-kickback statute may serve as the basis for a false claim under the false claims act since claims for items or services “resulting from” a violation of the anti-kickback statute are “false” or fraudulent claims. The Affordable Care Act also permits the federal government to suspend payments to a supplier or provider pending an investigation of a "credible allegation" of fraud.
We are unable to predict the future course of federal or state healthcare legislation and regulations, including regulations that will be issued to implement provisions of the Affordable Care Act. The Affordable Care Act and further changes in the law or regulatory framework that reduce our revenues or increase our costs could also harm our business, financial condition and results of operations and cash flows.
We may expand our business through the acquisition of companies or businesses or in-licensing product candidates that could disrupt our business and harm our financial condition.
We may in the future seek to expand our products and capabilities by acquiring one or more companies or businesses or in-licensing one or more product candidates. Acquisitions and in-licenses involve numerous risks, including:
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substantial cash expenditures;
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potentially dilutive issuance of equity securities;
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incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;
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difficulties in assimilating the operations of the acquired companies;
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diverting our management’s attention away from other business concerns;
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entering markets in which we have limited or no direct experience; and
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potential loss of our key employees or key employees of the acquired companies or businesses.
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We cannot assure you that any acquisition or in-license will result in short-term or long-term benefits to us. We may
incorrectly judge the value or worth of an acquired company or business or in-licensed products or product candidates, for example by overestimating approvability by the FDA or the market potential of acquired or in-licensed products or product candidates. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions and in-licenses. Any acquisition might distract resources from and otherwise harm sales of Ampyra. We cannot assure you that we would be able to make the combination of our business with that of acquired businesses or companies or in-licensed product candidates work or be successful. Furthermore, the development or expansion of our business or any acquired business or company or in-licensed product candidate may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds by selling shares of our stock, which could dilute our current shareholders’ ownership interest, or securities convertible into our stock, which could dilute current shareholders’ ownership interest upon conversion. Also, although we may from time to time announce that we have entered into agreements to acquire other companies or assets, we cannot assure you that these acquisitions will be completed in a timely manner or at all. These transactions are subject to an inherent risk that they may not be completed, for example because required closing conditions cannot be met at all or within specified time periods, termination rights may be exercised such as due to a breach by one of the parties, or other contingencies may arise that affect the transaction.
Under our financing arrangement with the Paul Royalty Fund, or PRF, upon the occurrence of certain events, PRF may require us to repurchase the right to receive revenues that we assigned to it or may foreclose on the Zanaflex assets that secure our obligations to PRF.
On December 23, 2005, we entered into a revenue interest assignment agreement with PRF, which was amended on November 28, 2006, pursuant to which we assigned to PRF the right to receive a portion of our net revenues from Zanaflex Capsules, Zanaflex tablets and any future Zanaflex products. To secure our obligations to PRF, we also granted PRF a security interest in substantially all of our assets related to Zanaflex.
Under our arrangement with PRF, upon the occurrence of certain events, including if we experience a change of control, undergo certain bankruptcy events, transfer any of our interests in Zanaflex (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement), transfer all or substantially all of our assets, or breach certain of the covenants, representations or warranties under the revenue interest assignment agreement, PRF may (i) require us to repurchase the rights we assigned to it at the "put/call price" in effect on the date such right is exercised or (ii) foreclose on the Zanaflex assets that secure our obligations to PRF. Except in the case of certain bankruptcy events, if PRF exercises its right to cause us to repurchase the rights we assigned to it, PRF may not foreclose unless we fail to pay the put/call price as required. The put/call price on a given date is the greater of (i) 150% of all payments made by PRF to us as of such date, less all payments received by PRF from us as of such date, or (ii) an amount that would generate an internal rate of return to PRF of 25% on all payments made by PRF to us as of such date, taking into account the amount and timing of all payments received by PRF from us as of such date.
If PRF were to validly exercise its right to cause us to repurchase the right we assigned to it, we may have to use funds that we planned to use for other purposes. Because PRF's right to cause us to repurchase the rights we assigned to it is triggered by, among other things, a change in control, transfer of any of our interests in Zanaflex (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement) or transfer of all or substantially all of our assets, the existence of that right could discourage us or a potential acquirer from entering into a business transaction that would result in the occurrence of any of those events.
On August 3, 2012, we received a letter from PRF alleging that we breached specified covenants and representations in the PRF agreement and purporting to exercise the put option. The letter also includes an allegation that PRF has suffered injuries beyond what is covered by their purported exercise of the put option, although it does not specify or quantify those injuries. We believe that the allegations are without merit and that the put option has not been validly exercised. We cannot predict whether these allegations will lead to any legal actions or, if they are initiated, the outcome or impact on us of any such legal actions.
On December 23, 2005, we entered into an agreement (subsequently amended) with an affiliate of Paul Royalty Fund (PRF), under which we received specified cash payments from PRF. In exchange, we assigned PRF revenue interest in Zanaflex Capsules, Zanaflex tablets and any future Zanaflex products. The agreement covers all Zanaflex net revenues (as defined in the agreement) generated from October 1, 2005 through and including December 31, 2015, unless the agreement terminates earlier. Under the agreement, PRF is entitled to receive specified percentages of our Zanaflex net revenues.
The agreement also contains put and call options whereby we may repurchase the revenue interest at our option or can be required by PRF to repurchase the revenue interest, contingent upon certain events. If we experiences a change of control, undergo certain bankruptcy events, transfer any of our interests in Zanaflex (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement), transfer all or substantially all of our assets, or breach certain of the covenants, representations or warranties made under the agreement, PRF has the right, which we refer to as PRF’s put option, to require us to repurchase the rights sold to PRF at the “put/call price” in effect on the date such right is exercised. The put/call price on a given date is the greater of (i) 150% of all payments made by PRF as of such date, less all payments received by PRF as of such date, and (ii) an amount that would generate an internal rate of return to PRF of 25% on all payments made by PRF as of such date, taking into account the amount and timing of all payments received by PRF as of such date.
On August 3, 2012, we received a letter from PRF alleging that we breached specified covenants and representations in the PRF agreement and purporting to exercise the put option. The letter also includes an allegation that PRF has suffered injuries beyond what is covered by their purported exercise of the put option, although it does not specify or quantify those injuries. We believe that the allegations are without merit and that the put option has not been validly exercised. Although the letter from PRF does not include a purported calculation of the put option price, if it were validly exercised, we estimate that the incremental cost to us in excess of amounts already accrued to PRF at June 30, 2012 would be no more than approximately $2.5 million. Our review is ongoing.