-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGDXzO8DO50MYFqHd2b92rHYkCf2Ah5q0uLm7w0UJtHQP4KUK3XTDi8WqlJbpzJk Ehk0gzpXfKuJO8uIpuUAFw== 0001125282-05-002434.txt : 20050510 0001125282-05-002434.hdr.sgml : 20050510 20050510172443 ACCESSION NUMBER: 0001125282-05-002434 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVIENT PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000722104 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 133033811 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15313 FILM NUMBER: 05818029 BUSINESS ADDRESS: STREET 1: ONE TOWER CENTER CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 BUSINESS PHONE: 7324189300 MAIL ADDRESS: STREET 1: ONE TOWER CENTER CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 FORMER COMPANY: FORMER CONFORMED NAME: BIO TECHNOLOGY GENERAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 b406582_10q.txt QUARTERLY REPORT =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-15313 SAVIENT PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3033811 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE TOWER CENTER, EAST BRUNSWICK, NEW JERSEY 08816 (Address of principal executive offices) (732) 418-9300 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES |X| NO |_| Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, as of May 6, 2005 was 60,777,197. =============================================================================== SAVIENT PHARMACEUTICALS, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 TABLE OF CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements .................................................. 1 Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 ................ 1 Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004.......................................................................... 2 Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2005 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004.......................................................................... 4 Notes to Consolidated Financial Statements ......................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 14 Risk Factors That May Affect Results ............................................... 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................... 38 Item 4. Controls and Procedures ............................................................ 38 PART II -- OTHER INFORMATION Item 1. Legal Proceedings .................................................................. 40 Item 6. Exhibits ........................................................................... 40 Signatures ......................................................................... 41 Exhibit Index ...................................................................... 42
i PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2005 DECEMBER 31, 2004 -------------- ----------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents ............... $ 24,793 $ 22,447 Short-term investments .................. 1,875 2,835 Accounts receivable, net ................ 1,185 6,118 Inventories, net ........................ 12,870 15,317 Prepaid expenses and other current assets.................................. 2,492 3,444 Assets held for sale .................... 75,616 79,268 -------- -------- Total current assets................... 118,831 129,429 Property and equipment, net ............. 6,851 6,985 Goodwill ................................ 40,121 40,121 Other intangibles, net .................. 70,675 71,688 Other assets (including restricted cash of $1,280 at March 31, 2005 and December 31, 2004)..................... 1,365 2,946 -------- -------- Total assets........................... $237,843 $251,169 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable (including income tax payable of $518 at March 31, 2005 and $1,599 at December 31, 2004)........... $ 9,749 $ 9,972 Current portion of long-term debt ....... 4,144 5,903 Current portion of deferred revenues .... 1,068 1,089 Other current liabilities ............... 12,732 18,938 Liabilities held for sale ............... 11,954 12,742 -------- -------- Total current liabilities.............. 39,647 48,644 Deferred revenues ........................ 9,917 10,180 Other long-term liabilities .............. 37 -- Negative goodwill ........................ 16,028 16,028 Deferred income taxes .................... 21,331 21,649 -------- -------- Total liabilities...................... $ 86,960 $ 96,501 -------- -------- Commitments and contingent liabilities (Note 7) Stockholders' Equity: Preferred stock - $.01 par value; 4,000 shares authorized; no shares issued..... -- -- Common stock - $.01 par value; 150,000 shares authorized; issued: 60,609 at March 31, 2005 and 60,457 at December 31, 2004....................... 606 606 Additional paid-in capital .............. 219,030 218,699 Accumulated deficit ..................... (71,068) (67,203) Accumulated other comprehensive income .. 2,315 2,566 -------- -------- Total stockholders' equity............. 150,883 154,668 -------- -------- Total liabilities and stockholders' equity............................... $237,843 $251,169 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 1 SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2005 2004 ------- ------- Revenues: Product sales, net ....................................... $22,615 $32,201 Contract fees ............................................ 291 230 Royalties ................................................ -- 932 Other revenues ........................................... 75 40 ------- ------- Total revenues.......................................... 22,981 33,403 ------- ------- Expenses: Cost of product sales .................................... 8,721 8,651 Research and development ................................. 6,282 8,664 Marketing and sales ...................................... 5,154 6,666 General and administrative ............................... 6,177 5,372 Amortization of intangibles associated with acquisition .. 1,013 1,013 Commissions and royalties ................................ 1,224 1,403 ------- ------- Total expenses.......................................... 28,571 31,769 ------- ------- Operating (loss) income ................................... (5,590) 1,634 Other income, net ......................................... 2,057 73 ------- ------- (Loss) income before income tax ........................... (3,533) 1,707 Income taxes .............................................. 332 529 ------- ------- Net (loss) income ......................................... $(3,865) $ 1,178 ======= ======= Basic (loss) earnings per share: ------- ------- Basic (loss) earnings per share .......................... $ (0.06) $ 0.02 ======= ======= Diluted (loss) earnings per share: ------- ------- Diluted (loss) earnings per share ........................ $ (0.06) $ 0.02 ======= ======= Weighted average number of common and common equivalent shares: Basic .................................................... 60,545 59,734 ======= ======= Diluted .................................................. 60,545 60,331 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 2 SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
COMMON STOCK ACCUMULATED ------------------- ADDITIONAL OTHER PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES PAR VALUE CAPITAL DEFICIT (LOSS) INCOME EQUITY ------ --------- ---------- ----------- ------------- ------------- BALANCE, DECEMBER 31, 2004 ..................... 60,457 $606 $218,699 $(67,203) $2,566 $154,668 Comprehensive loss: Net loss for three months ended March 31, 2005......................... (3,865) (3,865) Unrealized loss on Marketable securities, net................... (33) (33) Currency translation Adjustment ............... (218) (218) -------- Total comprehensive loss ....................... (4,116) Issuance of common stock ....................... 138 304 304 Exercise of stock options ...................... 14 27 27 ------ ---- -------- -------- ------ -------- BALANCE, MARCH 31, 2005 ........................ 60,609 $606 $219,030 $(71,068) $2,315 $150,883 ====== ==== ======== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------- 2005 2004 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ........................................ $(3,865) $ 1,178 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ............................ 604 585 Amortization of intangible assets associated with acquisition............................................. 1,013 1,013 Deferred revenues ........................................ (284) 287 Deferred income taxes .................................... (318) (306) Unrealized (gain) loss on investments .................... 224 -- Loss on sales of short-term investments .................. 27 -- Proceeds from sales of short-term investments ............ 676 -- Provision for inventory reserve .......................... 1,714 (270) Common stock issued as payment for services .............. 38 20 Restricted stock grant issuance .......................... 37 -- Provision for sales returns .............................. 2,388 1,005 Changes in: Accounts receivables ......................... 2,545 (1,648) Inventories....................................... 733 (442) Prepaid expenses and other current assets......... 952 115 Assets held for sale.............................. 3,652 5,327 Accounts payable.................................. (223) 1,370 Liabilities held for sale......................... (788) (1,039) Other changes in other current liabilities........ (6,206) (1,866) ------- ------- Net cash provided by operating activities ................ 2,919 5,329 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Short-term investments ................................... -- (519) Capital expenditures ..................................... (578) (1,098) Changes in other long-term assets ........................ (44) (497) Proceeds from sale of investment in Omrix ................ 1,625 -- Proceeds from sales of short-term investments ............ -- 471 ------- ------- Net cash provided by (used in) investing activities ...... 1,003 (1,643) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt .............................. (1,759) (1,668) Proceeds from issuance of common stock ................... 293 424 ------- ------- Net cash used in financing activities .................... (1,466) (1,244) ------- ------- Effect of exchange rate changes .......................... (110) 438 ------- ------- Net increase in cash and cash equivalents ................ 2,346 2,880 Cash and cash equivalents at beginning of period ......... 22,447 17,218 ------- ------- Cash and cash equivalents at end of period ............... $24,793 $20,098 ======= ======= SUPPLEMENTARY INFORMATION Other information: Income tax paid......................................... $ 115 $ 1,063 Interest paid........................................... $ 59 $ 77
The accompanying notes are an integral part of these consolidated financial statements. 4 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 -- BASIS OF PRESENTATION On March 23, 2005, the Company announced the signing of a definitive agreement to sell its global biologics manufacturing business to certain subsidiaries of Ferring Holding SA, a privately owned specialty pharmaceutical company headquartered in Lausanne, Switzerland ("Ferring"). Effective in the first quarter of 2005, the assets and liabilities of the global biologics manufacturing business have been segregated on the balance sheet as "assets held for sale". See Note 7 "Commitments and Contingencies", Note 8 "Assets and Liabilities Held for Sale" and Note 9 "Segment Information". The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the Company's financial position at March 31, 2005 and the results of its operations and cash flows for the three month periods ended March 31, 2005 and 2004. Interim financial statements are prepared on a basis consistent with the Company's annual financial statements, other than the changes in recognition of royalty revenue and the method for recording obsolescence. Results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2005. The consolidated balance sheet as of December 31, 2004 was derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. In the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, the Company reported that, as a result of the execution of a definitive agreement to sell the Company's global biologics manufacturing business, the Company would reclassify that business as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144. Upon further analysis, the Company has concluded that the global biologics manufacturing business should be reclassified only as "assets held for sale" in accordance with Emerging Issues Task Force ("EITF") Issue No. 03-13 "Applying the Conditions in Paragraph 42 of SFAS No. 144 in Determining Whether to Report Discontinued Operations". This reclassification is reflected in this Quarterly Report on Form 10-Q. Certain prior period amounts have been reclassified to conform to current year presentations. This reclassification includes the assets and liabilities held for sale. 2 -- INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, reserves are recorded for the difference between the cost and the market value. These reserves are determined based on estimates. For the three months ended March 31, 2005, the Company provided for additional obsolescence in the amount of $1,714,000. This increased the reserve to $3,765,000 as of March 31, 2005. In addition, loss contract reserves of $885,000 are included in other current liabilities for outstanding purchase orders and the resolution of other commitments that will be in excess of expected demand. The Company's inventories include Oxandrin inventories that the Company believes would potentially be in excess of expected product demand if the U.S. Food and Drug Administration, or FDA, approves a generic form of the product in the near term. The amount of such potential excess will vary depending upon the timing of the approval of a generic product, the number of generic products that are approved and the rate by 5 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 -- INVENTORIES -- (CONTINUED) which generic sales reduce demand for branded Oxandrin. If generic approval occurs during the second quarter of 2005, the Company estimates that such potential excess may be up to $6.7 million. Inventories at March 31, 2005 and December 31, 2004 are summarized below:
MARCH 31, 2005 DECEMBER 31, 2004 -------------- ----------------- (UNAUDITED) (IN THOUSANDS) Raw material ............................. $ 3,589 $ 3,996 Work in process .......................... 1,130 678 Finished goods ........................... 11,916 12,694 Inventory reserves ....................... (3,765) (2,051) ------- ------- Total ................................... $12,870 $15,317 ======= =======
3 -- REVENUE RECOGNITION Product sales are recognized when title to the product has transferred to the Company's customers in accordance with the terms of the sale, and when collectability is probable, net of discounts, sales incentives, sales allowances and sales returns. Under the terms of sale that the Company offers to its customers, title may transfer upon delivery to the customer, upon delivery to the customer's shipper or carrier or upon shipment. Contract fees consist mainly of license of marketing and distribution rights and research and development projects. In accordance with Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," as amended by SAB 104, issued by the Securities and Exchange Commission in December 1999, contract fee revenues are recognized over the estimated term of the related agreements, which range from 5 to 16 years. Revenue related to performance milestones is recognized based upon the achievement of the milestone, as defined in the respective agreements, and when collectability is probable. Advance payments received in excess of amounts earned are included in deferred revenue. Royalties are recognized as earned once agreement exists, the sale is made, and upon receipt of confirmation from the contracting parties. Through December 31, 2003, sales returns had been minimal and insignificant to the Company's results of operations. In the first quarter of 2004, the Company became aware that its wholesalers and their retail customers were preparing to return product, primarily Oxandrin 2.5-mg and 10-mg, which had reached the end of its shelf life. Historically, the Company had experienced virtually no returns of the 2.5-mg tablet because of the product's five-year shelf life. The 10-mg tablet, which was introduced in September 2002, has a two-year shelf life. On the basis of the actual returns received primarily in the second and third quarters of 2004, the Company estimated the total cost of future product returns and provided a provision for future returns. In the first quarter of 2005, the Company issued credits to its wholesalers in the amount of $511,000. The Company also determined that the rate of product returns was greater than that estimated in the previous quarter. On the basis of this information, the Company increased its estimates for future product returns and recorded an additional provision totalling $2,899,000 in the first quarter of 2005. As of March 31, 2005, the aggregate reserve for future product returns was $11,807,000 as compared to $9,419,000 as of December 31, 2004. Periodically the Company will evaluate the effectiveness of the reserve for returns based on actual returns and make any necessary adjustments. The Company regularly reviews the factors that influence its estimates including (i) actual returns experience; (ii) the demand for the Company's products; (iii) estimated inventory levels of its wholesaler customers; and (iv) other relevant factors. If necessary, the Company makes adjustments when it believes that actual product returns may differ from established reserves. Changes in facts and circumstances and the demand for the Company's products could result in material changes in the amount of returned product, and actual results may differ materially from the Company's estimates. 6 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 -- EARNINGS PER SHARE OF COMMON STOCK The Company has applied SFAS No. 128, "Earnings Per Share" in its calculation and presentation of earnings per share - "basic" and "diluted". Basic earnings per share are computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The numerator in calculating both basic and diluted earnings per common share for each period presented is the reported net income (loss). The denominator is based on the following weighted average number of common shares:
THREE MONTHS ENDED MARCH 31, --------------- 2005 2004 ------ ------ (UNAUDITED) (IN THOUSANDS) Basic ....................................................... 60,545 59,734 Incremental shares for assumed conversion of options ........ -- 597 ------ ------ Diluted ..................................................... 60,545 60,331 ====== ======
The difference between basic and diluted weighted average common shares resulted from the assumption that the dilutive stock options outstanding were exercised. For the three months ended March 31, 2004, options to purchase 6,298,000 shares of our common stock were not included in the diluted earnings per share calculation as their effect would have been anti-dilutive. For the three months ended March 31, 2005, options to purchase 5,953,000 shares of our common stock, representing all outstanding options as of such date, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive. 5 -- STOCK-BASED COMPENSATION The Company issues both stock options and restricted stock awards to its employees. Restricted stock awards are expensed over the life of the vesting period in accordance with SFAS No. 123, "Accounting for Stock Based Compensation." In January 2005, the Company issued approximately 311,000 shares of restricted stock options to its employees. These shares will vest over a four year period and are being expensed based on the closing market price of the Company's stock on the date of issuance. As permitted by SFAS No. 123, the Company accounts for stock-based compensation arrangements with employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation expense for stock options issued to employees is based on the difference on the date of grant between the fair value of the Company's stock and the exercise price of the option. No employee compensation cost related to stock option grants is reflected in net income, as all granted options had an exercise price equal to the market value of the underlying common stock at the date of grant. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services." All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Stock options granted to consultants, other than directors, are expensed upon issuance. 7 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 -- STOCK-BASED COMPENSATION -- (CONTINUED) The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:
THREE MONTHS ENDED MARCH 31, ---------------- 2005 2004 ------- ------ (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) Net (loss) income As reported ............................................... $(3,865) $1,178 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects...................................... 1,285 1,800 ------- ------ Pro forma net (loss) ....................................... $(5,150) $ (622) ======= ====== Basic (loss) earnings per common share: As reported ............................................... $ (0.06) $ 0.02 ======= ====== Pro forma ................................................. $ (0.09) $(0.01) ======= ====== Diluted (loss) earnings per common share: As reported ............................................... $ (0.06) $ 0.02 ======= ====== Pro forma ................................................. $ (0.09) $(0.01) ======= ======
6 -- INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of capital loss, net operating loss and tax credit carry forwards. Valuation allowances reduce deferred tax assets to the amounts that are more likely than not to be realized. Based upon the Company's current business outlook and the change in its strategic direction, the likelihood of the Company being able to fully realize its deferred income tax benefits against future income is uncertain. Accordingly, at March 31, 2005, the Company maintains a $24,388,000 valuation allowance against its deferred income tax assets. 7 -- COMMITMENTS AND CONTINGENCIES On December 20, 2002, a purported stockholder class action was filed against the Company and three of its officers. The action is pending under the caption A.F.I.K. Holding SPRL v. Fass, No. 02-6048 (HAA) in the U.S. District Court for the District of New Jersey and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiff purports to represent a class of stockholders who purchased shares of the Company between April 19, 1999 and August 2, 2002. The complaint asserts that certain of the Company's financial statements were materially false and misleading because the Company restated its earnings and financial statements for the years ended 1999, 2000 and 2001, as described in the Company's Current Report on Form 8-K dated, and its press release issued on August 2, 2002. Five nearly identical actions were filed in January and February 2003. In September 2003, the actions were consolidated and co-lead plaintiffs and co-lead counsel were appointed in accordance with the Private Securities Litigation Reform Act. The parties have entered into a stipulation which provides for the lead plaintiff to file an amended consolidated complaint. The Company has filed a motion to dismiss the action. Briefing in support of and in opposition to this motion has been completed but the court has not scheduled a hearing date. The Company cannot predict when a hearing on this motion will be scheduled, or, once such hearing has been held, when the court will render its decision. 8 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) On October 27, 2003, the Company received a letter addressed to the board of directors from attorneys for a purported stockholder of the Company demanding that Savient commence legal proceedings to recover its damages against directors who served on the Company's board immediately prior to the 2003 annual meeting of stockholders, Fulbright & Jaworski L.L.P., Arthur Andersen LLP, the partners of Arthur Andersen responsible for the audit of the Company's financial statements for 1999, 2000 and 2001, as well as all other officers and directors responsible for the alleged wrongdoing. The letter asserted that some or all of these persons were responsible for the material overstatement of the Company's assets, earnings and net worth, and that these persons caused the Company to disseminate false and misleading press releases and filings with the Securities and Exchange Commission. An advisory committee to the board of directors, consisting of directors who were not directors prior to the 2003 annual meeting of stockholders, investigated this demand and has determined that litigation should not proceed. The Company intends to vigorously defend against all allegations of wrongdoing. The Company has referred these claims to its directors' and officers' insurance carrier, which has reserved its rights as to coverage with respect to these actions. The Company is obligated under certain circumstances to indemnify certain customers for certain or all expenses incurred and damages suffered by them as a result of any infringement of third party patents. In addition the Company is obligated to indemnify its officers and directors against all reasonable costs and expenses related to stockholder and other claims pertaining to actions taken in their capacity as officers and directors which are not covered by the Company's directors and officers' insurance policy. These indemnification obligations are in the regular course of business and in most cases do not include a limit on maximum potential future payments, nor are there any recourse provisions or collateral that may offset the cost. As of March 31, 2005, the Company has not recorded a liability for any obligations arising as a result of these indemnification obligations. On March 11, 2005, the Company halted a Phase II clinical trial for Prosaptide in patients with HIV-associated peripheral neuropathy after a data and safety monitoring board advised the Company that there was little chance the trial would reach its primary endpoint. Under the terms of the Myelos acquisition agreement, through which the company acquired Prosaptide, the Company is required to make a payment of $30 million to the former stockholders of Myelos if the Company is in a position to file a New Drug Application for FDA approval of Prosaptide for the treatment of peripheral neuropathic pain or neuropathy. The agreement also requires the Company to pay 15% of worldwide net sales of Prosaptide in the third year of commercialization to the former stockholders of Myelos, at least 50% of which must be paid in shares of common stock. At the time of the acquisition of Myelos, the Company recorded negative goodwill of $18,989,000 on its balance sheet primarily because the amount written off as in-process research and development acquired exceeded the purchase price. Prior to January 1, 2002, the amount of negative goodwill was being amortized over five years. The amortization of the negative goodwill ceased effective January 1, 2002, in accordance with SFAS No. 142. The unamortized balance in negative goodwill as of March 31, 2005 was $16,028,000. This balance will be maintained as a deferred credit until it is either netted against the contingent payments or reflected in net income as an extraordinary item should the contingent payments not become due because the technology did not meet the milestones that trigger payment. Should the Company terminate further research into Prosaptide, the negative goodwill will be immediately recognized. On March 23, 2005, the Company announced the signing of a definitive agreement with Ferring Pharmaceuticals, Inc. ("Ferring USA") to co-promote Nuflexxa in the United States. Under the terms of the agreement, which is contingent upon completion of the sale of the Company's global biologics manufacturing business, the Company will promote Nuflexxa to rheumatologists in the United States. Ferring USA will focus its promotional efforts for Nuflexxa on the orthopedic surgeon community in the United States and will market globally to both rheumatologists and orthopedic surgeons. 9 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) The Company plans to establish a sales force targeting the rheumatology community for this co-promotion effort. In addition, the Company will contribute financial support to the medical education, training and related advertising and marketing programs to support Nuflexxa through December 31, 2008. In consideration of this investment, the Company will receive 50% of the global revenue for Nuflexxa above agreed upon revenue thresholds. Under the agreement, the Company is required to invest $20 million in its sales force and other marketing contributions over the first two calendar years, subject to adjustment if the closing of the sale of the Company's global biologics manufacturing business does not occur on or before July 31, 2005. Beyond the first two calendar years, the Company's continued contribution to and participation in the co-promotion arrangement is contingent upon the achievement of agreed upon revenue thresholds. During the first quarter of 2005, the Company settled the outstanding patent litigation with Genentech which had been pending in Israel with respect to certain methods relating to genetically engineered products and human growth hormone. The claim was settled for a payment of $2.25 million which was fully reserved at the end of the year. In January 2005, the Company concluded a partial settlement of its patent infringement and patent interference litigation against Novo Nordisk, receiving $3 million for the resolution of the Company's claims for lost profits and attorney's fees. An additional payment from Novo is due upon the conclusion of the appeal filed by Novo regarding an issue in the patent infringement opinion, regardless of the outcome of the appeal. Additionally, in January 2005, the Company and Berna Biotech Ltd. agreed to terminate their existing Technology Transfer and License Agreement whereupon Berna returned its license to the Company's Hepatitis B vaccine program in exchange for a payment of $750,000. 8 -- ASSETS AND LIABILITIES HELD FOR SALE On March 23, 2005, the Company announced the signing of a definitive agreement to sell its global biologics manufacturing business for $80 million cash to Ferring. The Company will receive the proceeds in three installments: $55 million at closing, $15 million at the first anniversary of closing and $10 million at the second anniversary of closing. The Company estimates the proceeds from this transaction over the next two years to be about $70 million after transaction-related expenses, taxes and the extinguishment of bank debt, assuming the transaction closes in the next five months. The closing of the transaction is subject to a number of conditions, including governmental and regulatory approvals. The global biologics manufacturing business is comprised of the Company's wholly owned subsidiary, BTG-Israel and certain assets and intellectual property of the parent company, Savient. Effective with the first quarter of 2005, the Company's assets and liabilities of the global biologics manufacturing business have been segregated on the balance sheet as held for sale. See Note 7 "Commitments and Contingencies". On March 23, 2005, the Company announced the signing of a definitive agreement with Ferring USA to co-promote Nuflexxa in the United States. Under the terms of the agreement, which is contingent upon completion of the sale of the Company's global biologics manufacturing business, the Company will promote Nuflexxa to rheumatologists in the United States. Ferring USA will focus its promotional efforts for Nuflexxa on the orthopedic surgeon community in the United States and will market globally to both rheumatologists and orthopedic surgeons. The Company plans to establish a sales force targeting the rheumatology community for this co-promotion effort. In addition, the Company will contribute financial support to the medical education, training and related advertising and marketing programs to support Nuflexxa through December 31, 2008. In consideration of this investment, the Company will receive 50% of the global revenue for Nuflexxa above agreed upon revenue thresholds. Under the agreement, the Company is required to invest $20 million in its sales force and other marketing contributions over the first two calendar years, subject to adjustment if the closing of the sale of the Company's global biologics manufacturing business does not occur on or before 10 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 -- ASSETS AND LIABILITIES HELD FOR SALE -- (CONTINUED) July 31, 2005. Beyond the first two calendar years, the Company's continued contribution to and participation in the co-promotion arrangement is contingent upon the achievement of agreed upon revenue thresholds. As of March 31, 2005, long-term debt outstanding was $3,889,000. This amount was repaid on April 30, 2005 in anticipation of the closing of the sale of the global biologics manufacturing business. In addition, upon the closing of the transaction, the Company will fund the currently unfunded portion of the employee severance obligation of BTG-Israel. As of March 31, 2005, the amount of unfunded severance obligations was $3,704,000. Also upon the closing of the transaction, the Company will realize as income any amounts of previously deferred revenues with respect to certain long-term contracts of the business. As of March 31, 2005, the amount of such deferred revenue was $10,985,000. A summary statement of net assets of the global biologics manufacturing business at March 31, 2005 and December 31, 2004, as they were included in the consolidated financial statements of the Company, follows:
MARCH 31, 2005 DECEMBER 31, 2004 -------------- ----------------- (UNAUDITED) (IN THOUSANDS) Accounts receivable, net ................. $ 3,827 $ 9,540 Inventories, net ......................... 7,921 5,781 Other current assets ..................... 2,097 805 ------- ------- Total current assets................... 13,845 16,126 Property and equipment, net .............. 58,941 60,033 Severance pay funded ..................... 2,587 2,945 Other assets ............................. 243 164 ------- ------- Total assets........................... 75,616 79,268 ------- ------- Accounts payable ......................... 1,276 1,366 Other current liabilities ................ 4,387 4,752 ------- ------- Total current liabilities.............. 5,663 6,118 Severance Pay ............................ 6,291 6,624 ------- ------- Total liabilities...................... 11,954 12,742 ------- ------- Net assets............................. $63,662 $66,526 ======= =======
9 -- SEGMENT INFORMATION The pending sale of the global biologics manufacturing business resulted in the identification of three reportable segments: Oral Liquid Pharmaceuticals, Other Specialty Pharmaceuticals and Biologics Manufacturing. In prior years, the operations were not managed along segment lines. The Oral Liquid Pharmaceuticals segment develops, manufactures and markets oral liquid formulations of off-patent drugs to treat patients who take medication in oral liquid form. This segment sells two categories of products: licensed products and specials. Licensed products are products for which the Company has received U.K. regulatory approval to promote the oral formulation, and specials are products for which the Company has limited U.K. regulatory approval to accept custom orders but which the Company is not permitted to promote. Other Specialty Pharmaceuticals includes the remaining products which are branded prescription pharmaceuticals. These products currently include an injectable testosterone product and a synthetic analogue of a testosterone derivative. The Biologics Manufacturing segment products include an injection to treat osteoarthritis pain, a human growth hormone, insulin and vaccines. 11 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 -- SEGMENT INFORMATION -- (CONTINUED) The accounting policies are consistent between segments. The Company allocates management fees to the segments based on various factors which include management time. These fees eliminate in the consolidation. Although the Company segments are managed on a worldwide basis, they operate in two principal geographic locations, the United States and the United Kingdom. The Company's three segments have been organized around these geographic areas. Information about the Company's segments is presented below:
THREE MONTHS ENDED MARCH 31, 2005 -------------------------------------------------------------- (UNAUDITED) (IN THOUSANDS) BIOLOGICS ORAL LIQUID OTHER SPECIALTY MANUFACTURING PHARMACEUTICALS PHARMACEUTICALS BUSINESS TOTAL --------------- --------------- ------------- -------- Revenues ......................................................... $ 9,064 $ 9,773 $ 4,144 $ 22,981 Operating income (loss) before corporate and non-cash charges .... 3,412 (8,014) 1,707 (2,895) Less: Depreciation and amortization ................................... 1,317 300 1,078 2,695 Corporate charges ............................................... 1,065 (1,065) -- -- -------- ------- ------- -------- Operating income as reported ..................................... 1,030 (7,249) 629 (5,590) Other (expense) income, net ...................................... (931) 3,117 (129) 2,057 Income tax expense ............................................... (35) (62) (235) (332) -------- ------- ------- -------- Net income (loss) ................................................ 64 (4,194) 265 (3,865) ======== ======= ======= ======== Segment assets ................................................... $128,948 $33,279 $75,616 $237,843 ======== ======= ======= ======== Expenditures for segment assets .................................. $ 490 $ 88 $ 117 $ 695 ======== ======= ======= ========
THREE MONTHS ENDED MARCH 31, 2004 ------------------------------------------------------------- (UNAUDITED) (IN THOUSANDS) BIOLOGICS ORAL LIQUID OTHER SPECIALTY MANUFACTURING PHARMACEUTICALS PHARMACEUTICALS BUSINESS TOTAL --------------- --------------- ------------- -------- Revenues ......................................................... $ 7,204 $22,051 $ 4,148 $ 33,403 Operating income before corporate and non-cash charges ........... 2,936 3,327 (2,106) 4,157 Less: Depreciation and amortization ................................... 1,191 421 911 2,523 Corporate charges ............................................... 626 (626) -- -- -------- ------- ------- -------- Operating income as reported ..................................... 1,119 3,532 (3,017) 1,634 Other income (expense), net ...................................... (827) 1,016 (116) 73 Income tax expense ............................................... (558) (748) 777 (529) -------- ------- ------- -------- Net income (loss) ................................................ $ (266) $ 3,800 $(2,356) $ 1,178 ======== ======= ======= ======== Segment Assets ................................................... $138,638 $66,468 $84,088 $289,194 ======== ======= ======= ======== Expenditures for segment assets .................................. $ 919 $ 156 $ 80 $ 1,155 ======== ======= ======= ========
12 SAVIENT PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 -- SEGMENT INFORMATION -- (CONTINUED) Information about the Company's product sales by geographic region is as follows:
THREE MONTHS ENDED MARCH 31, ----------------------------------- (UNAUDITED) DOLLAR AMOUNTS IN THOUSANDS 2005 2004 ---------------- --------------- United States ............................................................................... $ 9,324 41.2% $21,128 65.6% United Kingdom .............................................................................. 8,781 38.9 7,101 22.1 Other international ......................................................................... 4,510 19.9 3,972 12.3 ------- ----- ------- ----- Total ....................................................................................... 22,615 100.0 32,201 100.0 ======= ===== ======= =====
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing in Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis and other portions of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this report regarding our strategy, expected future financial position, results of operations, cash flows, financing plans, discovery and development of products, potential acquisitions, strategic alliances, intellectual property, competitive position, plans and objectives of management are forward-looking statements. Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "will" and other similar expressions help identify forward-looking statements, although not all forward-looking statements contain these identifying words. In particular, the statements regarding our new strategic direction and its potential effects on our business and the statements regarding the divestiture of our global biologics manufacturing business are forward-looking statements. These forward-looking statements involve substantial risks and uncertainties and are based on our current expectations, assumptions, estimates and projections about our business and the biopharmaceutical and specialty pharmaceutical industries in which we operate. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward- looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. We have included important factors in the cautionary statements included in this report, particularly in the section entitled "Risk Factors That May Affect Results," that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward- looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements. OVERVIEW We are an emerging specialty pharmaceutical company engaged in developing, manufacturing and marketing pharmaceutical products that address unmet medical needs in both niche and larger market segments. We distribute our products on a worldwide basis. In the United States, we distribute our products through wholesalers and we market our products to physicians through a sales force that includes both our own employees and representatives of a contract sales organization. In the United Kingdom, we distribute our oral liquid pharmaceutical products directly to hospitals and through wholesalers to retail customers, and we market our products primarily to physicians through our own sales force. In Israel, we distribute our products directly to hospitals, HMOs and retailers, and we market our products to physicians through our own sales force. Elsewhere in the world, we distribute our products primarily through third party license and distribution relationships. Through a combination of internal research and development, acquisitions, collaborative relationships and licensing arrangements, we have assembled a portfolio of therapeutic products and product candidates, many of which are currently being marketed and several of which are in registration or clinical development. In July 2004, we announced a change in our strategic business plan to reposition our company to focus on the full development of our pipeline products. This plan includes an enhanced focus on the clinical development of Puricase, our product candidate for which we recently completed Phase 2 clinical trials. In March 2005, we halted a Phase II clinical trial for our second product candidate, Prosaptide. We are also engaged in an active in-licensing program to access and develop novel compounds in late-stage clinical trials as well as marketed products complementary to this strategy. We were founded in 1980 as Bio-Technology General Corp. to develop, manufacture and market novel therapeutic products. In September 2002, we acquired Rosemont Pharmaceuticals Limited, a specialty pharmaceutical company located in the United Kingdom. Rosemont develops, manufactures and markets pharmaceutical products in oral liquid form. We coordinate our overall administration, finance, business development, human clinical trials, U.S. sales and marketing activities, quality assurance and regulatory affairs primarily from our headquarters in East Brunswick, New Jersey. We carry out the development, 14 manufacture, distribution and sale of our oral liquid pharmaceutical products through Rosemont in the United Kingdom. Development and manufacturing activities for our global biologics manufacturing business are primarily carried out in Israel through our Bio-Technology General (Israel) Ltd. subsidiary. On March 23, 2005, we announced that we had signed a definitive agreement to divest our global biologics manufacturing business to Ferring. As a result of the execution of this definitive agreement, we segregated our assets and liabilities held for sale on our balance sheet. On March 23, 2005, we also announced the signing of a definitive agreement with Ferring Pharmaceuticals, Inc. ("Ferring USA") to copromote Nuflexxa in the United States. Under the terms of the agreement, which is contingent upon completion of the sale of our global biologics manufacturing business to two subsidiaries of Ferring, we will promote Nuflexxa to rheumatologists in the United States. Ferring USA will focus its promotional efforts for Nuflexxa on the orthopedic surgeon community in the United States and will market globally to both rheumatologists and orthopedic surgeons. We plan to establish a sales force targeting the rheumatology community for this co-promotion effort. In addition, we will contribute financial support to the medical education, training and related advertising and marketing programs to support Nuflexxa through December 31, 2008. In consideration of this investment, we will receive 50% of the global revenue for Nuflexxa above agreed upon revenue thresholds. Under the agreement, we are required to invest $20 million in our sales force and other marketing contributions over the first two calendar years, subject to adjustment if the closing of the sale of our global biologics manufacturing business does not occur on or before July 31, 2005. Beyond the first two calendar years, our continued contribution to and participation in the co-promotion arrangement is contingent upon the achievement of agreed upon revenue thresholds. Our financial results have been heavily dependent on Oxandrin sales since we introduced it in December 1995. Sales of Oxandrin accounted for 45% of our net product sales in the first three months of 2005 and 65% of our net product sales in the first three months of 2004. However, oxandrolone, the active ingredient in Oxandrin, is off-patent, and our patents directed to the use of the active pharmaceutical ingredient in Oxandrin for weight gain have also expired. Oxandrin net sales in the first three months of 2005 were adversely impacted by returns during the period and a provision for future returns. Several companies have filed drug master files with the FDA relating to a generic drug with the same active pharmaceutical ingredient as Oxandrin. Although we cannot predict when generic competition for Oxandrin will begin, the FDA may approve one or more generic versions of Oxandrin at any time. The introduction of these generic products would likely cause a significant decrease in our Oxandrin revenues, which would adversely affect us financially and could require us to scale back some of our business activities. As a result, we anticipate that Oxandrin will be a less significant product for our future operating results. In February 2004, we filed a Citizens Petition with the FDA requesting that, in the interest of public health, the FDA establish specific bio-equivalence requirements for oral products containing oxandrolone. This petition cited a serious safety concern in patients using Oxandrin together with anticoagulant drugs containing warfarin. In addition, this petition cited concerns related to the physical-chemical properties of the oxandrolone drug substance which are important for manufacturing quality assurance and which we believe should result in the FDA categorizing Oxandralone as a "problem drug" in terms of manufacturing. We requested in our petition that any company wishing to introduce an oxandrolone product into the United States should, prior to the issuance of marketing approval, be required to also conduct a clinical trial to investigate the interaction between that product candidate and warfarin and demonstrate that it is identical to the interaction between Oxandrin and warfarin. We have since filed with the FDA affidavits supporting our petition. In August and September 2004, two opposition comment letters to our petition were filed with the FDA. In August 2004, the FDA issued a letter to us stating that extensive review of the questions raised in our petition will be required before the FDA will respond. In February 2005, we submitted another supplemental position paper to the FDA advocating the adoption of rigorous impurity standards for oxandrolone consistent with the draft recently published by the United States Pharmacopeia, which will become the standard in 2006. Since August 2004, we have received no further communication from the FDA regarding our petition. 15 Sales of Delatestryl have decreased significantly as a result of the FDA's allowance of the reintroduction of a generic version of Delatestryl into the market in March 2004, and could continue to decrease further in the future. Oral liquid pharmaceutical product sales represented a significant portion of our overall product sales in the first three months of 2005. These sales accounted for 40% of our net product sales for the first three months of 2005 and 22% of our net product sales for the first three months of 2004. Given the historical growth of oral liquids pharmaceutical product sales in combination with the potential introduction of generic oxandrolone and the divestiture of our global biologics manufacturing business, we expect oral liquid pharmaceutical products to account for an even higher percentage of our overall product sales in the coming years. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. Applying these principles requires our judgment in determining the appropriateness of acceptable accounting principles and methods of application in diverse and complex economic activities. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We discuss our critical accounting policies in our Annual Report on Form 10- K for the year ended December 31, 2004 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and the Use of Estimates." In addition to the critical accounting policies discussed in our Annual Report on Form 10-K we have identified the following additional critical accounting policies: In our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, we reported that, as a result of the execution of a definitive agreement to sell our global biologics manufacturing business, we would reclassify that business as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144. Upon further analysis, we have concluded that the global biologics manufacturing business should be reclassified only as "assets held for sale" in accordance with Emerging Issues Task Force ("EITF") Issue No. 03-13 "Applying the Conditions in Paragraph 42 of SFAS No. 144 in Determining Whether to Report Discontinuing Operations". This reclassification is reflected in this Quarterly Report on Form 10-Q. Revenue recognition. Product sales are recognized when title to the product has transferred to our customers in accordance with the terms of the sale, and when collectability is probable, net of discounts, sales incentives, sales allowances and sales returns. Under the terms of sale that we offer to our customers, title may transfer upon delivery to the customer, upon delivery to the customer's shipper or carrier or upon shipment. Contract fees consist mainly of license of marketing and distribution rights and research and development projects. In accordance with Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," as amended by SAB 104, issued by the SEC in December 1999, contract fee revenues are recognized over the estimated term of the related agreements, which range from 5 to 16 years. Revenue related to performance milestones is recognized based upon the achievement of the milestone, as defined in the respective agreements, and when collectibility is probable. Advance payments received in excess of amounts earned are included in deferred revenue. Royalties are recognized as earned once agreement exists, the sale is made only upon receipt of confirmation from the contracting parties. Allowances for returns. We recognize product sales when product is shipped and collectibility is probable, net of discounts, sales incentives, sales allowances and sales returns. Beginning in the first quarter of 2004 and continuing through the second quarter, we became aware that retail customers of our wholesalers were preparing to return expired product, primarily 2.5-mg Oxandrin and 16 10-mg Oxandrin. Historically, we had experienced virtually no returns of the 2.5-mg Oxandrin tablet because of the product's five-year shelf life. The 10-mg Oxandrin tablet, which was introduced in the second half of 2002, currently has a two-year shelf life. At December 31, 2004, we had recorded a reserve for returns totalling $9,419,000. In the first quarter of 2005, we issued credits to our wholesalers for product returns in the amount of $511,000. We also revised our estimates upwards to 12 months from 7 months to reflect the number of months remaining before our wholesale distributors will ship product to retail pharmacies in accordance with current industry standards. On the basis of this information, we increased our estimates for future product returns and recorded an additional reserve totalling $2,899,000 in the first quarter of 2005. At March 31, 2005, the aggregate reserve for returns was $11,807,000. We will continue to monitor our product returns. We regularly review the factors that influence our estimates including: o actual returns experience; o the demand for our products; o estimated inventory levels of our wholesaler customers; o the shipping and returns practices of our wholesalers as products approach their expiration dates; and o other relevant factors. If necessary, we make adjustments when we believe that actual product returns may differ from established reserves. Changes in facts and circumstances and the demand for our products could result in material changes in the amount of returned product, and actual results may differ materially from our estimates. Inventory obsolescence. We state inventories at the lower of cost or market. We determine cost using the weighted-average method. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we record reserves for the difference between the cost and the market value. We determine these reserves based on estimates. The reserves at March 31, 2005 were $3,765,000. In addition, we maintain loss contract reserves of $885,000 for outstanding purchase orders and the resolution of other commitments that will be in excess of expected demand. We believe Oxandrin inventories could potentially be in excess of expected product demand if the FDA approves a generic form of the product in the near term. The amount of such potential excess will vary depending upon the timing of the approval of a generic product, the number of generic products that are approved and the rate by which generic sales reduce demand for branded Oxandrin. If generic approval occurs during the second quarter of 2005, we estimate that such potential excess may be up to $6.7 million. For the three months ended March 31, 2005, the Company provided for additional obsolescence of $1,714,000. This increased the reserve to $3,765,000 as of March 31, 2005. 17 RESULTS OF OPERATIONS The following table sets forth for the periods indicated percentage of revenues represented by certain items reflected on our statements of operations.
THREE MONTHS ENDED MARCH 31, ------------- 2005 2004 ----- ----- Revenues: Products sales, net .......................................... 98.4% 96.4% Contract fees ................................................ 1.3 0.7 Royalties .................................................... -- 2.8 Other revenues ............................................... 0.3 0.1 ----- ----- Total revenues.............................................. 100.0 100.0 ----- ----- Expenses: Cost of product sales ........................................ 37.9 25.9 Research and development ..................................... 27.3 25.9 Marketing and sales .......................................... 22.4 20.0 General and administrative ................................... 26.9 16.1 Amortization of intangibles associated with acquisitions ..... 4.4 3.0 Commissions and royalties .................................... 5.3 4.2 ----- ----- Total expenses.............................................. 124.2 95.1 ----- ----- Operating (loss) income ....................................... (24.2) 4.9 Other income, net ............................................. 9.0 0.2 ----- ----- (Loss) income before income taxes ............................. (15.2) 5.1 Income taxes .................................................. 1.4 1.6 ----- ----- Net (loss) income ............................................. (16.6)% 3.5% ===== =====
We have historically derived our revenues from product sales as well as from collaborative arrangements with third parties. The sources of revenue under our third party arrangements include up-front contract fees, reimbursement for producing certain experimental materials, milestone payments and royalties on sales of product. Our revenues and expenses have in the past displayed, and may in the future continue to display, significant variations. These variations may result from a variety of factors, including: o the timing and amount of product sales; o changing demand for our products; o our inability to provide adequate supply for our products; o changes in wholesaler buying patterns; o returns of expired product; o changes in government or private payor reimbursement policies for our products; o increased competition from new or existing products, including generic products; o the timing of the introduction of new products; o the timing and realization of milestone and other payments from licensees; o the timing and amount of expenses relating to research and development, product development and manufacturing activities; o the extent and timing of costs of obtaining, enforcing and defending intellectual property rights; and o any charges related to acquisitions. 18 The decrease in the value of the U.S. dollar relative to the British pound sterling had the effect of increasing our revenues as measured in U.S. dollars by $263,000 for the three months ended March 31, 2005. This decrease also had the effect of reducing our net loss for the three months ended March 31, 2005 by $66,000. The following table summarizes net sales of our commercialized products as a percentage of net product sales for the periods indicated:
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2005 2004 ---------------- --------------- (DOLLARS IN THOUSANDS) Oxandrin .................................. $ 8,347 36.9% $18,423 57.2% Human growth hormone ...................... 1,972 8.7 1,928 6.0 BioLon .................................... 1,603 7.1 1,503 4.7 Delatestryl ............................... 1,144 5.1 2,704 8.4 Oral liquid pharmaceutical products ....... 9,064 40.1 7,204 22.3 Other ..................................... 485 2.1 439 1.4 ------- ----- ------- ----- Total .................................. $22,615 100.0% $32,201 100.0% ======= ===== ======= =====
We believe that our product mix will vary from period to period based on the purchasing patterns of our customers and our focus on: o increasing market penetration of our existing products; o expanding into new markets; and o commercializing additional products. In particular, quarterly fluctuations in sales of Oxandrin have had a significant impact on our quarterly results of operations, and we expect this to continue in future periods. Comparison of Three Months Ended March 31, 2005 and March 31, 2004. Revenues. Total revenues decreased by $10,422,000, or 31%, in the three months ended March 31, 2005 to $22,981,000 from $33,403,000 in the three months ended March 31, 2004. The decrease in total revenues resulted primarily from the decrease in product sales, net, and other revenues. Royalties decreased by $932,000, reflecting a change in our revenue recognition policy to recognizing royalty revenue only upon receipt of confirmation from the contracting party. Product sales, net decreased by $9,586,000, or 30%, in the three months ended March 31, 2005 to $22,615,000 from $32,201,000 in the three months ended March 31, 2004. The decrease resulted primarily from decreases in net sales of Oxandrin and Delatestryl, partially offset by an increase in sales of oral liquid pharmaceutical products. Sales of Oxandrin in the three months ended March 31, 2005 were $8,347,000, a decrease of $10,076,000, or 55%, from $18,423,000 in the three months ended March 31, 2004. This decrease is attributable to a significant purchasing reduction by Cardinal Health and other wholesalers, the negative impact of returns of expiring product and a provision for future returns. In addition, total dispensed prescriptions for Oxandrin in the three months ended March 31, 2005 declined by 7% as compared to the three months ended March 31, 2004, and by 6% as compared to the three months ended December 31, 2004. These decreases were partially offset by price increases. As a result of the product returns of expiring Oxandrin that began in 2004, we issued credits to our wholesalers totalling $499,000 in the first three months of 2005. As of March 31, 2005, the reserve for future returns, which may occur over several years, was increased by $2,303,000. Sales of oral liquid pharmaceutical products in the three months ended March 31, 2005 were $9,064,000, an increase of $1,860,000, or 26%, from $7,204,000 in the first three months of 2004. A portion of the increase in sales of oral liquid pharmaceutical products was attributable to the decrease in the value of the 19 U.S. dollar relative to the British pound sterling. Measured in pounds sterling, sales of oral liquid pharmaceutical products in the three months ended March 31, 2005 increased by 22% over sales in the first three months of 2004. Sales of Delatestryl in the three months ended March 31, 2005 were $1,144,000, a decrease of $1,560,000, or 58%, from $2,704,000 in the first three months of 2004. The decrease in sales was attributable to the reintroduction of a competing generic product into the market in 2004. We expect our Delatestryl sales during the last three quarters of 2005 to be significantly lower than our sales of $3,780,000 during the last three quarters of 2004 as a result of the reintroduction of this competing generic product. Contract fees were $291,000 in the three months ended March 31, 2005 and $230,000 in the three months ended March 31, 2004. These amounts mainly represent fees received in prior periods but earned and recognized in the three months ended March 31, 2005 and 2004 in accordance with SAB 101. Royalties in the three months ended March 31, 2005 were zero as compared to $932,000,000 in the first three months of 2004. These royalties are received on third party sales of our Mircette, Silkis and insulin products. The decrease in royalties in the first three months of 2005 was attributable to a change in our revenue recognition policy whereby revenue is only recognized as earned upon receipt of confirmation from the contracting parties. Cost of product sales increased by $70,000, or less than 1%, in the three months ended March 31, 2005 to $8,721,000 from $8,651,000 in the three months ended March 31, 2004. Cost of product sales as a percentage of product sales increased from 27% in the three months ended March 31, 2004 to 39% in the three months ended March 31, 2005. This increase was principally attributable to: o changes in our product mix, with an increase in sales of oral liquid pharmaceutical products; o an increase in the reserve for inventory obsolescence and o an increase in loss contract reserves. Cost of product sales as a percentage of product sales also varies from year to year and quarter to quarter depending on the quantity and mix of products sold. Oxandrin has relatively low manufacturing costs relative to its sales prices; whereas Delatestryl and the oral liquid pharmaceutical products have higher manufacturing costs relative to their sales prices. Research and development expense decreased by $2,382,000, or 27%, in the three months ended March 31, 2005 to $6,282,000 from $8,664,000 in the three months ended March 31, 2004. Research and development expense decreased during the three months ended March 31, 2005 as a result of a decrease in development studies in our Biologics Manufacturing segment, offset in part by increases in the costs of conducting toxicology studies of Prosaptide and of producing clinical supplies of both Puricase and Prosaptide. We expect research and development expense in 2005 to exceed the 2004 level if we proceed with the further development of Puricase and Prosaptide. Marketing and sales expense decreased by $1,512,000, or 23%, in the three months ended March 31, 2005 to $5,154,000 from $6,666,000 in the three months ended March 31, 2004. The decrease was primarily attributable to pre-marketing expenses incurred for Nuflexxa in the United States. General and administrative expense increased by $805,000, or 15%, in the three months ended March 31, 2005 to $6,177,000 from $5,372,000 in the three months ended March 31, 2004. The increase in general and administrative expense resulted from significant increases in final audit fees for the close out of 2004 and consulting expenses related to our compliance with the requirements of the Sarbanes-Oxley Act, partially offset by lower legal expenses. Amortization of intangibles associated with acquisitions. In connection with our acquisition of our oral liquid pharmaceutical business, we recorded intangibles of $80,800,000, consisting of developed products, trademarks and patents. We are amortizing these intangibles using the straight-line method over the estimated useful life of approximately 20 years. We recorded $1,013,000 of amortization of these intangibles in the first three months of 2005 and 2004. 20 Commissions and royalties expense was $1,224,000 in the three months ended March 31, 2005, compared to $1,403,000 in the three months ended March 31, 2004. The decrease of $179,000, or 13%, was primarily attributable to reduced commissions paid to the Ross Products Division of Abbott Laboratories, or Ross, on sales of Oxandrin for the long-term care market and a decrease in royalties that we were required to pay for our Delatestryl and Mircette products due to a decrease in the sales of those products. Other income, net was $2,057,000 for the three months ended March 31, 2005, compared to $73,000 for the three months ended March 31, 2004. The change is primarily attributable to the successful settlement of intellectual property litigation suits, most notably our settlement with Novo Nordisk. Income taxes. Provision for income taxes for the three months ended March 31, 2005 was $332,000, compared to $529,000 for the three months ended March 31, 2004. The decrease in provision for income taxes was primarily attributable to increased losses in our Other Specialty Pharmaceutical segment at March 31, 2005 compared to income at March 31, 2004. LIQUIDITY AND CAPITAL RESOURCES Our working capital at March 31, 2005 was $79,184,000, compared to an adjusted working capital figure of $80,785,000 at December 31, 2004. Our cash flows have fluctuated significantly as a result of changes in our revenues, operating expenses, capital spending, working capital requirements, the issuance of common stock and other financing activities. We expect that cash flows in the near future will be primarily determined by the levels of our net income, working capital requirements, milestone payment obligations and financings, if any, that we may undertake in addition to the receipt of anticipated proceeds from our divestiture of our global biologics manufacturing business. Net cash increased by $2,346,000 in the three months ended March 31, 2005. Net cash provided by operating activities was $2,919,000 in the three months ended March 31, 2005, compared to $5,329,000 in the three months ended March 31, 2004. Net loss was $3,865,000 in the three months ended March 31, 2005, compared to net income of $1,178,000 in the three months ended March 31, 2004. Net cash used in operating activities other than our Biologics Manufacturing segment was $920,000 in the three months ended March 31, 2005. In the three months ended March 31, 2005, net cash provided by operating activities was less than our net loss because of an increase in our reserves for inventory obsolescence of $1,714,000, amortization of intangible assets associated with acquisition of $1,013,000, an increase in our provision for sales returns of $2,388,000, a decrease in accounts receivable of $2,545,000 and an increase in assets available for sale of $3,652,000. Partially offsetting this was a $788,000 decrease in liabilities held for sale and a $6,206,000 decrease in other current liabilities, of which $3,000,000 was related to the retirement of a reserve for pending litigation. A portion of this retired reserve balance is in accounts payable at March 31, 2005. Net cash provided by investing activities was $1,003,000 in the three months ended March 31, 2005 compared to net cash used in investing activities of $1,643,000 in the three months ended March 31, 2004. Capital expenditures of $578,000 in the three months ended March 31, 2005 were offset by the proceeds from the sale of our investment in Omrix Corporation of $1,625,000. Net cash used in financing activities was $1,466,000 in the three months ended March 31, 2005, compared to $1,244,000 in the three months ended March 31, 2004. These amounts primarily reflected repayment of $1,759,000 of debt in the first three months of 2005 and $1,668,000 in the first three months of 2004, in each case partially offset by net proceeds from our issuance of common stock primarily pursuant to our employee stock purchase plan. We believe that our cash resources as of March 31, 2005, together with anticipated product sales and anticipated proceeds from the divestiture of our global biologics manufacturing business, will be sufficient to fund our ongoing operations and debt service obligations for at least the next twelve months. However, we may fail to achieve our anticipated liquidity levels as a result of unexpected events or failure to achieve our goals. Our future capital requirements will depend on many factors, including the following: o our ability to successfully close the divestiture of our global biologics manufacturing business; 21 o the timing and amount of product sales, particularly our continued ability to sell Oxandrin prior to the introduction of generic versions of the product; o continued progress in our research and development programs, particularly with respect to Prosaptide and Puricase; o the timing of, and the costs involved in, obtaining regulatory approvals, including regulatory approvals for Prosaptide, Puricase, and any other product candidates that we may seek to develop in the future and regulatory approval to manufacture oral liquid pharmaceutical products for supply into the U.S. market; o the timing and magnitude of any future milestone payment obligations; o fluctuations in foreign exchange rates for sales denominated in currencies other than the U.S. dollar; o the quality and timeliness of the performance of our third party suppliers and distributors; o the cost of commercialization activities, including product marketing, sales and distribution; o the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation; o the outcome of pending purported class action and other related, or potentially related, actions and the litigation costs with respect to such actions; and o our ability to establish and maintain collaborative arrangements. If we are required to seek additional funding for our operations, we might not be able to obtain such additional funds or, if such funds are available, such funding might be on unacceptable terms. We continue to seek additional collaborative research and development and licensing arrangements in order to provide revenue from sales of certain products and funding for a portion of the research and development expenses relating to the products covered. However, we may not be able to enter into any such agreements. 22 RISK FACTORS THAT MAY AFFECT RESULTS You should carefully consider the risks and uncertainties described below. If any of the following risks or uncertainties actually occurs, our business, prospects, financial condition and operating results would likely suffer, possibly materially. RISKS RELATING TO OUR NEW STRATEGIC DIRECTION THE CLOSING OF THE SALE OF OUR GLOBAL BIOLOGICS MANUFACTURING BUSINESS TO FERRING WILL BE COMPLEX, TIME-CONSUMING AND EXPENSIVE, AND MAY DISRUPT OR DISTRACT OUR MANAGEMENT AND OTHER EMPLOYEES. IN ADDITION, THE CLOSING OF THE TRANSACTION IS SUBJECT TO A NUMBER OF CONDITIONS, INCLUDING GOVERNMENTAL AND REGULATORY APPROVALS. IF WE ARE UNABLE TO COMPLETE THIS DIVESTITURE, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF OUR NEW STRATEGIC DIRECTION. On March 23, 2005, we announced that we had signed a definitive agreement to sell our global biologics manufacturing business to Ferring. We believe that this divestiture will provide the incremental resources required to fund the advancement of our lead drug candidate, Puricase for the treatment of severe refractory gout which has recently completed Phase 2 clinical trials in the United States, and pursue business development opportunities to in-license novel compounds in late-stage clinical trials as well as marketed products complementary to this strategy. However, divestiture of our global biologics manufacturing business will be complex, time-consuming and expensive, and may disrupt or distract our management and other employees. In addition, the closing of the transaction is subject to a number of conditions, including governmental and regulatory approvals. While we expect that the transaction will close in the first half of 2005, we may not be able to complete this divestiture within that time period or at all. This divestiture involves substantial transaction costs and we may not ultimately achieve expected benefits and cost reductions. If we do not successfully complete the divestiture of our global biologics manufacturing business, we may not achieve the expected benefits of our new strategic direction. WE ARE REPOSITIONING OUR COMPANY TO FOCUS ON PRODUCT DEVELOPMENT, INCLUDING AN ENHANCED FOCUS ON THE CLINICAL DEVELOPMENT OF PURICASE, OUR PRODUCT CANDIDATE THAT HAS RECENTLY COMPLETED PHASE 2 CLINICAL TRIALS, AND PROSAPTIDE. IF WE ARE UNABLE TO COMMERCIALIZE EITHER OR BOTH OF THESE PRODUCT CANDIDATES, OR EXPERIENCE SIGNIFICANT DELAYS OR UNANTICIPATED COSTS IN DOING SO, OUR BUSINESS WILL BE MATERIALLY HARMED. As part of our strategic business plan, we are repositioning our company to focus on the full development of our pipeline products. This will include an enhanced focus on the clinical development of Puricase, our product candidate that has recently completed Phase 2 clinical trials, and Prosaptide, our product candidate for which we may explore indications for the treatment of peripheral neuropathic pain or the potential to treat peripheral neuropathic pain in the HIV or other disease populations. We are engaged in an active in- licensing program to access and develop novel compounds in late-stage clinical trials as well as marketed products complementary to this strategy. On March 11, 2005, we announced that we will terminate our Phase 2 clinical trial of Prosaptide after a scheduled interim analysis, scheduled pursuant to the trial protocol, indicated that even if the trial were to continue as designed to its planned end there would be little chance that the trial would demonstrate efficacy in the treatment of peripheral neuropathic pain. We intend to analyze all the available data from this study and from recently completed pre- clinical pharmacology studies. When the whole of the Prosaptide data set has been thoroughly reviewed by our staff and a panel of independent experts, we will determine whether we will pursue alternative indications for the treatment or peripheral neuropathic pain, or further explore the potential of Prosaptide to treat the underlying peripheral neuropathy in HIV/AIDS and other diseases, or terminate our Prosaptide development program. Our ability to commercialize Puricase, Prosaptide and any other product candidate that we may develop in the future will depend on several factors, including: o successfully completing clinical trials; o receiving marking approvals from the FDA and similar foreign regulatory authorities; o establishing commercial manufacturing arrangements with third-party manufacturers, to the extent we do not manufacture the product candidates ourselves; 23 o launching commercial sales of the product, whether alone or in collaboration with others; and o acceptance of the product in the medical community and with third-party payors. If we are unable to successfully commercialize Puricase or Prosaptide, or both, or if we experience significant delays or unanticipated costs in doing so, our business will be materially harmed. We will face similar drug development risks for any other product candidates that we may develop in the future. PURICASE AND PROSAPTIDE, AND ANY OTHER PRODUCT CANDIDATE THAT WE MAY DEVELOP IN THE FUTURE, MUST SATISFY RIGOROUS STANDARDS OF SAFETY AND EFFICACY BEFORE THEY CAN BE APPROVED FOR SALE. TO SATISFY THESE STANDARDS, WE MUST ENGAGE IN EXPENSIVE AND LENGTHY CLINICAL TRIALS AND OBTAIN REGULATORY APPROVAL. We must successfully complete clinical trials for Puricase and Prosaptide before we can apply for marketing approval of these product candidates. In July 2003, we commenced a Phase 2 clinical trial of Prosaptide in patients with HIV-associated peripheral neuropathy to supplement the findings of a previous Phase 2 clinical trial in patients with diabetes mellitus. On March 11, 2005, we announced that we will terminate our Phase 2 clinical trial of Prosaptide after a scheduled interim analysis, scheduled pursuant to the trial protocol. We intend to analyze all the available data from this study and from recently completed preclinical pharmacology studies. When the whole of the Prosaptide data set has been thoroughly reviewed by our staff and a panel of independent experts, we will determine whether we will pursue alternative indications for the treatment of peripheral neuropathic pain, or further explore the potential of Prosaptide to treat the underlying peripheral neuropathy in HIV/AIDS and other diseases, or terminate our Prosaptide development program. In December 2004 we administered the last patient dose in a Phase 2 clinical trial of Puricase. We anticipate that the results of this study will be available in May 2005. Our Puricase clinical trial may be unsuccessful, which would materially harm our business. Even if this trial is successful, we will be required to conduct additional clinical trials before an NDA can be filed with the FDA for marketing approval of Puricase. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in early phases of clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize Prosaptide or Puricase, including: o regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site; o our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising; o enrollment in our clinical trials may be slower than we currently anticipate, or participants may drop out of our clinical trials; o we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; o regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; o the cost of our clinical trials may be greater than we currently anticipate; o any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable; and o the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics. 24 If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive, we may: o be delayed in obtaining marketing approval for our product candidates; o not be able to obtain marketing approval; o obtain approval for indications that are not as broad as intended; or o not obtain marketing approval before other companies are able to bring competitive products to market. Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether our ongoing clinical trials will be completed on schedule. Similarly, we do not know whether our planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant delays in clinical trials could also allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates. OUR NEW STRATEGIC FOCUS INCLUDES AN IN-LICENSING PROGRAM TO ACCESS AND DEVELOP NOVEL COMPOUNDS IN LATE-STAGE CLINICAL TRIALS. WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO EXPAND OUR PORTFOLIO OF PRODUCTS IN THIS MANNER. As part of the change in our strategic business plan, we announced that we intend to concentrate on an active in-licensing program to access and develop novel compounds in late-stage clinical trials. To date, we have had limited success in in-licensing compounds, and we may continue to have difficulty in this area for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is a competitive area. Numerous companies are also pursuing strategies to license or acquire products similar to those that we may pursue. These companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following: o we may be unable to identify suitable products or product candidates within our areas of expertise; o we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return on our investment in the product; or o companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us. If we are unable to develop suitable potential product candidates by obtaining rights to novel compounds from third parties, our business will suffer. RISKS RELATED TO OUR BUSINESS WE INCURRED A SUBSTANTIAL NET LOSS IN 2004 AND ANTICIPATE THAT WE MAY INCUR SUBSTANTIAL NET LOSSES FOR THE FORESEEABLE FUTURE. IF WE ARE UNABLE TO COMMERCIALIZE PURICASE, PROSAPTIDE OR ANY OTHER PRODUCT CANDIDATES, WE MAY NEVER RETURN TO PROFITABILITY. Our operations in 2004 reflected net income for the first quarter of 2004 of $1,178,000 compared to net loss of $3,865,000 in the first quarter of 2005. Our losses in 2005 resulted, in part, from returns of Oxandrin product and a provision for future Oxandrin returns that we recorded during 2005 and the FDA's allowance of the reintroduction of a generic version of Delatestryl in March 2004. We expect to continue to incur substantial losses for the foreseeable future. Our financial results have been substantially dependent on Oxandrin sales. Sales of Oxandrin accounted for 37% of our net product sales in the first 3 months of 2005 and 57% in the first three months of 2004. However, while we cannot predict when generic competition for Oxandrin will begin, the FDA may approve one or more generic versions of Oxandrin at any time. If the FDA approves a generic version of Oxandrin, our revenues will decline significantly, and our results of operations will be materially adversely affected. 25 Our return to profitability is dependent on the successful commercialization of Puricase, Prosaptide and any other product candidates that we may develop. If we are unable to successfully commercialize Puricase, Prosaptide or any other product candidates, or if we experience significant delays or unanticipated costs in doing so, or if sales revenue from any product candidate that receives marketing approval is insufficient, we may never return to profitability. Even if we do become profitable again, we may not be able to sustain or increase our profitability on a quarterly or annual basis. WE WILL NEED SUBSTANTIAL CAPITAL TO DEVELOP AND COMMERCIALIZE PRODUCTS, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED. The development and commercialization of pharmaceutical products requires substantial funds. In addition, we may require cash to acquire new product candidates. In recent periods, we have satisfied our cash requirements primarily through product sales. Historically, we have also obtained capital through collaborations with third parties, contract fees, government funding and equity and debt financings. These financing alternatives might not be available in the future to satisfy our cash requirements. We expect that the repositioning of our company will require significant additional capital resources. Although we believe that the divestiture of our global biologics manufacturing business will provide the incremental resources required to fund the advancement of our drug development programs, the closing of the divestiture is subject to a number of conditions, including governmental and regulatory approvals, and these goals may not be achieved due to unexpected events or our failure to achieve our strategic goals. We might not be able to obtain additional funds or, if such funds are available, such funding might be on unacceptable terms. If we raise additional funds by issuing equity securities, dilution to our then existing stockholders will result. If we raise additional funds through the issuance of debt securities or borrowings, we may incur substantial interest expense and could become subject to financial and other covenants that could restrict our ability to take specified actions, such as incurring additional debt or making capital expenditures. If adequate funds are not available, we may be required to significantly curtail one or more of our commercialization efforts or development programs or obtain funds through sales of assets or arrangements with collaborative partners or others on less favorable terms than might otherwise be available. A SIGNIFICANT PORTION OF OUR REVENUES IS REPRESENTED BY SALES OF OXANDRIN. SALES OF OXANDRIN DECLINED SUBSTANTIALLY DURING THE FIRST THREE MONTHS OF 2005 AS COMPARED TO THE FIRST THREE MONTHS OF 2004. OXANDRIN MAY BEGIN FACING GENERIC COMPETITION AT ANY TIME, WHICH WOULD LIKELY CAUSE A SIGNIFICANT FURTHER DECREASE IN OXANDRIN SALES AND RENDER OUR EXISTING OXANDRIN INVENTORY OBSOLETE. Net sales of Oxandrin for the first three months of 2005 amounted to $8.3 million, representing approximately 37% of our net product sales for that period. Net sales of Oxandrin amounted to $18.4 million in the first three months of 2004, representing 57% of net product sales. Several companies have filed drug master files with the FDA relating to a generic drug with the same active pharmaceutical ingredient as Oxandrin. While we cannot predict when generic competition for Oxandrin will begin, the FDA may approve one or more generic versions of Oxandrin at any time. The introduction of these generic products would likely cause a significant decrease in our Oxandrin revenues, which would adversely affect us financially and could require us to scale back some of our business activities. As a result, we anticipate that Oxandrin will be a less significant product for our future operating results. Our inventories include Oxandrin inventories that we believe would potentially be in excess of expected product demand if the FDA approves a generic form of the product in the near term. The amount of such potential excess will vary depending upon the timing of the approval of a generic product, the number of generic products that are approved and the rate by which generic sales reduce demand for branded Oxandrin. If generic approval occurs during the second quarter of 2005, we estimate that such potential excess may be up to $6.7 million. 26 OXANDRIN SALES IN PARTICULAR REPORTING PERIODS MAY BE AFFECTED BY WHOLESALERS' BUYING PATTERNS AND PRODUCT RETURNS. We make a significant portion of our sales of Oxandrin in the United States to major drug wholesalers. These sales are affected by fluctuations in the buying patterns of these wholesalers and the corresponding changes in inventory levels that they maintain. These changes may not reflect underlying prescriber demand and can be influenced by price concessions or announcements of price increases in future periods. We believe that Oxandrin sales in the second quarter of 2004 were negatively affected by reduced purchases by wholesalers as they reduced their inventory levels. Our Oxandrin sales in future periods may be further reduced if wholesalers continue to reduce inventories. This may be more likely if and when a generic version of Oxandrin is introduced. The Ross Products Division of Abbott Laboratories, or Ross, markets Oxandrin under a co-promotion agreement with us for the treatment of weight loss by residents of long-term care facilities. According to IMS Health data, the long-term care market represented approximately 17% of Oxandrin wholesaler to end-user sales in 2004, 16% in 2003 and 14% in 2002. Prescriptions in the long-term care market decreased by 9.3% in 2004 compared to 2003. To date, the average prescription written for the long-term care market involves a lower dose of Oxandrin than the average prescription written for the AIDS market. As a result, the rate of growth in Oxandrin sales may be less than the rate of growth in prescriptions. Ross has the right to terminate our Oxandrin co- promotion agreement at any time upon six months notice. If Ross elects to do so, our Oxandrin sales could be adversely affected until we are able to replace the Ross sales force. However, we may not be able to do so successfully. OUR RESULTS OF OPERATIONS HAVE BEEN ADVERSELY AFFECTED BY RECENT RETURNS OF OXANDRIN. FUTURE RETURNS OF OXANDRIN OR OTHER PRODUCTS COULD ALSO AFFECT OUR RESULTS OF OPERATIONS. Revenues from Oxandrin sales were reduced by approximately $2.9 million as a result of product returns and sales return allowances that we recorded in the first three months of 2005. As of March 31, 2005, $11.8 million of that amount remains as an allowance for future product returns. Future product returns in excess of our reserves would reduce our revenues and adversely affect our results of operations. WE OPERATE IN A HIGHLY COMPETITIVE MARKET. OUR COMPETITORS MAY DEVELOP ALTERNATIVE TECHNOLOGIES OR SAFER OR MORE EFFECTIVE PRODUCTS BEFORE WE ARE ABLE TO DO SO. The pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which we work continue to evolve at a rapid pace. Our future success will depend upon our ability to compete in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and we expect it to increase. Many of these competitors are substantially larger than we are and have substantially greater capital resources, research and development capabilities and experience and manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors. Rapid technological development may result in our product candidates in development becoming obsolete before we can begin marketing these product candidates or before we are able to recover a significant portion of the research, development and commercialization expenses incurred in the development of those products. For example, since our launch of Oxandrin in December 1995 through December 2000, a significant portion of Oxandrin sales has been for treatment of patients suffering from AIDS-related weight loss. These patients' need for Oxandrin may decrease as a result of the development of safer or more effective treatments, such as protease inhibitors. In fact, since January 2001, growth in the AIDS-related weight loss market has slowed substantially. As a result, we are working to expand the use of Oxandrin to treat involuntary weight loss associated with other conditions, such as cancer, burns, non-healing wounds and chronic obstructive pulmonary disease. However, we may not be successful in our efforts. Our products must compete with others to gain market acceptance and market share. An important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which 27 we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success. Our competitors may develop safer, more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we do. Our competitors' achievement of any of these goals could have a material adverse effect on our business. These companies also compete with us to attract qualified personnel and to attract third parties for acquisitions, joint ventures or other collaborations. MANUFACTURING OUR PRODUCTS REQUIRES US TO MEET STRINGENT QUALITY CONTROL STANDARDS. IN ADDITION, WE DEPEND ON THIRD PARTIES TO MANUFACTURE MANY OF OUR PRODUCTS, AND PLAN TO RELY ON THIRD PARTIES TO MANUFACTURE ANY FUTURE PRODUCTS. IF WE OR THESE THIRD PARTIES FAIL TO MEET APPLICABLE QUALITY REQUIREMENTS, OUR REVENUES AND PRODUCT DEVELOPMENT EFFORTS MAY BE MATERIALLY ADVERSELY AFFECTED. The manufacture of our products involves a number of technical steps and requires us or our third-party suppliers to meet stringent quality control specifications imposed by us or by governmental regulatory bodies. In the event of a natural disaster, equipment failure, strike, war or other difficulty, we or our suppliers may be unable to manufacture our products in a manner necessary to fulfill demand. Our inability to fulfill demand may permit our licensees and distributors to terminate their agreements, seek alternate suppliers or manufacture the products themselves. Further, we depend on third parties for the supply of many of our products. Failure of any third party to meet applicable regulatory requirements may adversely affect our profit margins or result in unforeseen delays or other problems beyond our control. For example, in July 2001, Bristol-Myers Squibb Company ceased manufacturing Delatestryl for us when it closed the manufacturing facility at which it produced Delatestryl. Risks involved with engaging third-party suppliers include: o reliance on the third party for regulatory compliance and quality assurance; o the possible breach of the manufacturing agreement by the third party or the inability of the third party to meet our production schedules because of factors beyond our control, such as shortages in qualified personnel; and o the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us. Delays or difficulties with our third party suppliers could significantly delay the manufacture of one or more of our products. If that occurs, we may have to seek alternative sources of supply, which we may not be able to obtain at commercially acceptable rates, if at all. If we cannot enter into alternative supply arrangements, we may have to abandon or sell product lines on unsatisfactory terms. Any of the foregoing may adversely affect our financial results, possibly materially. THE MANUFACTURE AND PACKAGING OF PHARMACEUTICAL PRODUCTS ARE SUBJECT TO THE REQUIREMENTS OF THE FDA AND SIMILAR FOREIGN REGULATORY BODIES. IF WE OR OUR THIRD-PARTY SUPPLIERS FAIL TO SATISFY THESE REQUIREMENTS, OUR BUSINESS OPERATIONS MAY BE MATERIALLY HARMED. The manufacturing process for pharmaceutical products is highly regulated. Manufacturing activities must be conducted in accordance with the FDA's current GMP, and comparable requirements of foreign regulatory bodies. For example, Rosemont is currently upgrading its manufacturing facility to obtain FDA approval to sell oral liquid formulations in the United States. Similarly, despite prior approvals of certain products manufactured at our Be'er Tuvia manufacturing facility, the FDA must reinspect that facility on a product-by- product basis before we can sell those additional products manufactured in that facility in the United States. Failure by us or our third-party suppliers to comply with applicable regulations, requirements, or guidelines could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. Other than by contract, we do not have control over the compliance by our third-party suppliers with these regulations and standards. 28 Changes in manufacturing processes or procedures, including changes in the location where a product is manufactured or changes in a third-party supplier may require prior FDA or other governmental review or approval or revalidation of the manufacturing process. This review or revalidation may be costly and time-consuming. Because there are a limited number of manufacturers that operate under applicable regulatory requirements, it may be difficult for us to change a third-party supplier if we were otherwise required to do so. Similarly, because of the applicable requirements, we may not be able to quickly and efficiently replace our manufacturing capacity if we are unable to manufacture our products at our facilities. WE HAVE LIMITED MARKETING CAPABILITY AND EXPERIENCE AND RELY ON THIRD PARTIES TO MARKET MANY OF OUR PRODUCTS. IF THESE THIRD PARTIES DO NOT MEET OUR PERFORMANCE EXPECTATIONS, OUR SALES MAY BE ADVERSELY AFFECTED. We depend on third party licensees to distribute and market many of our products, including Bio-Tropin, Biolon, Mircette, Silkis, Bio-Hep-B, Nuflexxa, Euflexxa and insulin products. The success of these arrangements depends on each licensee's own financial, competitive, marketing and strategic considerations, which include the relative advantages, including patent and proprietary positions, of alternate products being marketed or developed by others. Furthermore, the amounts of any payments to be received by us under our license agreements from sales of product by licensees depends on the extent to which our licensees devote resources to the development and commercialization of the products. Although we believe that our licensees have an economic motivation to commercialize their products, we have no effective control over the licensees' commercialization efforts. Turnover in our sales and marketing employees adversely affects our product sales, as it can take several months to find and train new sales and marketing employees. Competition for experienced sales and marketing employees is intense, and we compete with companies with greater resources and larger product lines. During 2003 we experienced significant difficulty in maintaining our sales and marketing force in the United States as a result of a number of factors, including the limited number of products we market in the United States, the expected introduction of generic versions of Oxandrin, our inability to in-license additional products for our sales and marketing team to sell and the uncertainty created by the proposed (and now abandoned) acquisition of us by Teva Pharmaceutical Industries Ltd. As a result, in November 2003, we engaged a contract sales organization to fill territories for which we had lost and could not replace sales and marketing employees. The successful marketing of our products will be dependent on the efforts of this contract sales organization, over which we will have little or no control. WE MAY NOT BE SUCCESSFUL IN ESTABLISHING ADDITIONAL STRATEGIC ALLIANCES, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS AND SERVICES. Part of our new strategic plan to focus on product development involves entering into new strategic alliances for the development and commercialization of products and services when we believe that doing so will maximize product value. For example, if the results of our ongoing Phase 2 clinical trial for Puricase are favorable, we may seek partners to commercialize Puricase, rather than continue to develop it on our own. We may also seek a collaborator for Prosaptide. If we are unsuccessful in reaching an agreement with a suitable collaborator for our current or future product candidates, we may fail to meet our business objectives for the applicable product or program. We face significant competition in seeking appropriate collaborators. Moreover, these alliance arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to establish additional strategic alliances or other alternative arrangements. The terms of any additional strategic alliances or other arrangements that we establish may not be favorable to us. Moreover, such strategic alliances or other arrangements may not be successful. The risks that we are likely to face in connection with any future strategic alliances include the following: o strategic alliance agreements are typically for fixed terms and are subject to termination under various circumstances, including, in many cases without cause; 29 o our collaborators may change the focus of their development and commercialization efforts; o we may rely on our collaborators to manufacture the products covered by our alliances; o the areas of research, development and commercialization that we may pursue, either alone or in collaboration with third parties, may be limited as a result of non-competition provisions of our strategic alliance agreements; and o our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with the products and services that are the subject of the alliance with us. OUR SALES DEPEND ON PAYMENT AND REIMBURSEMENT FROM THIRD-PARTY PAYORS, AND A REDUCTION IN THE PAYMENT OR REIMBURSEMENT RATE COULD RESULT IN DECREASED USE OR SALES OF OUR PRODUCTS. Most patients will rely on Medicare and Medicaid, private health insurers and other third party payors to pay for their medical needs, including any drugs we or our collaborators may market. If third party payors do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and prospects for profitability will suffer. The U.S. Congress recently enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug and Modernization Act of 2003. While the program established by this statute may increase demand for our products, if we participate in this program our prices will be negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than we might otherwise obtain. Non-Medicare third party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries. A primary trend in the U.S. healthcare industry is toward cost containment. In addition, in some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization of our products. Third-party payors are challenging the prices charged for medical products and services, and many third-party payors limit reimbursement for newly approved healthcare products. In particular, third-party payors may limit the indications for which they will reimburse patients who use any products we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us. Beginning in the second quarter of 2003, three states with budget crises - New York, California, and Florida - have eliminated or limited reimbursement of prescription drugs for HIV and AIDS, including Oxandrin, under their AIDS Drug Assistance Programs, which has adversely affected and is expected to continue to adversely affect sales of Oxandrin in those states. Efforts and discussions are ongoing with these state agencies to reverse these recent changes, but to date we have not been successful and we cannot predict whether we will be successful in the future. If we are not successful, our Oxandrin sales in this HIV/AIDS related involuntary weight loss market will continue to be adversely impacted. WE HAVE RECENTLY MADE SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM. IF WE FAIL TO ATTRACT AND KEEP SENIOR MANAGEMENT AND KEY SCIENTIFIC PERSONNEL, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCT CANDIDATES. We have recently made significant changes in our senior management team. On July 13, 2004, Christopher Clement, who had been our president and chief operating officer, became our president and chief executive officer. On May 28, 2004, Philip K. Yachmetz joined us as senior vice president and general counsel and on August 23, 2004, Lawrence A. Gyenes joined us as senior vice president, chief financial officer and treasurer. On March 30, 2005, David Fink joined us as senior vice president, commercial operations. Our success will depend in part on our ability to attract, retain and motivate highly qualified personnel and to maintain continuity and stability within our management team. 30 There is a great deal of competition from other companies and research and academic institutions for the limited number of scientists with expertise in the areas of our activities. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations and execute on our business plan. We generally do not enter into employment agreements with any of our scientific personnel. In addition, we do not maintain, and have no current intention of obtaining, "key man" life insurance on any of our employees. ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH FOREIGN OPERATIONS COULD ADVERSELY AFFECT OUR INTERNATIONAL SALES. We significantly expanded our international operations with the acquisition of Rosemont on September 30, 2002. Our net product sales outside the United States accounted for approximately 59% of our total product sales for the first three months of 2005 and 34% of our net product sales in 2004. Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally, including: o difficulties in staffing and managing foreign operations; o changes in a country's or region's political or economic conditions; o longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions; o trade protection measures and import or export licensing requirements; o less familiarity with business customs and practices; o the imposition of tariffs and import and export controls; o the impact of possible recessionary environments in economies outside the United States; o unexpected changes in regulatory requirements; o currency exchange rate fluctuations; o differing labor laws and changes in those laws; o differing protection of intellectual property and changes in that protection; o differing tax laws and changes in those laws; and o differing regulatory requirements and changes in those requirements. We do not currently engage in currency hedging transactions. However, depending on our sales from international operations and our perception as to currency volatility, we may choose to limit our exposure by the purchase of forward foreign exchange contracts or similar hedging strategies. The currency exchange strategy that we adopt may not be successful in avoiding exchange- related losses. In addition, the above-listed factors may cause a decline in our future international revenue and, consequently, may harm our business. We may not be able to sustain or increase revenue that we derive from international sources. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY DEVELOPMENTS IN ISRAEL. We currently conduct significant research, development and biologics production activities in Israel. These activities are affected by economic, military and political conditions in Israel and in the Middle East in general. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. These hostilities have caused security and economic problems in Israel. In addition, since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip. During the course of military operations, Israel's military reserves, which include a number of our employees and executives, may be called up, which could adversely affect our ability to conduct our business. Any major hostilities involving Israel could adversely affect our research, development and production operations. Ongoing or revived hostilities related to Israel could adversely affect us. For example, from the 31 fourth quarter of 2001 until September 2002, we were required to stop U.S. shipments of BioLon sterilized by our Israeli contractor because the FDA was unable to inspect the new manufacturing facility of this contractor as a result of the violence in Israel at the time. Additionally, in recent years the FDA has from time to time suspended inspections of manufacturing facilities in Israel as a result of violence in Israel. For example, the FDA cancelled its scheduled April 2003 visit to Israel in light of the then existing situation with Iraq. Any such action could delay FDA inspection of the Be'er Tuvia facility and, therefore, use of such facility to manufacture products for the U.S. market. On March 23, 2005, we announced that we had signed a definitive agreement to divest our global biologics manufacturing business to Ferring. WE MAY INCUR SUBSTANTIAL PRODUCT LIABILITY. The testing and marketing of our products entail an inherent risk of product liability and associated adverse publicity. Pharmaceutical product liability exposure could be extremely large and pose a material risk. Although we have so far been able to obtain indemnification from pharmaceutical companies commercializing our products, other companies with which we collaborate may not agree to do so. Furthermore, the companies that agree to these indemnification obligations may not have adequate financial resources to satisfy their obligation. To the extent we elect to test or market products independently, we will bear the risk of product liability directly. We currently have $20 million of product liability insurance coverage in place. We might not be able to maintain existing insurance or obtain additional insurance on acceptable terms, or at all. It is possible that a single product liability claim could exceed our insurance coverage limits, and multiple claims are possible. Any successful product liability claim made against us could substantially reduce or eliminate any stockholders' equity we may have and could materially harm our financial results. Product liability claims, regardless of their merits, could be costly and divert management's attention, and adversely affect our reputation and the demand for our products. THE ULTIMATE OUTCOME OF PENDING SECURITIES LITIGATION IS UNCERTAIN. After the restatement of our financial statements for the years ended December 31, 1999, 2000 and 2001 and the first two quarters of 2002, we and some of our current and former officers were named in a series of similar purported securities class action lawsuits. The complaints in theses actions allege violations of U.S. securities law through alleged material misrepresentations and omissions and seek an unspecified award of damages. In addition, members of our board of directors prior to June 2003 and Arthur Andersen LLP, our prior auditor, were named in derivative actions that claimed, among other things, that our directors breached their fiduciary duties by failing to implement and maintain an adequate internal accounting control system. While these derivative suits were dismissed by the court, we have received a letter on behalf of a purported stockholder demanding that we commence an action against most of our directors, certain former directors, Arthur Andersen and others who were responsible for the actions that resulted in the restatement of our financial statements. A special committee of our board of directors, consisting of directors who were not directors prior to our June 2003 annual meeting of stockholders, has investigated this demand and has determined that litigation relating to this matter should not proceed. We intend to contest the pending securities actions against us vigorously. However, an adverse decision in these cases could adversely affect us financially. We have referred these claims to our directors and officers insurance carrier, which has reserved its rights as to coverage with respect to these actions. RISKS RELATING TO INTELLECTUAL PROPERTY IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PROTECTION FOR THE INTELLECTUAL PROPERTY RELATING TO OUR TECHNOLOGY AND PRODUCTS, THE VALUE OF OUR TECHNOLOGY AND PRODUCTS WILL BE ADVERSELY AFFECTED. Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals is highly uncertain and 32 involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. IF WE ARE UNABLE TO PROTECT THE CONFIDENTIALITY OF OUR PROPRIETARY INFORMATION AND KNOW-HOW, THE VALUE OF OUR TECHNOLOGY AND PRODUCTS COULD BE ADVERSELY AFFECTED. In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If our confidential information or trade secrets become publicly known, they may lose their value to us. IF WE INFRINGE OR ARE ALLEGED TO INFRINGE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, IT WILL ADVERSELY AFFECT OUR BUSINESS. Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license from the third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office or in another patent office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could adversely affect our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time. 33 WE CURRENTLY ARE, AND IN THE FUTURE MAY BE, INVOLVED IN COSTLY LEGAL PROCEEDINGS TO ENFORCE OR PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR TO DEFEND AGAINST CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Litigation is inherently uncertain, and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings that we initiate to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, could be time-consuming and expensive to resolve and could divert our management's time and attention. Any intellectual property litigation also could force us to take specific actions, including: o cease selling products or undertaking processes that are claimed to be infringing a third party's intellectual property; o obtain licenses to make, use, sell, offer for sale or import the relevant technologies from the intellectual property's owner, which licenses may not be available on reasonable terms, or at all; o redesign those products or processes that are claimed to be infringing a third party's intellectual property; or o pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests. We are currently a party to a lawsuit regarding intellectual property with Barr Laboratories, relating to Mircette in the United States. This lawsuit, which is described in greater detail in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004 in the section titled "Item 3. Legal Proceedings", has diverted, and expected to continue to divert, the efforts and attention of our key management and technical personnel. We have incurred, and expect to continue to incur, substantial legal fees and expenses in connection with this lawsuit. As a result, this lawsuit, regardless of the eventual outcomes, has been, and will continue to be, costly and time-consuming. Furthermore, we could be involved in similar disputes or litigation with other third parties in the future. An adverse decision in any intellectual property litigation could have a material adverse effect on our business, results of operations and financial condition REGULATORY RISKS WE ARE SUBJECT TO STRINGENT GOVERNMENTAL REGULATION, AND OUR FAILURE TO COMPLY WITH APPLICABLE REGULATIONS COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS. Virtually all aspects of our business are subject to extensive regulation by numerous federal and state governmental authorities in the United States, such as the FDA, as well as by foreign countries where we manufacture or distribute our products. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of pharmaceutical products for human use. All of our products, manufacturing processes and facilities require governmental licensing or approval prior to commercial use. A pharmaceutical product cannot be marketed in the United States until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of an NDA or a BLA are substantial. The approval process applicable to products of the type being developed by us usually takes five to seven years from the commencement of human clinical trials and typically requires substantial expenditures. We and our collaborators may encounter significant delays or excessive costs in our or their respective efforts to secure necessary approvals or licenses. Before obtaining regulatory approval for the commercial sale of our products, we are required to conduct pre-clinical and clinical trials to demonstrate that the product is safe and efficacious for the treatment of the target indication. The timing of completion of clinical trials depends on a number of factors, many of which are outside our control. In addition, we and our collaborators may encounter delays or rejections based upon changes in the policies of regulatory authorities. The FDA and foreign regulatory authorities have substantial discretion to terminate clinical trials, require additional testing, delay or withhold registration and marketing approval, and mandate product withdrawals. 34 Failure to obtain requisite governmental approvals, or failure to obtain approvals of the scope requested, could delay or preclude us or our collaborators from marketing our products, could limit the commercial use of the products and could also allow competitors time to introduce competing products ahead of product introductions by us. Even after regulatory approval is obtained, use of the products could reveal side effects that, if serious, could result in suspension of existing approvals and delays in obtaining approvals in other jurisdictions. Regulation by governmental authorities in the United States and other countries is a significant factor affecting the timing of the commercialization of our products and our ongoing research and development activities. The timing of regulatory approvals is not within our control. To date, the length of time required to obtain regulatory approval of genetically engineered products has been significantly longer than expected, both for us and the biotechnology industry in general. We believe that these delays have in the past negatively impacted our ability to attract funding and that, as a result, the terms of such financings have been less favorable to us than they might otherwise have been had our product revenues provided sufficient funds to finance the large costs of taking a product from discovery through commercialization. As a result, we have had to license the commercialization of many of our products to third parties in exchange for research funding and royalties on product sales, resulting in lower revenues than if we had commercialized the products on our own. Failure to comply with applicable regulatory requirements can, among other things, result in significant fines or other sanctions, termination of clinical trials, suspension of regulatory approvals, product recalls, seizure of products, imposition of operating restrictions and criminal prosecutions. While we have developed and instituted a corporate compliance program based on current best practices, we cannot assure you that we or our employees have been or will be in compliance with all potentially applicable federal and state regulations. Further, FDA policy or similar policies of regulatory agencies in other countries may change and additional governmental requirements may be established that could prevent or delay regulatory approval of our products. We cannot predict what effect changes in regulations, enforcement positions, statutes or legal interpretation, when and if promulgated, adopted or enacted, may have on our business in the future. Changes could, among other things, require changes to manufacturing methods or facilities, expanded or different labeling, new approvals, the recall, replacement or discontinuance of certain products, additional record keeping and expanded scientific substantiation. These changes, or new legislation, could adversely affect our business. RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK OUR STOCK PRICE IS VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT. Our stock price is volatile. Since January 1, 2001, our common stock traded as high as $13.57 per share and as low as $1.77 per share. The market price of our common stock may be influenced by many factors, including: o our ability to successfully implement our new strategic direction; o announcements of technological innovations or new commercial products by us or our competitors; o announcements by us or our competitors of results in pre-clinical testing and clinical trials; o regulatory developments; o patent or proprietary rights developments; o public concern as to the safety or other implications of biotechnology products; o changes in our earnings estimates and recommendations by securities analysts; o period-to-period fluctuations in our financial results; and o general economic, industry and market conditions. 35 The volatility of our common stock imposes a greater risk of capital losses on our stockholders than would a less volatile stock. In addition, volatility makes it difficult to ascribe a stable valuation to a stockholder's holdings of our common stock. The stock market in general and the market for biotechnology companies in particular have also experienced significant price and volume fluctuations that are often unrelated to the operating performance of particular companies. In the past, following periods of volatility in the market price of the securities of biopharmaceutical companies, securities class action litigation has often been instituted against these companies. Such litigation would result in substantial costs and a diversion of management's attention and resources, which could adversely affect our business. WE EXPECT OUR QUARTERLY RESULTS TO FLUCTUATE, WHICH MAY CAUSE VOLATILITY IN OUR STOCK PRICE. Our revenues and expenses have in the past and may in the future continue to display significant variations. These variations may result from a variety of factors, including: o the amount and timing of product sales; o changing demand for our products; o our inability to provide adequate supply for our products; o changes in wholesaler buying patterns; o returns of expired product; o changes in government or private payor reimbursement policies for our products; o increased competition from new or existing products, including generic products; o the timing of the introduction of new products; o the timing and realization of milestone and other payments from licensees; o the timing and amount of expenses relating to research and development, product development and manufacturing activities; o the extent and timing of costs of obtaining, enforcing and defending intellectual property rights; and o any charges related to acquisitions. Because many of our expenses are fixed, particularly in the short-term, any decrease in revenues will adversely affect our earnings until revenues can be increased or expenses reduced. We also expect our revenues and earnings to be adversely affected once a generic version of Oxandrin is introduced. Because of fluctuations in revenues and expenses, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, which could cause the market price of our common stock to decline. We believe that period-to-period comparisons of our operating results are not a good indication of our future performance and stockholders should not rely on those comparisons to predict our future operating or share price performance. EFFECTING A CHANGE OF CONTROL OF OUR COMPANY COULD BE DIFFICULT, WHICH MAY DISCOURAGE OFFERS FOR SHARES OF OUR COMMON STOCK. Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may delay or prevent an attempt by a third party to acquire control of us. These provisions include the requirements of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits designated types of business combinations, including mergers, for a period of three years between us and any third party that owns 15% or more of our common stock. This provision does not apply if: o our board of directors approves of the transaction before the third party acquires 15% of our stock; o the third party acquires at least 85% of our stock at the time its ownership goes past the 15% level; or o our board of directors and two-thirds of the shares of our common stock not held by the third party vote in favor of the transaction. 36 We have also adopted a stockholder rights plan intended to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of our board of directors under specified circumstances, our other stockholders have the right to purchase shares of our common stock, or shares of the acquiring company, at a substantial discount to the public market price. As a result, the plan makes an acquisition much more costly to a potential acquirer. Our certificate of incorporation also authorizes us to issue up to 4 million shares of preferred stock in one or more different series with terms fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult for a person or group to acquire control of us. No shares of our preferred stock are currently outstanding. While our board of directors has no current intention or plan to issue any preferred stock, issuance of these shares could also be used as an anti-takeover device. WE HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING. THESE IDENTIFIED MATERIAL WEAKNESSES AND ANY OTHER MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING OR OUR FAILURE TO REMEDIATE SUCH MATERIAL WEAKNESSES COULD RESULT IN A MATERIAL MISSTATEMENT IN OUR FINANCIAL STATEMENTS NOT BEING PREVENTED OR DETECTED AND COULD AFFECT INVESTOR CONFIDENCE IN THE ACCURACY AND COMPLETENESS OF OUR FINANCIAL STATEMENTS AS WELL AS OUR STOCK PRICE. In conjunction with our review of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we have identified material weaknesses in our internal control over financial reporting relating to the Company's financial reporting process, internal communications and insufficient expertise with respect to accounting for income taxes and the application of complex revenue recognition standards. Material weaknesses in our internal control over financial reporting could result in material misstatements in our financial statements not being prevented or detected. We may experience difficulties or delays in completing remediation or may not be able to successfully remediate material weaknesses at all. Any material weakness or unsuccessful remediation could affect investor confidence in the accuracy and completeness of our financial statements, which in turn could harm our business and have an adverse effect on our stock price and our ability to raise additional funds. 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. To date our exposure to market risk has been limited. We do not currently hedge any market risk, although we may do so in the future. We do not hold or issue any derivative financial instruments for trading or other speculative purposes. Our obligations under our credit facility bear interest at floating rates. Therefore, changes in prevailing interest rates affect our interest expense. As of March 31, 2005, the outstanding principal amount of our credit facility was $3,889,000. A 100 basis point increase in market interest rates would result in an increase to our annual interest expense of $39,000 before giving effect to required monthly principal payments. Our material interest-bearing assets consist of cash and cash equivalents and short-term investments, including investments in commercial paper, time deposits and other debt instruments. Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates, and other market conditions. As a result of our operations in Israel and the United Kingdom, we are subject to currency exchange rate fluctuations that can affect our results of operations. Our results of operations for the first three months of 2004 and the first three months of 2005 benefited from the decrease in value of the U.S. dollar relative to the British pound sterling and to the euro. We manage our Israeli operations with the objective of protecting against any material net financial loss from the effects of Israeli inflation and currency devaluations on our non-U.S. dollar assets and liabilities, as measured in U.S. dollars. The cost of our operations in Israel, as expressed in U.S. dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a lagging basis, by a devaluation of the Israeli Shekel relative to the U.S. dollar. To date, BTG- Israel's revenues, as measured in Shekels, have consisted primarily of research funding from the Office of the Chief Scientist of the State of Israel, as well as product sales in Israel. To the extent that BTG-Israel's expenses as measured in Shekels exceed its revenues in Shekels, devaluations of the Shekel have been and will continue to be a benefit to our financial condition. However, should BTG-Israel's revenues in Shekels exceed its expenses in Shekels in any material respect, the devaluation of the Shekel will adversely affect our financial condition. Furthermore, to the extent the devaluation of the Shekel relative to the U.S. dollar does not substantially offset the increase in the costs of local goods and services in Israel, our financial results will be adversely affected as local expenses measured in U.S. dollars will increase. ITEM 4. CONTROLS AND PROCEDURES Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2005. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. As previously described in our Annual Report of Form 10-K for the fiscal year ended December 31, 2004, as amended, in connection with the preparation of our Annual Report on Form 10-K, deficiencies were identified that constituted material weaknesses in our internal controls. To remediate these and other 38 deficiencies in our internal controls, during the quarter ended March 31, 2005, we instituted the following additional procedures and controls: o hired a Director of Taxation to upgrade our tax expertise and improve the accuracy of future tax calculations; o hired a Chief Accounting Officer to upgrade our U.S. generally accepted accounting principles and SEC skill sets; o improved communications and initiated periodic reviews of material contracts by the accounting staff for completeness, accuracy and proper accounting treatment; o performed additional reviews of customer billing terms and determined actual delivery dates for shipments by our accounting staff; and o made changes in assigned roles and responsibilities within the accounting department to complement the hiring of additional accounting personnel and enhance our segregation of duties within Savient. No other change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 39 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 20, 2002, a purported stockholder class action was filed against us and three of our officers. The action is pending under the caption A.F.I.K. Holding SPRL v. Fass, No. 02-6048 (HAA) in the U.S. District Court for the District of New Jersey and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiff purports to represent a class of stockholders who purchased our shares between April 19, 1999 and August 2, 2002. The complaint asserts that certain of our financial statements were materially false and misleading because we restated our earnings and financial statements for the years ended 1999, 2000 and 2001, as described in our Current Report on Form 8-K dated, and our press release issued on August 2, 2002. Five nearly identical actions were filed in January and February 2003. In September 2003, the actions were consolidated and co-lead plaintiffs and co-lead counsel were appointed in accordance with the Private Securities Litigation Reform Act. The parties have entered into a stipulation which provides for the lead plaintiff to file an amended consolidated complaint. We have filed a motion to dismiss the action. Briefing in support of and in opposition to this motion has been completed but the court has not scheduled a hearing date. We cannot predict when a hearing on this motion will be scheduled, or, once such hearing has been held, when the court will render its decision. On October 27, 2003, we received a letter addressed to our board of directors from attorneys for a purported stockholder of the Company demanding that we commence legal proceedings to recover our damages against directors who served on our board immediately prior to our 2003 annual meeting of stockholders, Fulbright & Jaworski L.L.P., Arthur Andersen LLP, the partners of Arthur Andersen responsible for the audit of our financial statements for 1999, 2000 and 2001, as well as all other officers and directors responsible for the alleged wrongdoing. The letter asserted that some or all of these persons were responsible for the material overstatement of our assets, earnings and net worth, and that these persons caused us to disseminate false and misleading press releases and filings with the Securities and Exchange Commission. An advisory committee to our board of directors, consisting of directors who were not directors prior to our 2003 annual meeting of stockholders, investigated this demand and has determined that litigation should not proceed. We intend to vigorously defend against all allegations of wrongdoing. We have referred these claims to our directors' and officers' insurance carrier, which has reserved its rights as to coverage with respect to these actions. We are obligated under certain circumstances to indemnify certain customers for certain or all expenses incurred and damages suffered by them as a result of any infringement of third party patents. In addition, we are obligated to indemnify our officers and directors against all reasonable costs and expenses related to stockholder and other claims pertaining to actions taken in their capacity as officers and directors which are not covered by our directors and officers' insurance policy. These indemnification obligations are in the regular course of business and in most cases do not include a limit on maximum potential future payments, nor are there any recourse provisions or collateral that may offset the cost. As of March 31, 2005, we have not recorded a liability for any obligations arising as a result of these indemnification obligations. During the first quarter of 2005, we settled the outstanding patent litigation with Genentech which had been pending in Israel with respect to certain methods relating to genetically engineered products and human growth hormone. The claim was settled for a payment of $2.25 million which was fully reserved at the end of the year. In January 2005, we concluded a partial settlement of our patent infringement and patent interference litigation against Novo Nordisk, receiving $3 million for the resolution of our claims for lost profits and attorney's fees. An additional payment from Novo is due upon the conclusion of the appeal filed by Novo regarding an issue in the patent infringement opinion, regardless of the outcome of the appeal. ITEM 6. EXHIBITS (a) Exhibits The exhibits listed in the Exhibit Index are included in this report. 40 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAVIENT PHARMACEUTICALS, INC. (Registrant) By: /s/ Christopher Clement ----------------------------------------- Christopher Clement President and Chief Executive Officer (Principal Executive Officer) By: /s/ Lawrence A. Gyenes ----------------------------------------- Lawrence A. Gyenes Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated: May 10, 2005 41 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Certificate of Incorporation, as amended (1) 3.2 By-laws, as amended (2) 10.1 Employment agreement dated August 23, 2004, between Lawrence A. Gyenes and the Registrant (3) 31.1 Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended 31.2 Certification of the principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended 32.1 Statement pursuant to 18 U.S.C. ss.1350 32.2 Statement pursuant to 18 U.S.C. ss.1350
- --------------- (1) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. (2) Incorporated by reference from the Registrant's Current Report on Form 8-K, dated October 7, 1998. (3) Incorporated by reference from the Registrant's Current Report on Form 8-K, dated August 27, 2004. 42 EX-31.1 2 b406582ex31_1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Christopher Clement, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Savient Pharmaceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 10, 2005 /s/ Christopher Clement ------------------------------------------- Christopher Clement President and Chief Executive Officer EX-31.2 3 b406582ex31_2.txt CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, Lawrence A. Gyenes, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Savient Pharmaceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 10, 2005 /s/ Lawrence A. Gyenes ------------------------------------------- Lawrence A. Gyenes Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 4 b406582ex32_1.txt STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.1 STATEMENT PURSUANT TO 18 U.S.C. ss.1350 Pursuant to 18 U.S.C. ss.1350, the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Savient Pharmaceuticals, Inc. May 10, 2005 By: /s/ Christopher Clement ---------------------------------------- Christopher Clement President and Chief Executive Officer EX-32.2 5 b406582ex32_2.txt STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.2 STATEMENT PURSUANT TO 18 U.S.C. ss.1350 Pursuant to 18 U.S.C. ss.1350, the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Savient Pharmaceuticals, Inc. May 10, 2005 By: /s/ Lawrence A. Gyenes ---------------------------------------- Lawrence A. Gyenes Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----