e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 1-10269
Allergan, Inc.
(Exact name of Registrant as
Specified in its Charter)
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Delaware
(State of
Incorporation)
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95-1622442
(I.R.S. Employer
Identification No.)
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2525 Dupont Drive
Irvine, California
(Address of principal
executive offices)
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92612
(Zip Code)
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(714) 246-4500
(Registrants
telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
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Title of each class
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which each class registered
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Common Stock, $0.01 par value
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New York Stock Exchange
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Preferred Share Purchase Rights
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ.
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 þ No
o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one)
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ.
As of June 30, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $16,451 million based on the
closing sale price as reported on the New York Stock Exchange.
Common Stock outstanding as of February 23, 2007
153,755,944 shares (including 1,675,344 shares held in
treasury).
DOCUMENTS
INCORPORATED BY REFERENCE
Part III of this report incorporates certain information by
reference from the registrants proxy statement for the
annual meeting of stockholders to be held on May 1, 2007,
which proxy statement will be filed no later than 120 days
after the close of the registrants fiscal year ended
December 31, 2006.
Statements made by us in this report and in other reports and
statements released by us that are not historical facts
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21 of the Securities Exchange Act of 1934. These
forward-looking statements are necessarily estimates reflecting
the best judgment of our senior management based on our current
estimates, expectations, forecasts and projections and include
comments that express our current opinions about trends and
factors that may impact future operating results. Disclosures
that use words such as we believe,
anticipate, estimate,
intend, could, plan,
expect, project or the negative of
these, as well as similar expressions, are intended to identify
forward-looking
statements. These statements are not guarantees of future
performance and rely on a number of assumptions concerning
future events, many of which are outside of our control, and
involve known and unknown risks and uncertainties that could
cause our actual results, performance or achievements, or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking
statements. We discuss such risks, uncertainties and other
factors throughout this report and specifically under the
caption Risk Factors in Item 1A of Part I
of this report below. Any such forward-looking statements,
whether made in this report or elsewhere, should be considered
in the context of the various disclosures made by us about our
businesses including, without limitation, the risk factors
discussed below. Except as required under the federal securities
laws and the rules and regulations of the U.S. Securities
and Exchange Commission, we do not have any intention or
obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, changes
in assumptions, or otherwise.
PART I
General
Overview of our Business
We are a technology-driven, global health care company that
discovers, develops and commercializes specialty pharmaceutical
and medical device products for the ophthalmic, neurological,
medical aesthetics, medical dermatological, breast aesthetics,
obesity intervention and other specialty markets. We are a
pioneer in specialty pharmaceutical research, targeting products
and technologies related to specific disease areas such as
glaucoma, retinal disease, dry eye, psoriasis, acne and movement
disorders. Additionally, we discover, develop and market
medical devices, aesthetics-related pharmaceuticals and
over-the-counter
products. Within these areas, we are an innovative leader in
saline and silicone gel-filled breast implants, dermal facial
fillers and obesity intervention products, therapeutic and other
prescription products, and to a limited degree,
over-the-counter
products that are sold in more than 100 countries around the
world. We are also focusing research and development efforts on
new therapeutic areas, including gastroenterology, neuropathic
pain and genitourinary diseases.
In June 2002, we completed the spin-off of our optical medical
device business to our stockholders, forming Advanced Medical
Optics, Inc., or AMO, which is now an independent,
publicly-traded company. Our optical medical device business
consisted of two businesses: our ophthalmic surgical products
business and our contact lens care products business.
In March 2006, we completed the acquisition of Inamed
Corporation, a global healthcare manufacturer and marketer of
breast implants, a range of dermal products to correct facial
wrinkles, and bariatric medical devices for approximately
$3.3 billion, consisting of approximately $1.4 billion
in cash and 17,441,693 shares of our common stock.
In January 2007, we acquired all of the outstanding capital
stock of Groupe Cornéal Laboratoires, or Cornéal, a
medical device manufacturer and marketer, for an aggregate
purchase price of approximately $233.9 million, subject to
possible post-closing adjustments based on a final determination
of Cornéals debt and cash levels. The acquisition of
Cornéal expanded our marketing rights to
Juvédermtm
and a range of hyaluronic acid dermal fillers from the United
States, Canada and Australia to all countries worldwide and
provided us with control over the manufacturing process and
future development of
Juvédermtm.
Our Internet website address is www.allergan.com.
We make our periodic and current reports, together with
amendments to these reports, available on our Internet website,
free of charge, as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the
Securities and Exchange Commission. The information on our
Internet website is not incorporated by reference into this
Annual Report on
Form 10-K.
1
Operating
Segments
Following our spin-off of AMO and through the first fiscal
quarter of 2006, we operated our business on the basis of a
single reportable segment specialty pharmaceuticals.
Due to the Inamed acquisition, beginning in the second fiscal
quarter of 2006, we operated our business on the basis of two
reportable segments specialty pharmaceuticals and
medical devices. The specialty pharmaceuticals segment produces
a broad range of pharmaceutical products, including: ophthalmic
products for glaucoma therapy, ocular inflammation, infection,
allergy and dry eye; skin care products for acne, psoriasis and
other prescription and
over-the-counter
dermatological products; and
Botox®
for certain therapeutic and aesthetic indications. The medical
devices segment produces breast implants for aesthetic
augmentation and reconstructive surgery; facial aesthetics
products; and the
LAP-BAND®
Intragastric Banding System, or
LAP-BAND®
System, designed to treat severe and morbid obesity and the
BIBtm
BioEnterics®
Intragastric Balloon, or
BIBtm
System, for the treatment of obesity. We provide global
marketing strategy teams to coordinate the development and
execution of a consistent marketing strategy for our products in
all geographic regions that share similar distribution channels
and customers. The following table sets forth, for the periods
indicated, product net sales for each of our product lines
within our specialty pharmaceuticals segment, product net sales
for each of our product lines within our medical devices
segment, domestic and international sales as a percentage of
total product net sales within our specialty pharmaceuticals
segment and medical devices segment, and segment operating
income for our specialty pharmaceuticals segment and medical
devices segment:
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Year Ended December 31,
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2006
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2005
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2004
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(in millions)
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Specialty Pharmaceuticals Segment
Product Net Sales by Product Line
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Eye Care Pharmaceuticals
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$
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1,530.6
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$
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1,321.7
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$
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1,137.1
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Botox®/Neuromodulator
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982.2
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830.9
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705.1
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Skin Care Products
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125.7
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120.2
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103.4
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Other(1)
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46.4
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100.0
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Total Specialty Pharmaceuticals
Segment Product Net Sales
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$
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2,638.5
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$
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2,319.2
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$
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2,045.6
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Specialty Pharmaceuticals Segment
Product Net Sales
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Domestic
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67.9
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67.5
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69.1
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International
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32.1
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32.5
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30.9
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Medical Devices Segment Product
Net Sales by Product Line(3)
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Breast Aesthetics
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$
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177.2
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$
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$
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Obesity Intervention
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142.3
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Facial Aesthetics
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52.1
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Total Medical Devices Segment
Product Net Sales
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$
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371.6
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$
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$
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Medical Devices Segment Product
Net Sales(3)
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Domestic
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64.2
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%
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International
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35.8
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%
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%
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Specialty Pharmaceuticals Segment
Operating Income(2)
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$
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888.8
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$
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762.9
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$
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684.7
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Medical Devices Segment Operating
Income(2)(3)
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119.9
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Consolidated Long-Lived Assets
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Domestic
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$
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3,279.0
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$
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470.7
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$
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360.7
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International
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244.0
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199.3
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197.2
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(1) |
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Other sales primarily consist of sales to AMO pursuant to a
manufacturing and supply agreement entered into as part of the
AMO spin-off that terminated as scheduled in June 2005. |
2
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(2) |
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Management evaluates business segment performance on an
operating income basis exclusive of general and administrative
expenses and other indirect costs, restructuring charges,
in-process research and development expenses, amortization of
identifiable intangible assets related to the Inamed acquisition
and certain other adjustments, which are not allocated to our
business segments for performance assessment by our chief
operating decision maker. Other adjustments excluded from our
business segments for purposes of performance assessment
represent income or expenses that do not reflect, according to
established company-defined criteria, operating income or
expenses associated with our core business activities. |
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(3) |
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Due to the Inamed acquisition, beginning in the second quarter
of 2006, we operated our business on the basis of two reportable
segments specialty pharmaceuticals and medical
devices. |
We do not discretely allocate assets to our operating segments,
nor does our chief operating decision maker evaluate operating
segments using discrete asset information.
See Note 14, Business Segment Information, in
the notes to the consolidated financial statements listed under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules, for further information
concerning our foreign and domestic operations.
Specialty
Pharmaceuticals Segment
Eye
Care Pharmaceuticals Product Line
We develop, manufacture and market a broad range of prescription
and non-prescription products designed to treat diseases and
disorders of the eye, including glaucoma, dry eye, inflammation,
infection and allergy.
Glaucoma. The largest segment of the market
for ophthalmic prescription drugs is for the treatment of
glaucoma, a sight-threatening disease typically characterized by
elevated intraocular pressure leading to optic nerve damage.
Glaucoma is currently the worlds second leading cause of
blindness, and we estimate that over 60 million people
worldwide have glaucoma. According to IMS Health Inc., an
independent marketing research firm, our products for the
treatment of glaucoma, including
Alphagan®
(brimonide tartrate ophthalmic solution) 0.2%, or
Alphagan®,
Alphagan®
P (brimonide tartrate ophthalmic solution) 0.15%, or
Alphagan®
P,
Alphagan®
P 0.1% (brimonide tartrate ophthalmic solution) 0.1%, or
Alphagan®
P 0.1%, and
Lumigan®
(bimatoprost ophthalmic solution) 0.03%, captured approximately
17% of the worldwide glaucoma market for the first nine months
of 2006.
Lumigan®
is now our largest selling eye care product. According to IMS
Health, Inc.,
Lumigan®
was the third largest selling glaucoma product in the world for
the first nine months of 2006.
Our second largest selling eye care pharmaceutical products are
the ophthalmic solutions
Alphagan®,
Alphagan®
P, and
Alphagan®
P 0.1%.
Alphagan®,
Alphagan®
P and
Alphagan® P 0.1%
lower intraocular pressure by reducing aqueous humor production
and increasing uveoscleral outflow.
Alphagan® P
and
Alphagan®
P 0.1% are improved reformulations of
Alphagan®
containing brimonidine,
Alphagan®s
active ingredient, preserved with
Purite®.
We currently market
Alphagan®,
Alphagan®
P, and
Alphagan®
P 0.1% in over 70 countries worldwide.
Alphagan®,
Alphagan®
P, and
Alphagan®
P 0.1% combined were the fifth best selling glaucoma
products in the world for the first nine months of 2006,
according to IMS Health Inc. Combined sales of
Alphagan®,
Alphagan® P
and
Alphagan®
P 0.1%, and our glaucoma and ocular hypertension product
Combigantm
(brimonidine tartrate 0.2%/timolol maleate ophthalmic solution
0.5%), discussed below, represented approximately 10% of our
total consolidated product net sales in 2006, 12% of our total
consolidated product net sales in 2005 and 13% of our total
consolidated product net sales in 2004. The decline in the
percentage of our total net sales represented by sales of
Alphagan®,
Alphagan®
P,
Alphagan®
P 0.1% and
Combigantm
primarily resulted from the significant increase in our net
sales in 2006 as a result of the Inamed acquisition. In July
2002, based on the acceptance of
Alphagan®
P, we discontinued the U.S. distribution of
Alphagan®.
In May 2004, we entered into an exclusive licensing agreement
with Kyorin Pharmaceutical Co., Ltd., under which Kyorin became
responsible for the development and commercialization of
Alphagan®
and
Alphagan® P
in Japans ophthalmic specialty area. Kyorin
subsequently
sub-licensed
its rights under the agreement to Senju Pharmaceutical Co., Ltd.
Under the licensing agreement, Senju incurs associated costs,
makes clinical development and commercialization milestone
payments, and makes royalty-based payments on product sales. We
agreed to work collaboratively with Senju on overall product
strategy
3
and management.
Alphagan®
P 0.1% was launched in the U.S. market in the first
quarter of 2006. The marketing exclusivity period for
Alphagan®
P expired in the United States in September 2004 and the
marketing exclusivity period for
Alphagan®
P 0.1% will expire in August 2008, although we have a
number of patents covering the
Alphagan®
P and
Alphagan®
P 0.1% technology that extend to 2021 in the United
States and 2009 in Europe, with corresponding patents pending in
Europe. In May 2003, the FDA approved the first generic form of
Alphagan®.
Additionally, a generic form of
Alphagan®
is sold in a limited number of other countries, including
Canada, Mexico, India, Brazil, Colombia and Argentina. See
Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and
Contingencies, in the notes to the consolidated financial
statements listed under Item 15 of Part IV of this
report, Exhibits and Financial Statement Schedules,
for further information regarding litigation involving
Alphagan®.
Falcon Pharmaceuticals, Ltd., an affiliate of Alcon
Laboratories, Inc., attempted to obtain FDA approval for and to
launch a brimonidine product to compete with our
Alphagan®
P product. However, pursuant to a March 2006 settlement
with Alcon, Alcon agreed not to sell, offer for sale or
distribute its brimonidine product until September 30,
2009, or earlier if specified market conditions occur. The
primary market condition will have occurred if the extent to
which prescriptions of
Alphagan®
P have been converted to other brimonidine-containing
products we market has increased to a specified threshold.
Lumigan®
is a topical treatment indicated for the reduction of elevated
intraocular pressure in patients with glaucoma or ocular
hypertension who are either intolerant or insufficiently
responsive when treated with other intraocular pressure-lowering
medications. We currently sell
Lumigan®
in over 50 countries worldwide. Sales of
Lumigan®
represented approximately 11% of our total consolidated product
net sales in 2006, 12% of our total consolidated product net
sales in 2005 and 11% of our total consolidated product net
sales in 2004. The decline in the percentage of our total net
sales in 2006 compared to 2005 represented by sales of
Lumigan®
primarily resulted from the significant increase in our net
sales in 2006 as a result of the Inamed acquisition. In March
2002, the European Commission approved
Lumigan®
through its centralized procedure. In January 2004, the European
Unions Committee for Proprietary Medicinal Products
approved
Lumigan®
as a first-line therapy for the reduction of elevated
intraocular pressure in chronic open-angle glaucoma and ocular
hypertension. In June 2006, the FDA approved
Lumigan®
as a first-line therapy. In May 2004, we entered into an
exclusive licensing agreement with Senju Pharmaceutical Co.,
Ltd., under which Senju became responsible for the development
and commercialization of
Lumigan®
in Japan. Senju incurs associated costs, makes clinical
development and commercialization milestone payments and makes
royalty-based payments on product sales. We agreed to work
collaboratively with Senju on overall product strategy and
management. In November 2003, we filed a New Drug Application
with the FDA for a
Lumigan®
and timolol combination designed to treat glaucoma or ocular
hypertension. In August 2004, we announced that the FDA issued
an approvable letter regarding
Ganfort®,
the
Lumigan®
and timolol combination, setting out the conditions, including
additional clinical investigation, that we must meet in order to
obtain final FDA approval. In May 2006, we received a license
from the European Commission to market
Ganfort®
in the European Union.
In addition to our
Alphagan®
and
Lumigan®
products, we have developed the ophthalmic solution
Combigantm,
a brimonidine and timolol combination designed to treat glaucoma
and ocular hypertension (high pressure in the eye) in people who
are not responsive to treatment with only one medication and are
considered appropriate candidates for combination therapy.
Outside the United States,
Combigantm
is now approved and has been launched in over 30 countries
worldwide, including Canada, Australia, New Zealand, across
Latin America and Asia, as well as Europe. In September 2005, we
received a positive opinion from the European Union by way of
the Mutual Recognition Process for
Combigantm
in all twenty-one concerned member states in which we filed. In
March 2005, the FDA issued an approvable letter for our
brimonidine and timolol combination and in December 2006, the
FDA issued an approvable letter for
Combigantm.
The approvable letter outlines the remaining conditions that we
must meet in order to obtain FDA final marketing approval.
Ocular Surface
Disease. Restasis®
(cyclosporine ophthalmic emulsion) 0.05% is the first and
currently the only prescription therapy for the treatment of
chronic dry eye disease. Dry eye disease is a painful and
irritating condition involving abnormalities and deficiencies in
the tear film initiated by a variety of causes. The incidence of
dry eye disease increases markedly with age, after menopause in
women and in people with systemic diseases such as
Sjogrens syndrome and rheumatoid arthritis. Until the
approval of
Restasis®,
physicians used lubricating tears as a temporary measure to
provide palliative relief of the debilitating symptoms of dry
eye disease. We launched
4
Restasis®
in the United States in April 2003 under a license from
Novartis for the ophthalmic use of cyclosporine.
Restasis®
is currently approved in 26 countries. In April 2005, we
entered into a royalty buy-out agreement with Novartis related
to
Restasis®
and agreed to pay $110 million to Novartis in exchange
for Novartis worldwide rights and obligations, excluding
Japan, for technology, patents and products relating to the
topical ophthalmic use of cyclosporine A, the active ingredient
in
Restasis®.
Under the royalty buy-out agreement, we no longer make royalty
payments to Novartis in connection with our sales of
Restasis®.
In June 2001, we entered into a licensing, development and
marketing agreement with Inspire Pharmaceuticals, Inc. under
which we obtained an exclusive license to develop and
commercialize Inspires INS365 Ophthalmic, a treatment to
relieve the signs of dry eye disease by rehydrating conjunctival
mucosa and increasing non-lacrimal tear component production, in
exchange for our agreement to make royalty payments to Inspire
on sales of both
Restasis®
and, ultimately, INS365, and for Inspire to promote
Restasis®
in the United States. In December 2003, the FDA issued an
approvable letter for INS365 and also requested additional
clinical data. In February 2005, Inspire announced that INS365
failed to demonstrate statistically significant improvement as
compared to a placebo for the primary endpoint of the incidence
of corneal clearing. Inspire also announced that INS365 achieved
improvement compared to a placebo for a number of secondary
endpoints. Inspire filed a New Drug Application amendment with
the FDA in the second quarter of 2005. In December 2005, Inspire
announced that it had received a second approvable letter from
the FDA in connection with INS365.
Ophthalmic Inflammation. Our leading
ophthalmic anti-inflammatory product is
Acular®
(ketorolac ophthalmic solution) 0.5%.
Acular®
is a registered trademark of and is licensed from its developer,
Syntex (U.S.A.) Inc., a business unit of Hoffmann-LaRoche Inc.
Acular®
is indicated for the temporary relief of itch associated with
seasonal allergic conjunctivitis, the inflammation of the mucus
membrane that lines the inner surface of the eyelids, and for
the treatment of post-operative inflammation in patients who
have undergone cataract extraction. Acular
PF®
was the first, and currently remains the only, unit-dose,
preservative-free topical non-steroidal anti-inflammatory drug,
or NSAID, in the United States. Acular
PF®
is indicated for the reduction of ocular pain and photophobia
following incisional refractive surgery. The
Acular®
franchise was the highest selling ophthalmic NSAID in the world
during the first nine months of 2006, according to IMS Health,
Inc. Our Acular
LS®
(ketorolac ophthalmic solution) 0.4% product is a version of
Acular®
that has been reformulated for the reduction of ocular pain,
burning and stinging following corneal refractive surgery.
Our product Pred
Forte®
remains a leading topical steroid worldwide based on 2006
sales. Pred
Forte®
has no patent protection or marketing exclusivity and faces
generic competition.
Ophthalmic Infection. Our
Ocuflox®/Oflox®/Exocin®
ophthalmic solution is a leading product in the ophthalmic
anti-infective market.
Ocuflox®
has no patent protection or marketing exclusivity and faces
generic competition.
We license
Zymar®
(gatifloxacin ophthalmic solution) 0.3% from Kyorin
Pharmaceutical Co. Ltd., and have worldwide ophthalmic rights
excluding Japan, Korea, Taiwan and certain other countries in
Asia. We launched
Zymar®
in the United States in April 2003.
Zymar®
is a fourth-generation fluoroquinolone for the treatment of
bacterial conjunctivitis and is currently approved in 21
countries. Laboratory studies have shown that
Zymar®
kills the most common bacteria that cause eye infections as
well as specific resistant bacteria. According to Verispan, an
independent research firm,
Zymar®
was the number one ophthalmic anti-infective prescribed by
ophthalmologists in the United States in 2006.
Zymar®
was the third best selling ophthalmic anti-infective product
in the world (and second in the United States) for the first
nine months of 2006, according to IMS Health, Inc.
Allergy. The allergy market is, by its nature,
a seasonal market, peaking during the spring months. We market
Alocril®
ophthalmic solution for the treatment of itch associated
with allergic conjunctivitis. We license
Alocril®
from Fisons Ltd., now a business unit of Sanofi-Aventis,
and hold worldwide ophthalmic rights excluding Japan.
Alocril®
is approved in the United States, Canada and Mexico. We
license
Elestat®
from Boehringer Ingelheim AG, and hold worldwide ophthalmic
rights excluding Japan. We co-promote
Elestat®
(epinastine ophthalmic solution) 0.05% in the United States
under an agreement with Inspire within the ophthalmic specialty
area and to allergists.
Elestat®
is used for the prevention of itching associated with
allergic conjunctivitis. Under the terms of our agreement with
Inspire, Inspire provided us with an up-front payment and we
make payments to Inspire based on
Elestat®
net sales. In addition, the agreement reduced our existing
royalty payment to Inspire for
Restasis®.
Inspire
5
has primary responsibility for selling and marketing activities
in the United States related to
Elestat®.
We have retained all international marketing and selling rights.
We launched
Elestat®
in Europe under the brand names
Relestat®
and
Purivist®
during 2004, and Inspire launched
Elestat®
in the United States during 2004.
Elestat®/Relestat®/Purivist®
is currently approved in 38 countries and was the third best
selling ophthalmic allergy product in the world (and second in
the United States) for the first nine months of 2006, according
to IMS Health, Inc.
Neuromodulator
Our neuromodulator product,
Botox®
(Botulinum Toxin Type A), is used for a wide variety of
treatments that continue to expand.
Botox®
is accepted in many global regions as the standard therapy for
indications ranging from therapeutic neuromuscular disorders and
related pain to cosmetic facial aesthetics. There are currently
in excess of 100 therapeutic and aesthetic uses for
Botox®
reported in the medical literature. The versatility of
Botox®
is based on its localized treatment effect and approximately
18 years of safety experience in large patient groups.
Marketed as
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®,
depending on the indication and country of approval, the product
is currently approved in approximately 75 countries for up to 20
unique indications. Sales of
Botox®
represented approximately 33%, 36% and 34% of our total
consolidated product net sales in 2006, 2005 and 2004,
respectively.
Botox®. Botox®
is used therapeutically for the treatment of certain
neuromuscular disorders which are characterized by involuntary
muscle contractions or spasms. The approved therapeutic
indications for
Botox®
in the United States are as follows:
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blepharospasm, the uncontrollable contraction of the eyelid
muscles which can force the eye closed and result in functional
blindness;
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strabismus, or misalignment of the eyes, in people 12 years
of age and over;
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cervical dystonia, or sustained contractions or spasms of
muscles in the shoulders or neck in adults, along with
associated pain; and
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severe primary axillary hyperhidrosis (underarm sweating) that
is inadequately managed with topical agents.
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In many countries outside of the United States,
Botox®
is also approved for treating hemifacial spasm, pediatric
cerebral palsy, and post-stroke focal spasticity. We are
currently pursuing approvals for
Botox®
in the United States and Europe for new indications,
including headache, post-stroke focal spasticity, overactive
bladder and benign prostatic hypertrophy. In April 2005, we
announced plans to move forward with a large Phase III
clinical trial program to investigate the safety and efficacy of
Botox®
as a prophylactic therapy in a subset of migraine patients
with chronic daily headache, and in May 2005, we reached
agreement with the FDA to enter Phase III clinical trials
for
Botox®
to treat neurogenic overactive bladder and Phase II
clinical trials for
Botox®
to treat idiopathic overactive bladder. In December 2005, we
initiated Phase II clinical trials for
Botox®
to treat benign prostatic hypertrophy.
Botox®
Cosmetic. The FDA has approved
Botox®
for the temporary improvement in the appearance of moderate to
severe glabellar lines in adult men and women age 65 or
younger. Referred to as
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®,
depending on the country of approval, this product is designed
to relax wrinkle-causing muscles to smooth the deep, persistent,
glabellar lines between the brow that often develop during the
aging process. Currently, over 50 countries have approved the
glabellar line indication for
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®.
Health Canada, the Canadian national regulatory body, also
approved
Botox®
Cosmetic for the treatment of upper facial lines in November
2005. In 2005, we extended our previously launched
direct-to-consumer
marketing campaigns in Canada and the United States. These
campaigns included television commercials and print advertising
aimed at consumers and aesthetic specialty physicians. We
continue to sponsor training of aesthetic specialty physicians
in approved countries to further expand the base of qualified
physicians using
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®.
With the integration of the former Inamed medical products into
our TOTAL FACIAL
REJUVENATIONtm
portfolio, we now have a worldwide leadership position in the
facial aesthetic market.
In October 2005, we entered into a long-term arrangement with
GlaxoSmithKline (GSK) under which GSK agreed to develop and
promote
Botox®
in Japan and China and we agreed to co-promote GSKs
products ImitrexSTATdose
System®
(sumatriptan succinate) and
Amerge®
(naratriptan hydrochloride) in the United
6
States. Under the terms of the arrangement, we licensed to GSK
all clinical development and commercial rights to
Botox®
in Japan and China, markets in which GSK has extensive
commercial, regulatory and research and development resources,
as well as expertise in neurology. We received an up-front
payment and receive payments for research and development and
marketing support, and royalties on GSKs Japan and China
Botox®
sales. We also manufacture
Botox®
for GSK as part of a long-term supply agreement and
collaboratively support GSK on new clinical developments for
Botox®
and strategic marketing in those markets. In addition, we
obtained the right to co-promote GSKs products
ImitrexSTATdose
System®
and
Amerge®
in the United States to neurologists for a
5-year
period. ImitrexSTATdose
System®
is approved for the treatment of acute migraine in adults and
for the acute treatment of cluster headache episodes.
Amerge®
tablets are approved for the acute treatment of migraine attacks
with and without an aura in adults. Our agreement with GSK
provides that we receive fixed and performance payments from GSK
in connection with our co-promotion of ImitrexSTATdose
System®
and
Amerge®.
Skin
Care Product Line
Our skin care product line focuses on the psoriasis and acne
markets, particularly in the United States and Canada.
Tazarotene Products. We market
Tazorac®
gel in the United States for the treatment of plaque psoriasis,
a chronic skin disease characterized by dry red patches, and
acne. We also market a cream formulation of
Tazorac®
in the United States for the treatment of psoriasis and the
topical treatment of acne. We have also engaged Pierre Fabre
Dermatologie as our promotion partner for
Zorac®
in certain parts of Europe, the Middle East and Africa.
Our product
Avage®
is a tazarotene cream indicated for the treatment of facial fine
wrinkling, mottled hypo- and hyperpigmentation (blotchy skin
discoloration) and benign facial lentigines (flat patches of
skin discoloration) in patients using a comprehensive skin care
and sunlight avoidance program. We launched
Avage®
in the United States in January 2003.
In January 2005, we launched
Prevagetm
cream, containing 1% idebenone, a clinically tested antioxidant
designed to reduce the appearance of fine lines and wrinkles, as
well as provide protection against environmental factors,
including sun damage, air pollution and cigarette smoke. In May
2005, we entered into an exclusive
co-marketing
agreement with Elizabeth Arden, Inc. to globally market a new
formulation of
Prevagetm
containing 0.5% idebenone, to leading department stores and
other prestige cosmetic retailers. In September 2005, we began
marketing
Prevagetm
MD, containing 1% idebenone, to physicians.
Azelex®. Azelex®
cream is approved by the FDA for the topical treatment of
mild to moderate inflammatory acne vulgaris and is licensed from
Intendis GmbH, a division of Bayer Schering Pharma AG. We market
Azelex®
cream primarily in the United States.
M.D.
Forte®. We
develop and market glycolic acid-based skin care products. We
market our M.D.
Forte®
line of alpha hydroxy acid products to physicians.
Finacea®. Through
a collaboration with Intendis GmbH, we jointly
promote Intendis topical rosacea treatment,
Finacea®
(azelaic acid gel 15%).
Finacea®
is approved by the FDA for the treatment of rosacea and holds a
leading position in the market.
Medical
Devices Segment
Breast
Aesthetics
We develop, manufacture, and market a diverse line of breast
implants, consisting of a variety of shapes, sizes, and
textures. Our breast implants consist of a silicone elastomer
shell filled with either a saline solution or silicone gel with
varying degrees of cohesivity. This shell can consist of either
a smooth or textured surface. We market our breast implants
under the trade names
McGhan®
and
CUI®
and the trademarks
BioCell®,
MicroCell®,
BioDimensionaltm,
and
Inamed®.
Our breast implants are available in a large number of
variations to meet customers preferences and needs.
7
Saline-Filled Breast Implants. We sell
saline-filled breast implants in the United States and
internationally for use in breast augmentation for cosmetic or
revision reasons and for reconstructive surgery. The
U.S. market is the primary consumer of our saline-filled
breast implants.
Silicone Gel-Filled Breast Implants. We sell
silicone gel-filled breast implants primarily in Europe, the
Middle East, Latin America, Australia, New Zealand and Asia.
More than 90% of our breast implant sales outside the United
States and Canada are silicone gel-filled. There are a variety
of silicone gel-filled breast implants available in these
markets based upon the degrees of cohesivity of the silicone
gel-filler material. In October 2006, Health Canada granted us a
medical device license with conditions to sell and market
silicone gel-filled breast implants, including our round, smooth
and textured silicone gel-filled breast implants and Style 410
shaped and textured implants, for use in breast augmentation,
reconstruction and revision surgery. In November 2006, the FDA
approved our round silicone gel-filled breast implants for
breast augmentation. FDA approval was conditioned on our
continuation of our core clinical study and our pre-clinical
studies, our completion of a focus group study regarding format
and content of patient labeling, our distribution of labeling to
physicians and patients within sufficient time prior to surgery
to fully consider the risks associated with breast implant
surgery, our termination of new enrollment into an adjunct study
and continuation of
follow-up
for currently enrolled patients and our initiation of a
10-year
prospective study, of 40,000 patients with silicone
gel-filled implants and 20,000 patients with
saline-filled
implants, to further validate the long-term safety and
effectiveness of silicone gel-filled breast implants.
Tissue Expanders. We sell a line of tissue
expanders for breast reconstruction and as an alternative to
skin grafting to cover burn scars and correct birth defects.
Facial
Aesthetics
We develop, manufacture, and market dermal filler products
designed to improve facial appearance by smoothing wrinkles and
scars and enhancing the definition of facial structure. Our
primary facial aesthetics products are
Zyderm®
and
Zyplast®,
CosmoDerm®
and
CosmoPlast®,
the
Juvédermtm/Hydrafilltm/Surgiderm®
product range, the
Hylaform®
product range and
Captiquetm.
Zyderm®
and
Zyplast®. Zyderm®
and
Zyplast®
dermal fillers are injectable formulations of bovine collagen.
Zyderm®
implants are formulated for people with fine line wrinkles or
superficial facial contour defects. These implants are
particularly effective in smoothing delicate frown and smile
lines, and fine creases that develop at the corners of the eyes
and above and below the lips, and can also help correct certain
shallow scars.
Zyplast®
implants are designed to treat deeper depressions and can be
used for more pronounced contour problems, such as deeper scars,
lines and furrows, and for areas upon which more force is
exerted, such as the corners of the mouth. The implants take on
the texture and appearance of human tissue and are subject to
similar stresses and aging processes. Consequently, supplemental
treatments are necessary to maintain the desired result.
Zyderm®
and
Zyplast®
implants require a skin test, with a requisite
30-day
period to observe the possibility of allergic reaction in the
recipient. Both of these products are formulated with Lidocaine,
an anesthetic, to alleviate pain during injection.
Zyderm®
and
Zyplast®
are approved for marketing in the United States and Europe.
CosmoDerm®
and
CosmoPlast®. CosmoDerm®
and
CosmoPlast®
dermal fillers are a line of injectable human skin-cell derived
collagen products that we license from Smith & Nephew,
Inc.
CosmoDerm®
implants are formulated for people with fine line wrinkles or
superficial facial contour defects. These implants are
particularly effective in smoothing delicate frown and smile
lines and fine creases that develop at the corners of the eyes
and above and below the lips and can also help correct certain
shallow scars.
CosmoPlast®
implants are designed to treat deeper depressions and can be
used for more pronounced contour problems, such as deeper scars,
lines and furrows, and for areas upon which more force is
exerted, such as the corners of the mouth. The implants take on
the texture and appearance of human tissue and are subject to
similar stresses and aging processes. Consequently, supplemental
treatments are necessary to maintain the desired result.
CosmoDerm®
and
CosmoPlast®
implants do not require a skin test pre-treatment. Both of these
products are formulated with Lidocaine, an anesthetic, to
alleviate pain during injection. We received FDA approval for
CosmoDerm®
and
CosmoPlast®
in March 2003 and received approval from Health Canada in
December 2002. We received approval to market
CosmoDerm®
and
CosmoPlast®
in a number of European countries in 2004.
8
In January 2007, our Board of Directors approved a plan to
restructure and eventually sell or close our collagen
manufacturing facility in Fremont, California that we acquired
in the Inamed acquisition. This plan is the result of a
reduction in anticipated future market demand for human and
bovine collagen products. In connection with the restructuring
and eventual sale or closure of the facility, we estimate that
total pre-tax charges for severance, lease termination and
contract settlement costs will be between $6.0 million and
$8.0 million, all of which are expected to be cash
expenditures. The foregoing estimates are based on assumptions
relating to, among other things, a reduction of approximately 69
positions, consisting principally of manufacturing positions at
our facility. We expect to begin to record these costs in the
first quarter of 2007 and expect to continue to incur them up
through and including the fourth quarter of 2008. Prior to any
closure of our facility, we intend to manufacture a sufficient
quantity of inventories of our collagen products to meet
estimated market demand through 2010.
Hylaform®
Gel. Hylaform®
gel dermal fillers are an avian-based, cross-linked hyaluronic
acid injectable product for the treatment of facial wrinkles and
scars, which are approved for sale and marketing in Canada,
Europe and the United States. We license
Hylaform®
from Genzyme Corporation.
Hylaform®
does not require a skin test, so patients can be treated
immediately. In 2001, two new formulations of
Hylaform®
gel were developed:
Hylaform®
FineLine, designed especially for people with fine line wrinkles
or superficial facial contour defects, and
Hylaform®
Plus, formulated for treating deeper depressions and more
pronounced contour problems such as deeper scars, lines, and
furrows. We launched
Hylaform®
FineLine and
Hylaform®
Plus in Europe in September 2001. In December 2001, Health
Canadas Therapeutic Products Programme, or HCTPP, granted
Genzyme Corporation a Medical Device License for
Hylaform®
gel. In January 2002, the HCTPP approved both
Hylaform®
Plus and
Hylaform®
FineLine. In April 2004, Inamed received approval from the FDA
to market and sell Hylaform gel in the United States. In October
2004, the FDA granted market approval for
Hylaform®
Plus in the United States.
Juvédermtm/Hydrafilltm. Our
product
Juvédermtm
is a non-animal based, cross-linked hyaluronic acid-based dermal
filler, and is indicated for wrinkle correction, facial
contouring and lip enhancements. This technology is based on the
delivery of a homogeneous gel-based hyaluronic acid, as opposed
to a particle
gel-based
hyaluronic acid technology, which is used in other products.
Inamed had obtained the rights to develop, distribute and market
Juvédermtm
dermal fillers (including product lines and extensions) from
Groupe Cornéal Laboratoires, or Cornéal, in January
2004. Inameds rights were exclusive in the United States,
Canada, and Australia, and non-exclusive in France, Spain, the
United Kingdom, Italy, Germany and Switzerland. In these
European countries,
Juvédermtm
is marketed under the trademark
Hydrafilltm.
Juvédermtm
and
Hydrafilltm
are each currently available in five formulations for soft
tissue augmentation of varying severities of wrinkles. Through
our January 2007 acquisition of Cornéal, we expanded our
marketing rights to
Juvédermtm,
Surgiderm®,
Voluma®
and other hyaluronic acid dermal fillers to all countries
worldwide and obtained control over the manufacturing process
and future development of
Juvédermtm
and the companys R&D pipeline.
Juvédermtm
products are currently approved or registered in over 34
countries, including all major European markets. In these
markets,
Juvédermtm
does not require a skin test pre-treatment. Distribution of
Juvédermtm
in Canada and key European markets commenced in 2004. In June
2006, the FDA approved the
Juvédermtm
dermal filler family of products and in September 2006, we
launched the next-generation hyaluronic acid-based
dermal filler products,
Juvédermtm
Ultra and
Juvédermtm
Ultra Plus through an experience trial with a group of
physicians with expertise in facial aesthetics, in advance of
U.S. product availability, which commenced in January 2007.
Captiquetm. Captiquetm
dermal filler is a non-animal stabilized hyaluronic acid
injectable product indicated for the correction of moderate to
severe facial wrinkles and scars. We license
Captiquetm
from Genzyme Corporation.
Captiquetm
does not require a skin test, so patients can be treated
immediately. We commenced sales of the product in the United
States in January 2005.
Obesity
Intervention
We develop, manufacture, and market several devices for the
treatment of obesity. Our principal product in this market area,
the
LAP-BAND®
System, is designed to provide minimally invasive long-term
treatment of severe obesity and is used as an alternative to
more invasive procedures such as gastric bypass surgery or
stomach stapling. The
LAP-BAND®
System is an adjustable silicone elastomer band which is
laparoscopically placed around the upper part of the stomach
through a small incision, creating a small pouch at the top of
the stomach. This new pouch fills faster to make the patient
feel full sooner, and regulates the passage of food to retain
that feeling of fullness for
9
longer periods of time. Unlike other obesity surgeries that are
permanent, the
LAP-BAND®
System procedure is adjustable and reversible.
The
LAP-BAND®
System has achieved widespread acceptance in the United States,
Europe, Australia, Latin America, the Middle East, and other
countries around the world. In 2001, the FDA approved the
LAP-BAND®
System for the treatment of severe obesity in adults who have
failed more conservative weight reduction alternatives. In April
2004, Inamed introduced the LAP-BAND
VG®,
which was approved by the FDA in January 2004. The LAP-BAND
VG®
meets the needs of a wider range of patients, allowing us to
serve a broader market. The larger band circumference of the
LAP-BAND
VG®
serves those who are physically larger, have thicker gastric
walls, or have substantial internal fat. Over 300,000
LAP-BAND®
System units have been sold worldwide since 1993.
We also sell the
BIBtm
System, which is a short-term weight loss therapy designed for
use with moderately obese patients. Broadly approved around the
world outside the United States, the
BIBtm
System includes a silicone elastomer balloon that is filled with
saline after transoral insertion into the patients stomach
to reduce stomach capacity and create an earlier sensation of
fullness. The
BIBtm
System is removed endoscopically within six months of being
implanted, and works best when used in conjunction with a
comprehensive diet and exercise program.
Other
Products
Contigen®
is our collagen product used for treatment of urinary
incontinence due to intrinsic sphincter deficiency. C. R. Bard,
Inc. licenses from us the exclusive worldwide marketing and
distribution rights to
Contigen®.
We also provide other collagen products for use by other medical
manufacturers.
International
Operations
Our international sales have represented 32.6%, 32.5% and 30.9%
of our total consolidated product net sales for the years ended
December 31, 2006, 2005 and 2004, respectively. Our
products are sold in over 100 countries. Marketing activities
are coordinated on a worldwide basis, and resident management
teams provide leadership and infrastructure for
customer-focused, rapid introduction of new products in the
local markets.
Sales and
Marketing
We maintain a global marketing team, as well as regional sales
and marketing organizations, in the promotion and sale of
products from all of our segments. We also engage contract sales
organizations to promote certain products. Our sales efforts and
promotional activities are primarily aimed at eye care
professionals, neurologists, plastic and reconstructive
surgeons, bariatric physicians and dermatologists who use,
prescribe and recommend our products. We advertise in
professional journals, participate in medical meetings and
utilize direct mail programs to provide descriptive product
literature and scientific information to specialists in the
ophthalmic, dermatological, medical aesthetics, bariatric,
neurology and movement disorder fields. We have developed
training modules and seminars to update physicians regarding
evolving technology in our products. In 2006, we also utilized
direct-to-consumer
advertising for
Botox®
Cosmetic,
Botox®
for hyperhidrosis,
Restasis®,
Refresh®
artificial tears and the
LAP-BAND®
System.
Our products are sold to drug wholesalers, independent and chain
drug stores, pharmacies, commercial optical chains, opticians,
mass merchandisers, food stores, hospitals, ambulatory surgery
centers and medical practitioners, including ophthalmologists,
neurologists, dermatologists, bariatric physicians,
pediatricians, and plastic and reconstructive surgeons. As of
December 31, 2006, we employed approximately 2,000 sales
representatives throughout the world. We also utilize
distributors for our products in smaller international markets.
U.S. sales, including manufacturing operations, represented
67.4%, 67.5% and 69.1% of our total consolidated product net
sales in 2006, 2005 and 2004, respectively. Sales to Cardinal
Healthcare for the years ended December 31, 2006, 2005 and
2004 were 13.0%, 14.9% and 14.1% respectively, of our total
consolidated product net sales. Sales to McKesson Drug Company
for the years ended December 31, 2006, 2005 and 2004 were
13.0%, 14.2% and 13.0% respectively, of our total consolidated
product net sales. No other country, or single customer,
generated over 10% of our total product net sales.
10
We sell our products directly and through independent
distributors in approximately 70 countries worldwide. We
supplement our marketing efforts with appearances at medical
conventions, advertisements in trade journals, sales brochures,
and national media. In addition, we sponsor symposia and
educational programs to familiarize physicians with the leading
techniques and methods of using our products.
Research
and Development
Our global research and development efforts currently focus on
eye care, skin care, neuromodulators, medical aesthetics,
obesity intervention and neurology. We also have development
programs in genitourinary diseases and gastroenterology. We have
a fully integrated research and development organization with
in-house discovery programs, including medicinal chemistry, high
throughput screening, and biological sciences. We supplement our
own research and development activities with our commitment to
identify and obtain new technologies through in-licensing,
research collaborations, joint ventures and acquisitions.
As of December 31, 2006, we had approximately 1,200
employees involved in our research and development efforts. Our
research and development expenditures for 2006, 2005 and 2004
were approximately $1,055.5 million, $388.3 million
and $342.9 million, respectively. Excluding in-process
research and development expenditures related to company
acquisitions, we have increased our annual investment in
research and development by over $243 million in the past
five years. In 2004, we completed construction of a new
$75 million research and development facility in Irvine,
California, which provides us with approximately
175,000 square feet of additional laboratory space. In
2005, we completed construction of a new biologics facility on
our Irvine, California campus at an aggregate cost of
approximately $50 million. Both facilities are occupied and
in use.
Our strategy is to develop innovative products to address unmet
medical needs. Our top priorities include furthering our
leadership in medical aesthetics and neuromodulators,
identifying new potential compounds for sight-threatening
diseases such as glaucoma, age-related macular degeneration and
other retinal disorders, and developing novel therapies for dry
eye, pain, gastroenterology, and genitourinary diseases. We plan
to continue to build on our strong market positions in medical
aesthetics, ophthalmic pharmaceuticals, medical dermatology and
neurology, and to explore new therapeutic areas that are
consistent with our specialty healthcare focus.
Our research and development efforts for the ophthalmic
pharmaceuticals business focus primarily on new therapeutic
products for retinal disease, glaucoma and dry eye. As part of
our focus on diseases of the retina, we acquired Oculex
Pharmaceuticals, Inc. in 2003. With this acquisition, we
obtained a novel posterior segment drug delivery system for use
with compounds to treat diseases, including age-related macular
degeneration and other retinal disorders. We have subsequently
begun Phase III studies for
Posurdex®,
dexamethasone delivered in a bioerodable implant for macular
edema and retinal vein occlusion. In March 2005, we entered into
an exclusive licensing agreement with Sanwa Kagaku Kenkyusho
Co., Ltd. (Sanwa) to develop and commercialize
Posurdex®
for the ophthalmic specialty market in Japan. Under the terms of
the agreement, Sanwa is responsible for the development and
commercialization of
Posurdex®
in Japan and associated costs. Sanwa pays us a royalty based on
net sales of
Posurdex®
in Japan, makes clinical development and commercialization
milestone payments and reimburses us for certain expenses
associated with our continuing Phase III studies outside of
Japan. We are working collaboratively with Sanwa on the clinical
development of
Posurdex®,
as well as overall product strategy and management. In September
2005, we entered into a multi-year alliance with Sirna
Therapeutics, Inc. to develop Sirna-027, a novel RNAi-based
therapeutic currently in clinical trials for age-related macular
degeneration, and to discover and develop other novel RNAi-based
therapeutics against select gene targets for ophthalmic diseases.
We license memantine from Merz GmbH & Co. KGaA, and
hold worldwide rights for ophthalmic use. Memantine is approved
by the FDA for Alzheimers Disease in the United States and
is marketed as
Namenda®
by Forest Laboratories and as
Axura®
by Merz and as
Ebixa®
by Lundbeck in Europe. Two Phase III clinical trials have
been conducted over the last five years. In January 2007, we
completed the initial analysis of the data from the first of
these two Phase III clinical trials of memantine for the
preservation of visual function in patients with glaucoma. The
use of memantine as a neuroprotective agent would be the first
drug approved to prevent the loss of visual function, and
potentially lead to a paradigm shift in the treatment of this
important disease. To date, glaucoma treatment has focused on
medications or surgery to lower intraocular pressure.
11
Two measures of visual function were selected in the statistical
analysis plan to assess the efficacy of memantine in glaucoma.
The functional measure chosen as the primary endpoint did not
show a benefit of memantine in preserving visual function. In a
number of analyses using the secondary functional measure,
memantine demonstrated a statistically significant benefit of
the high dose compared to placebo. While we are encouraged that
a functional benefit of memantine was demonstrated in this
secondary analysis, there are a number of challenges that
remain. First, we need to complete the full assessment of the
data from this complex clinical trial that contains four years
of data on approximately 1,000 glaucoma patients. Once
completed, we will review the data with the FDA and other
regulatory agencies. Importantly, the safety and efficacy of
memantine must be confirmed in the second Phase III
clinical trial. Until we complete the data analysis and agency
meetings, which we currently believe could take up to twelve
months, we cannot assess the impact to filing and approval
timing.
We continue to invest heavily in the research and development of
neuromodulators, primarily
Botox®.
We are focused on both expanding the approved indications for
Botox®
and pursuing new neuromodulator-based therapeutics. This
includes expanding the approved uses for
Botox®
to include treatment for spasticity, headache, brow furrow and
urologic conditions, including overactive bladder. Also, we are
conducting Phase II clinical trials of
Botox®
for the treatment of benign prostatic hypertrophy. In
collaboration with Syntaxin, a newly formed company, whose
technology was contributed by the United Kingdom
governments Health Protection Agency, we are focused on
engineering new neuromodulators for the treatment of severe
pain. We are also continuing our investment in the areas of
biologic process development and manufacturing and the next
generation of neuromodulator products, and we are conducting a
Phase IV study of
Botox®
for the treatment of palmar hyperhydrosis, as part of our
conditions of approval for axiliar hyperhidrosis by the FDA .
In connection with our obesity intervention products, we are
planning to conduct clinical trials of the
BIBtm
System, which is currently approved in Europe, with the goal of
obtaining approval in the United States. We anticipate beginning
those trials in 2007.
We are also working to leverage our technologies in therapeutic
areas outside of our current specialties, such as our
Phase II clinical trials for the use of alpha agonists for
the treatment of neuropathic pain. Additionally, we have novel
proton pump inhibitors which reduce excess stomach acid
secretion and have a longer half life than current standards of
care. Our intention is to out-license these compounds to a large
pharmaceutical company with a large general practitioner sales
force.
In December 2002, we entered into a strategic research
collaboration and license agreement with ExonHit Therapeutics.
The goals of this collaboration are to identify new molecular
targets based on ExonHit Therapeutics gene profiling
DATAStm
technology and to work collaboratively developing unique
compounds and commercial products based on these targets. Our
strategic alliance with ExonHit Therapeutics provides us with
the rights to compounds developed in the fields of
neurodegenerative disease, pain and ophthalmology.
The continuing introduction of new products supplied by our
research and development efforts and
in-licensing
opportunities are critical to our success. There are intrinsic
uncertainties associated with research and development efforts
and the regulatory process. We cannot assure you that any of the
research projects or pending drug marketing approval
applications will result in new products that we can
commercialize. Delays or failures in one or more significant
research projects and pending drug marketing approval
applications could have a material adverse affect on our future
operations.
Manufacturing
We manufacture the majority of our commercial products in our
own plants located in Arklow, Ireland; San José, Costa
Rica; Annecy, France; Fremont, California; Warsaw, Poland; Waco,
Texas; Westport, Ireland; and Guarulhos, Brazil. We maintain
sufficient manufacturing capacity at these facilities to support
forecasted demand as well as a modest safety margin of
additional capacity to meet peaks of demand and sales growth in
excess of expectations. We increase our capacity as required in
anticipation of future sales increases. In the event of a very
large or very rapid unforeseen increase in market demand for a
specific product or technology, supply of that product or
technology could be negatively impacted until additional
capacity is brought on line. Third parties manufacture a small
number of commercial products for us. However, the revenues from
these products are not material to our operating results.
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We are vertically integrated into the production of plastic
parts and produce our own bottles, tips and caps for use in the
manufacture of our ophthalmic solutions. Additionally, we
ferment, purify and characterize the botulinum toxin used in our
product
Botox®.
With these two exceptions, we purchase all other significant raw
materials from qualified domestic and international sources.
Where practical, we maintain more than one supplier for each
material, and we have an ongoing alternate sourcing endeavor
that identifies additional sources of key raw materials. In some
cases, however, most notably with active pharmaceutical
ingredients, we are a niche purchaser of specialty chemicals,
which, in certain cases, are sole sourced. These sources are
identified in filings with regulatory agencies, including the
FDA, and cannot be changed without prior regulatory approval. In
these cases, we maintain inventories of the raw material itself
and precursor intermediates to mitigate the risk of interrupted
supply. A lengthy interruption of the supply of one of these
materials could adversely affect our ability to manufacture and
supply commercial product. A small number of the raw materials
required to manufacture certain of our products are derived from
biological sources which could be subject to contamination and
recall by their suppliers. We use multiple lots of these raw
materials at any one time in order to mitigate such risks.
However, a shortage, contamination or recall of these products
could disrupt our ability to maintain an uninterrupted
commercial supply of our finished goods.
Manufacturing facilities producing medical devices intended for
distribution in the United States and internationally are
subject to regulation and periodic review by the FDA,
international regulatory authorities, and European notified
bodies for certain of our medical devices. All of our facilities
are currently approved by the FDA, the relevant notified bodies
and other regulatory authorities to manufacture medical devices
for distribution in the United States and international markets.
Competition
The pharmaceutical and medical device industries are highly
competitive and require an ongoing, extensive search for
technological innovation. They also require, among other things,
the ability to effectively discover, develop, test and obtain
regulatory approvals for products, as well as the ability to
effectively commercialize, market and promote approved products,
including communicating the effectiveness, safety and value of
products to actual and prospective customers and medical
professionals. Numerous companies are engaged in the
development, manufacture and marketing of health care products
competitive with those that we manufacture and develop. Many of
our competitors have greater resources than we have. This
enables them, among other things, to make greater research and
development investments and spread their research and
development costs, as well as their marketing and promotion
costs, over a broader revenue base. Our competitors may also
have more experience and expertise in obtaining marketing
approvals from the FDA and other regulatory authorities. In
addition to product development, testing, approval and
promotion, other competitive factors in the pharmaceutical and
medical device industries include industry consolidation,
product quality and price, product technology, reputation,
customer service and access to technical information. We believe
that our products principally compete on the basis of quality,
product design, managements knowledge of and sensitivity
to market demands, an experienced sales force, physicians
and surgeons familiarity with our products and brand
names, regional warranty programs, and our ability to identify
and develop or license patented products embodying new
technologies.
Specialty
Pharmaceuticals Segment
Eye Care Pharmaceuticals. Our major eye care
competitors include Alcon Laboratories, Inc., Bausch &
Lomb, Pfizer, Novartis Ophthalmics and Merck & Co.,
Inc. For our eye care products to be successful, we must be able
to manufacture and effectively market those products and
persuade a sufficient number of eye care professionals to use or
continue to use our current products and the new products we may
introduce. Glaucoma must be treated over an extended period and
doctors may be reluctant to switch a patient to a new treatment
if the patients current treatment for glaucoma remains
effective.
In addition, we also face competition from generic drug
manufacturers in the United States and internationally. For
instance, Falcon Pharmaceuticals, Ltd., an affiliate of Alcon
Laboratories, Inc., attempted to obtain FDA approval for and to
launch a brimonidine product to compete with our
Alphagan®
P product. However, pursuant to a March 2006 settlement
with Alcon, Alcon agreed not to sell, offer for sale or
distribute its brimonidine product until September 30,
2009, or earlier if specified market conditions occur. The
primary market condition will have
13
occurred if the extent to which prescriptions of
Alphagan®
P have been converted to other brimonidine-containing
products we market has increased to a specified threshold. In
addition, Apotex, Inc. attempted to obtain FDA approval for and
to launch a generic form of
Acular®.
Pursuant to a federal court ruling in June 2006, Apotex is
barred from obtaining approval before our
Acular®
patent expires in 2009. See Item 3 of Part I of this
report, Legal Proceedings and Note 12,
Commitments and Contingencies, in the notes to the
consolidated financial statements listed under Item 15 of
Part IV of this report, Exhibits and Financial
Statement Schedules, for information concerning our
current litigation.
Neuromodulators. With respect to
neuromodulators, until December 2000,
Botox®
was the only neuromodulator approved by the FDA. At that time,
the FDA approved
Myobloc®,
a neuromodulator formerly marketed by Elan Pharmaceuticals and
now marketed by Solstice Neurosciences Inc. Beaufour Ipsen Ltd.
is seeking FDA approval of its
Dysport®
neuromodulator for certain therapeutic indications, and Medicis
Pharmaceutical Corporation, its licensee for the United States,
Canada and Japan, is seeking approval of
Reloxin®
for cosmetic indications. Beaufour Ipsen has marketed
Dysport®
in Europe since 1991, prior to our European commercialization of
Botox®
in 1992. In June 2006, Beaufour Ipsen received the marketing
authorization for a cosmetic indication for
Dysport®
in Germany. In 2007, Beaufour Ipsen granted an exclusive
development and marketing license for
Dysport®
to Galderma, a joint venture between Nestle and LOreal, in
the European Union, Russia, Eastern Europe and the Middle East,
and first rights of negotiation for other countries around the
world, except the United States, Canada and Japan. Beaufour
Ipsen is also seeking approval for
Reloxin®
for cosmetic indications across the European Union. Also, Mentor
Corporation is conducting clinical trials for a competing
neuromodulator in the United States. In addition, we are aware
of competing neuromodulators currently being developed and
commercialized in Asia, Europe, South America and other markets.
A Chinese entity received approval to market a botulinum toxin
in China in 1997, and we believe that it has launched or is
planning to launch its botulinum toxin product in other lightly
regulated markets in Asia, South America and Central America.
These lightly regulated markets may not require adherence to the
FDAs current Good Manufacturing Practice regulations, or
cGMPs, or the regulatory requirements of the European Medical
Evaluation Agency or other regulatory agencies in countries that
are members of the Organization for Economic Cooperation and
Development. Therefore, companies operating in these markets may
be able to produce products at a lower cost than we can. In
addition, Merz received approval for
Xeomin®
in Germany and launched its product in July 2005, received
approval in Mexico in 2006 and is pursuing additional approvals
in the European Union and Latin America. A Korean botulinum
toxin product,
Neuronox®,
was approved for sale in Korea in June 2006. The company,
Medy-Tox Inc., received exportation approval from Korean
authorities in early 2005. In February 2007, Q-Med announced a
worldwide license for
Neuronox®,
with the exception of certain countries in Asia where Medy-Tox
may retain the marketing rights.
Skin Care Product Line. Our skin care business
competes against a number of companies, including among others,
Dermik, a division of Sanofi-Aventis, Galderma, Medicis,
Stiefel, Novartis, Schering-Plough Corporation and
Johnson & Johnson, most of which have greater resources
than us.
Medical
Devices Segment
Breast Aesthetics. We compete in the
U.S. breast implant market with Mentor Corporation. Mentor
announced that, like us, it received FDA approval in November
2006 to sell its silicone breast implants. The conditions under
which Mentor is allowed to market its silicone breast implants
in the United States are similar to ours, including indications
for use and the requirement to conduct post-marketing studies.
If patients or physicians prefer Mentors breast implant
products to ours or perceive that Mentors breast implant
products are safer than ours, our sales of breast implants could
materially suffer. We are aware of several companies conducting
clinical studies of breast implant products in the United
States. Internationally, we compete with several manufacturers,
including Mentor Corporation, Silimed, Medicor Corporation, Poly
Implant Prostheses, Nagor, Laboratories Sebbin, and LPI.
Facial Aesthetics. Our facial products compete
in the dermatology and plastic surgery markets with other
hyaluronic acid products, substantially different treatments,
such as laser treatments, chemical peels, fat injections,
gelatin- or cadaver-based collagen products, and botulinum
toxin-based products, as well as other polymer-based
injectibles. In addition, several companies are engaged in
research and development activities examining the use of
collagen, hyaluronic acids and other biomaterials for the
correction of soft tissue defects. Internationally, we
14
compete with products such as
Restylane®,
Restylane®
Fine Lines, and
Perlanetm
(all manufactured by
Q-Med A.B.).
Since the first quarter of 2004, we have competed in the
U.S. dermal filler market with
Restylane®,
which is distributed by Medicis. Also, in 2006,
Radiesse®,
a filler from BioForm Medical, Inc., received approval in the
United States.
Obesity Intervention. No gastric bands other
than our
LAP-BAND®
System are commercially available in the United States, and we
are currently aware of only one other company conducting
U.S. clinical studies of gastric bands. This company,
Ethicon Endo-Surgery, Inc., a Johnson & Johnson
company, announced an early 2007 premarket filing target for FDA
approval of its gastric band product, SAGB Quick Close (Swedish
Adjustable Gastric Band), which will compete against our
LAP-BAND®
System upon entry to the U.S. market. Outside the United
States, the
LAP-BAND®
System competes primarily with the Swedish Adjustable Gastric
Band and the Heliogast Band (manufactured by Helioscopie, S.A.,
France). There are at least two other gastric bands on the
market internationally. The
LAP-BAND®
System also competes with surgical obesity procedures, including
gastric bypass, vertical banded gastroplasty, and
biliopancreatic diversion. No intragastric balloons for the
treatment of obesity are commercially available in the United
States, and we are currently aware of only one other company
outside the United States, Helioscopie, which recently launched
its intragastric balloon, the Heliosphere. We are not aware of
any published clinical studies that support this devices
effectiveness.
Government
Regulation
Specialty
Pharmaceuticals Segment
Drugs and biologics are subject to regulation by the FDA, state
agencies and, in varying degrees, by foreign health agencies.
Pharmaceutical products and biologics are subject to extensive
pre- and post-market regulation by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising and
promotion of the products under the Federal Food, Drug, and
Cosmetic Act, or FFDCA, with respect to drugs and the Public
Health Services Act with respect to biologics, and by comparable
agencies in foreign countries. Failure to comply with applicable
FDA or other requirements may result in civil or criminal
penalties, recall or seizure of products, partial or total
suspension of production or withdrawal of a product from the
market.
The process required by the FDA before a new drug or biologic
may be marketed in the United States generally involves the
following: completion of preclinical laboratory and animal
testing; submission of an Investigational New Drug Application,
or IND, which must become effective before clinical trials may
begin; and performance of adequate and well controlled human
clinical trials to establish the safety and efficacy of the
proposed drug or biologic for its intended use. Clinical trials
are typically conducted in three sequential phases, which may
overlap, and must satisfy extensive Good Clinical Practice
regulations and regulations for informed consent. Further, an
independent institutional review board (IRB) for each medical
center proposing to conduct the clinical trial must review and
approve the plan for any clinical trial before it commences at
that center and must monitor the study until completed. The FDA,
the IRB, or the study sponsor may suspend a clinical trial at
any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health
risk.
Approval by the FDA of a New Drug Application, or NDA, is
required prior to marketing a new drug, and approval of a
Biologics License Application, or BLA, is required before a
biologic may be legally marketed in the United States. To
satisfy the criteria for approval, an NDA or BLA must
demonstrate the safety and efficacy of the product based on
results of product development, preclinical studies and the
three phases of clinical trials. Both NDAs and BLAs must also
contain extensive manufacturing information, and the applicant
must pass an FDA
pre-approval
inspection of the manufacturing facilities at which the drug or
biologic is produced to assess compliance with the cGMP
regulations prior to commercialization. Satisfaction of FDA
pre-market approval requirements typically takes several years
and the actual time required may vary substantially based on the
type, complexity and novelty of the product, and we cannot be
certain that any approvals for our products will be granted on a
timely basis, or at all.
Once approved, the FDA may withdraw product approval if
compliance with pre- and post-market regulatory standards is not
maintained or if safety problems occur after the product reaches
the marketplace. In addition, the FDA may require post-marketing
clinical studies, known as Phase IV studies, and
surveillance programs to monitor the effect of approved
products. The FDA may limit further marketing of the product
based on the results of these
15
post-market studies and programs. Drugs and biologics may be
marketed only for the approved indications and in accordance
with the provisions of the approved label. Further, any
modifications to the drug or biologic, including changes in
indications, labeling, or manufacturing processes or facilities,
may require the submission of a new or supplemental NDA or BLA,
which may require that we develop additional data or conduct
additional preclinical studies and clinical trials.
Any products manufactured or distributed by us or our
collaborators pursuant to FDA approvals are also subject to
continuing regulation by the FDA, including recordkeeping
requirements and reporting of adverse experiences associated
with the drug. Drug and biologic manufacturers and their
subcontractors are required to register their establishments
with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state
agencies for compliance with ongoing regulatory requirements,
including cGMPs, which regulate all aspects of the manufacturing
process and impose certain procedural and documentation
requirements. Failure to comply with the statutory and legal
requirements can subject a manufacturer to possible legal or
regulatory action, including fines and civil penalties,
suspension or delay in the issuance of approvals, seizure or
recall of products, and withdrawal of approvals, any one or more
of which could have a material adverse effect upon us.
The FDA imposes a number of complex regulatory requirements on
entities that advertise and promote pharmaceuticals and
biologics, including, but not limited to, standards and
regulations for
direct-to-consumer
advertising, off-label promotion, industry sponsored scientific
and educational activities, and promotional activities involving
the Internet. A manufacturer can make only those claims relating
to safety and efficacy that are approved by the FDA. The FDA has
very broad enforcement authority under the FFDCA, and failure to
abide by these regulations can result in penalties, including
the issuance of a warning letter directing us to correct
deviations from FDA standards, a requirement that future
advertising and promotional materials be
pre-cleared
by the FDA, and state and federal civil and criminal
investigations and prosecutions. Physicians may prescribe
(although we are not permitted to promote) legally available
drugs and biologics for uses that are not described in the
products labeling and that differ from those tested by us
and approved by the FDA. Such off-label uses are common across
medical specialties.
Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, impose stringent restrictions
on manufacturers communications regarding off-label use.
We are also subject to various laws and regulations regarding
laboratory practices, the experimental use of animals, and the
use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these
areas, as above, the FDA has broad regulatory and enforcement
powers, including the ability to levy fines and civil penalties,
suspend or delay the issuance of approvals, seize or recall
products, and withdraw approvals, any one or more of which could
have a material adverse effect upon us.
Internationally, the regulation of drugs is also complex. In
Europe, our products are subject to extensive regulatory
requirements. As in the United States, the marketing of
medicinal products has for many years been subject to the
granting of marketing authorizations by medicine agencies.
Particular emphasis is also being placed on more sophisticated
and faster procedures for reporting adverse events to the
competent authorities. The European Union procedures for the
authorization of medicinal products were amended in May 2004 and
are now effective. The amended procedures are intended to
improve the efficiency of operation of both the mutual
recognition and centralized procedures. Additionally, new rules
have been introduced or are under discussion in several areas,
including the harmonization of clinical research laws and the
law relating to orphan drugs and orphan indications. Outside the
United States, reimbursement pricing is typically regulated by
government agencies.
The total cost of providing health care services has been and
will continue to be subject to review by governmental agencies
and legislative bodies in the major world markets, including the
United States, which are faced with significant pressure to
lower health care costs. The Medicare Prescription Drug
Modernization Act of 2003 imposed certain reimbursement
restrictions on our products in the United States. Additionally,
Medicare Part D and proposed federal and state legislation
may result in additional reimbursement and rebate obligations.
These reimbursement restrictions or other price reductions or
controls could materially and adversely affect our revenues and
financial condition. Additionally, price reductions and rebates
have recently been mandated in several European countries,
principally Germany, Italy, Spain and the United Kingdom.
Certain products are also no longer eligible for reimbursement
in France, Italy and Germany. Reference pricing is used in
several markets around the
16
world to reduce prices. Furthermore, parallel trade within the
European Union, whereby products flow from relatively low-priced
to high-priced markets, has been increasing.
We cannot predict the likelihood or pace of any significant
regulatory or legislative action in these areas, nor can we
predict whether or in what form health care legislation being
formulated by various governments will be passed. Medicare
reimbursement rates are subject to change at any time. We also
cannot predict with precision what effect such governmental
measures would have if they were ultimately enacted into law.
However, in general, we believe that such legislative activity
will likely continue. If adopted, such measures can be expected
to have an impact on our business.
Medical
Devices Segment
Medical devices are subject to regulation by the FDA, state
agencies and, in varying degrees, by foreign government health
agencies. FDA regulations, as well as various U.S. federal
and state laws, govern the development, clinical testing,
manufacturing, labeling, record keeping, and marketing of
medical device products. The majority of our medical device
product candidates, including our breast implants, must undergo
rigorous clinical testing and an extensive government regulatory
approval process prior to sale in the United States and other
countries. The lengthy process of clinical development and
seeking required approvals, and the continuing need for
compliance with applicable laws and regulations, require the
expenditure of substantial resources. Regulatory approval, when
and if obtained, may be limited in scope, and may significantly
limit the indicated uses for which a product may be marketed.
Approved products and their manufacturers are subject to ongoing
review, and discovery of previously unknown problems with
products may result in restrictions on their manufacture, sale,
or use, or their withdrawal from the market.
Our breast implants and obesity products are medical devices
intended for human use and are subject to extensive regulation
by the FDA in the United States. Unless an exemption applies,
each medical device we market in the United States must have a
510(k) clearance or a Premarket Approval (PMA) application in
accordance with the FFDCA. The FDA classifies medical devices
into one of three classes, depending on the degree of risk
associated with each medical device and the extent of controls
that are needed to ensure safety and effectiveness. Devices
deemed to pose a lower risk are placed in either Class I or
Class II, which requires the manufacturer to submit to the
FDA a premarket notification under Section 510(k) of the
FFDCA requesting permission for commercial distribution. This
process is known as 510(k) clearance. Some low risk devices are
exempted from this requirement. Devices deemed by the FDA to
pose the greatest risk, such as
life-sustaining,
life-supporting or implantable devices, or a device deemed to be
not substantially equivalent to a previously cleared 510(k)
device, are placed in Class III. In general, a
Class III device cannot be marketed in the United States
unless the FDA approves the device after submission of a PMA
application. The majority of our medical device products,
including our breast implants, are regulated as Class III
medical devices.
When we are required to obtain a 510(k) clearance for a device
we wish to market, we must submit a premarket notification to
the FDA demonstrating that the device is substantially
equivalent to a previously cleared 510(k) device or a
device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of
PMA applications. By regulation, the FDA is required to respond
to a 510(k) premarket notification within 90 days of
submission of the notification. As a practical matter, clearance
can take significantly longer. If the FDA determines that the
device, or its intended use, is not substantially equivalent to
a
previously-cleared
device or use, the FDA will place the device, or the particular
use of the device, into Class III. After a device receives
510(k) clearance for a specific intended use, any modification
that could significantly affect its safety or efficacy, or that
would constitute a major change in its intended use, design or
manufacture, will require a new 510(k) clearance or could
require PMA approval. The FDA requires each manufacturer to make
this determination initially, but the FDA can review any such
decision and can disagree with a manufacturers
determination. If the FDA disagrees with a manufacturers
determination that a new clearance or approval is not required
for a particular modification, the FDA can require the
manufacturer to cease marketing
and/or
recall the modified device until 510(k) clearance or premarket
approval is obtained.
A PMA application must be submitted if the device cannot be
cleared through the 510(k) process. The PMA process is much more
demanding than the 510(k) clearance process. A PMA application
must be supported by
17
extensive information, including data from preclinical and
clinical trials, sufficient to demonstrate to the FDAs
satisfaction that the device candidate is safe and effective for
its intended use. The FDA, by statute and regulation, has
180 days to review an accepted premarket approval
application, although the review generally occurs over a
significantly longer period of time, and can take up to several
years. During this review period, the FDA may request additional
information or clarification of information already provided.
Also during the review period, an advisory panel of experts from
outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the
approvability of the device. New PMA applications or
supplemental PMA applications are required for significant
modifications to the manufacturing process, labeling and design
of a medical device that is approved through the PMA process.
PMA supplements often require submission of the same type of
information as an initial PMA, except that the supplement is
limited to information needed to support any changes from the
device covered by the original PMA application, and may not
require as extensive clinical data or the convening of an
advisory panel.
A clinical trial is almost always required to support a PMA
application and is sometimes required for a 510(k) premarket
notification. These trials generally require submission of an
application for an investigational device exemption, or IDE, to
the FDA. The IDE application must be supported by appropriate
data, such as animal and laboratory testing results, showing
that it is safe to test the device in humans and that the
testing protocol is scientifically sound. Clinical trials for a
significant risk device may begin once the IDE application is
approved by the FDA and the IRB overseeing the clinical trial.
If the product is deemed a non-significant risk device, only
approval from the IRB overseeing the clinical trial is required.
We, the FDA or the IRB at each site at which a clinical trial is
being performed may suspend a clinical trial at any time for
various reasons, including a belief that the study subjects are
being exposed to an unacceptable health risk. The results of
clinical testing may not be sufficient to obtain approval of the
product.
After a device is placed on the market, numerous regulatory
requirements apply. These include:
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Quality System Regulation, which requires manufacturers to
follow design, testing, control documentation and other quality
assurance procedures during the manufacturing process;
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Labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling; and
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Medical device reporting, or MDR, regulations, which require
that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur.
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Compliance with regulatory requirements is assured through
periodic, unannounced facility inspections by the FDA and other
regulatory authorities, and these inspections may include the
manufacturing facilities of our subcontractors. Failure to
comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include any of the
following sanctions: Warning Letters or untitled letters; fines,
injunctions and civil penalties; recall or seizure of our
products; operating restrictions, partial suspension or total
shutdown of production; refusing our request for 510(k)
clearance or PMA approval of new products; withdrawing 510(k)
clearance or PMAs that are already granted; and criminal
prosecution.
Products that are marketed in the European Union, or EU, must
comply with the requirements of the Medical Device Directive, or
MDD, as implemented into the national legislation of the EU
member states. The MDD, as implemented, provides for a
regulatory regime with respect to the design, manufacture,
clinical trials, labeling and adverse event reporting for
medical devices to ensure that medical devices marketed in the
EU are safe and effective for their intended uses. Medical
devices that comply with the MDD, as implemented, are entitled
to bear a CE marking and may be marketed in the EU. Medical
device laws and regulations similar to those described above are
also in effect in many of the other countries to which we export
our products. These range from comprehensive device approval
requirements for some or all of our medical device products to
requests for product data or certifications. Failure to comply
with these domestic and international regulatory requirements
could affect our ability to market and sell our products in
these countries.
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Other
Regulations
We are subject to federal, state, local and foreign
environmental laws and regulations, including the
U.S. Occupational Safety and Health Act, the
U.S. Toxic Substances Control Act, the U.S. Resource
Conservation and Recovery Act, Superfund Amendments and
Reauthorization Act, Comprehensive Environmental Response,
Compensation and Liability Act and other current and potential
future federal, state, or local regulations. Our manufacturing
and research and development activities involve the controlled
use of hazardous materials, chemicals, and biological materials,
which require compliance with various laws and regulations
regarding the use, storage, and disposal of such materials. We
cannot assure you, however, that environmental problems relating
to properties owned or operated by us will not develop in the
future, and we cannot predict whether any such problems, if they
were to develop, could require significant expenditures on our
part. In addition, we are unable to predict what legislation or
regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal. Additionally, we
may be subject either directly or by contract to federal and
state laws pertaining to the privacy and security of personal
health information.
We are also subject to various federal and state laws pertaining
to health care fraud and abuse. The federal
Anti-Kickback Statute makes it illegal to solicit, offer,
receive or pay any remuneration, directly or indirectly, in cash
or in kind, in exchange for, or to induce, the referral of
business, including the purchase or prescription of a particular
product, for which payment may be made under government health
care programs such as Medicare and Medicaid. The
U.S. federal government has published regulations that
identify safe harbors or exemptions for certain
practices from enforcement actions under the Anti-Kickback
Statute. We seek to comply with the safe harbors where possible.
Due to the breadth of the statutory provisions and in the
absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that
our practices might be challenged under the Anti-Kickback
Statute or similar laws. The federal False Claims Act prohibits
anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payors (including Medicare
and Medicaid) claims for reimbursed products or services that
are false or fraudulent, claims for items or services not
provided as claimed, or claims for medically unnecessary items
or services. The federal Health Insurance Portability and
Accountability Act of 1996, or HIPAA, prohibits executing a
scheme to defraud any healthcare benefit program or making false
statements relating to health care matters. In addition, many
states have adopted laws similar to the federal fraud and abuse
laws discussed above, which, in some cases, apply to all payors
whether governmental or private. Our activities, particularly
those relating to the sale and marketing of our products, may be
subject to scrutiny under these laws. Violations of fraud and
abuse laws may be punishable by criminal
and/or civil
sanctions, including fines and civil monetary penalties, as well
as the possibility of exclusion from federal health care
programs (including Medicare and Medicaid).
Patents,
Trademarks and Licenses
We own, or are licensed under, numerous U.S. and foreign patents
relating to our products, product uses and manufacturing
processes. We believe that our patents and licenses are
important to all segments of our business.
With the exception of the U.S. and European patents relating to
Lumigan®
and
Alphagan®
P, and the U.S. patents relating to
Restasis®,
Acular®
and
Zymar®,
no one patent or license is currently of material importance in
relation to our overall sales for our specialty pharmaceuticals
segment. The U.S. compound and ophthalmic use patents
covering
Lumigan®
currently expire in 2015. The European patent covering
Lumigan®
expires in various countries between 2013 and 2017. The
U.S. patent covering the commercial formulation of
Acular®
expires in 2009 and in 2008 in Europe. The U.S. patents
covering the commercial formulation of
Alphagan®
P expire in 2012 and 2021 and in 2009 in Europe, with
corresponding patents pending. The U.S. patents covering
Restasis®
expire in 2009 and 2014.
Zymar®s
various U.S. patents expire in mid-2010, late 2015 and late
2019.
Our success depends in part on our ability to obtain patents or
rights to patents, protect trade secrets and other proprietary
technologies and processes, operate without infringing upon the
proprietary rights of others, and prevent others from infringing
on our patents, trademarks, service marks and other intellectual
property rights. Upon the expiration or loss of patent
protection for a product, we can lose a significant portion of
sales of that product in a very short period of time as other
companies manufacture generic forms of our previously protected
product at lower cost, without having had to incur significant
research and development costs in formulating the product. In
19
addition, the issuance of a patent is not conclusive as to its
validity or as to the enforceable scope of the claims of the
patent. It is impossible to anticipate the breadth or degree of
protection that any such patents will afford, or that any such
patents will not be successfully challenged in the future.
Accordingly, our patents may not prevent other companies from
developing substantially identical products. Hence, if our
patent applications are not approved or, even if approved, such
patents are circumvented, our ability to competitively exploit
our patented products and technologies may be significantly
reduced. Also, such patents may or may not provide competitive
advantages for their respective products, in which case our
ability to commercially exploit these products may be diminished.
Third parties may challenge, invalidate or circumvent our
patents and patent applications relating to our products,
product candidates and technologies. Challenges may result in
potentially significant harm to our business. The cost of
responding to these challenges and the inherent costs to defend
the validity of our patents, including the prosecution of
infringements and the related litigation, can require a
substantial commitment of our managements time, be costly
and can preclude or delay the commercialization of products. See
Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and
Contingencies, in the notes to the consolidated financial
statements listed under Item 15 of Part IV of this
report, Exhibits and Financial Statement Schedules,
for information concerning our current intellectual property
litigation.
From time to time, we may need to obtain licenses to patents and
other proprietary rights held by third parties to develop,
manufacture and market our products. If we are unable to timely
obtain these licenses on commercially reasonable terms, our
ability to commercially exploit such products may be inhibited
or prevented. See Item 1A of Part I of this report,
Risk Factors.
We market our products under various trademarks, for which we
have both registered and unregistered trademark protection in
the United States and certain countries outside the United
States. We consider these trademarks to be valuable because of
their contribution to the market identification of our products.
Any failure to adequately protect our rights in our various
trademarks and service marks from infringement, could result in
a loss of their value to us. If the marks we use are found to
infringe upon the trademark or service mark of another company,
we could be forced to stop using those marks and, as a result,
we could lose the value of those marks and could be liable for
damages caused by an infringement. In addition to intellectual
property protections afforded to trademarks, service marks and
proprietary know-how by the various countries in which our
proprietary products are sold, we seek to protect our
trademarks, service marks and proprietary know-how through
confidentiality agreements with third parties, including our
partners, customers, employees and consultants. These agreements
may be breached or become unenforceable, and we may not have
adequate remedies for any such breach. It is also possible that
our trade secrets will become known or independently developed
by our competitors, resulting in increased competition for our
products.
In addition, we are currently engaged in various collaborative
ventures for the development, manufacturing, and distribution of
current and new products. These projects include the following:
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We have entered into an exclusive licensing agreement with
Kyorin Pharmaceutical Co., Ltd., under which Kyorin became
responsible for the development and commercialization of
Alphagan®
and
Alphagan®
P in Japan. Kyorin subsequently
sub-licensed
its rights under the agreement to Senju Pharmaceutical Co., Ltd.
Under the licensing agreement, Senju incurs associated costs,
makes clinical development and commercialization milestone
payments, and makes royalty-based payments on product sales. We
are working collaboratively with Senju on overall product
strategy and management.
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We have entered into an exclusive licensing agreement with Senju
Pharmaceutical Co., Ltd., under which Senju became responsible
for the development and commercialization of
Lumigan®
in Japans ophthalmic specialty area. Senju incurs
associated costs, makes development and commercialization
milestone payments and makes royalty-based payments on product
sales. We are working collaboratively with Senju on overall
product strategy and management.
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We have licensed from Novartis the worldwide, excluding Japan,
rights for technology, patents and products relating to the
topical ophthalmic use of cyclosporine A, the active ingredient
in
Restasis®.
In April 2005, we entered into a royalty buy-out agreement with
Novartis related to
Restasis®
and agreed to pay $110 million to
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Novartis. As a result of the buy-out agreement, we no longer pay
royalties to Novartis based on sales of Restasis.
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We have been the distributor and licensee for Genzyme
Corporations
Hylaform®
products since 1999, including
Hylaform®
Plus and
Hylaform®
FineLine. In December 2004, we entered into an amended and
restated agreement with Genzyme Corporation for exclusive
U.S. development and distribution rights of
Captiquetm,
a non-animal based hyaluronic acid-based dermal filler. We
purchase these products from Genzyme Corporation and pay
royalties based on sales.
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Through Inamed, in June 2004, we entered into a settlement
agreement with Ethicon Endo-Surgery, Inc. pursuant to which,
among other terms, we were granted a worldwide, royalty-bearing,
non-exclusive license with respect to a portfolio of U.S. and
international patents applicable to adjustable gastric bands.
We are also a party to license agreements allowing other
companies to manufacture products using some of our technology
in exchange for royalties and other compensation or benefits.
Although we believe our patents and patent rights are valuable,
our technical knowledge with respect to manufacturing processes,
materials, and product design are also valuable.
Environmental
Matters
We are subject to federal, state, local and foreign
environmental laws and regulations. We believe that our
operations comply in all material respects with applicable
environmental laws and regulations in each country where we have
a business presence. Although we continue to make capital
expenditures for environmental protection, we do not anticipate
any significant expenditures in order to comply with such laws
and regulations that would have a material impact on our
earnings or competitive position. We are not aware of any
pending litigation or significant financial obligations arising
from current or past environmental practices that are likely to
have a material adverse effect on our financial position. We
cannot assure you, however, that environmental problems relating
to properties owned or operated by us will not develop in the
future, and we cannot predict whether any such problems, if they
were to develop, could require significant expenditures on our
part. In addition, we are unable to predict what legislation or
regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal.
Seasonality
Our business, both taken as a whole and by our business
segments, is not materially affected by seasonal factors,
although we have noticed an historical trend with respect to
sales of our
Botox®
product. Specifically, sales of
Botox®
have tended to be lowest during the first fiscal quarter, with
sales during the second and third fiscal quarters being
comparable and marginally higher than sales during the first
fiscal quarter.
Botox®
sales during the fourth fiscal quarter have tended to be the
highest due to patients obtaining their final therapeutic
treatment at the end of the year, presumably to fully utilize
deductibles and to receive additional cosmetic treatments prior
to the holiday season.
Third
Party Coverage and Reimbursement
Health care providers generally rely on third-party payors,
including governmental payors such as Medicare and Medicaid, and
private insurance carriers, to adequately cover and reimburse
the cost of pharmaceuticals and medical devices. Such
third-party payors are increasingly challenging the price of
medical products and services and instituting cost containment
measures to control or significantly influence the purchase of
medical products and services. The market for our products
therefore is influenced by third-party payors policies.
This includes the placement of our pharmaceutical products on
drug formularies or lists of medications.
Purchases of aesthetic products and procedures using those
products generally are not covered by most
third-party
payors, and patients incur
out-of-pocket
costs for such products and associated procedures. This includes
breast aesthetics products for augmentation and facial
aesthetics products. Since 1998, however, U.S. federal law
has mandated that group health plans, insurance companies and
health maintenance organizations offering mastectomy coverage
must also provide coverage for reconstructive surgery following
a
21
mastectomy, which includes coverage for breast implants. Outside
the United States, reimbursement for breast implants used in
reconstructive surgery following a mastectomy may be available,
but the programs vary on a country by country basis.
Furthermore, treatments for obesity alone may not be covered by
third-party payors. In February 2006, Medicare began covering
certain designated bariatric surgical services, including
gastric bypass surgery and procedures using the
LAP-BAND®
System, for Medicare patients with a body mass index equal to or
greater than 35, who have at least one co-morbidity and have
been previously unsuccessful with the medical treatment of
obesity. However, the policy reiterates that treatments for
obesity alone are not covered, because such treatments are not
considered reasonable and necessary. While Medicare policies are
sometimes adopted by other third-party payors, other
governmental and private insurance coverage currently varies by
carrier and geographic location, and we actively work with major
insurance carriers to obtain reimbursement coverage for
procedures using our
LAP-BAND®
System product. For instance, the Technology Evaluation Center
of the Blue Cross/Blue Shield National Association provided a
positive assessment of the
LAP-BAND®
System, an important step in providing private payor
reimbursement for the procedure.
Outside the United States, reimbursement programs vary on a
country by country basis. In some countries, both the procedure
and product are fully reimbursed by the government healthcare
systems for all citizens who need it, and there is no limit on
the number of procedures that can be performed. In other
countries, there is complete reimbursement but the number of
procedures that can be performed at each hospital is limited
either by the hospitals overall budget or by the budget
for the type of product.
In the United States, there has been and continues to be a
number of legislative initiatives to contain health care
coverage and reimbursement by governmental and other payors. For
example, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 implemented a new Part D
prescription drug benefit under which Medicare beneficiaries can
purchase certain prescription drugs at discounted prices from
private sector entities, or Part D plan sponsors.
Currently, drug manufacturers negotiate directly with
Part D plan sponsors to determine whether their drugs will
be listed on a Part D formulary and the prices at which
such drugs will be listed. Industry competition to be included
in formularies maintained by both private payors and Part D
plans can result in downward pricing pressures on pharmaceutical
companies. Although certain lawmakers have suggested recently
that the federal government may be granted the authority to
negotiate the prices of drugs included on Part D
formularies, at this time the federal government does not have
such authority. There has also been an increased emphasis in the
marketplace on the delivery of more cost-effective medical
devices as well as a number of federal and state proposals to
limit payments by governmental payors for medical devices and
the procedures in which medical devices are used.
Breast
Implant Replacement Programs
We conduct our product development, manufacturing, marketing,
and service and support activities with careful regard for the
consequences to patients. As with any medical device
manufacturer, however, we receive communications from surgeons
or patients with respect to various products claiming the
products were defective, lost volume, or have resulted in injury
to patients. In the event of a loss of shell integrity resulting
in breast implant rupture or deflation that requires surgical
intervention with respect to our breast implant products sold
and implanted in the United States, in most cases our
ConfidencePlustm
programs provide lifetime product replacement and some financial
assistance for surgical procedures required within ten years of
implantation. Breast implants sold and implanted elsewhere are
subject to a similar program. We do not warrant any level of
aesthetic result and, as required by government regulation, make
extensive disclosure concerning the risks of our products and
implantation surgery.
Employee
Relations
At December 31, 2006, we employed approximately 6,772
persons throughout the world, including approximately 3,601 in
the United States. None of our
U.S.-based
employees are represented by unions. We believe that our
relations with our employees are generally good.
22
Executive
Officers
Our executive officers and their ages as of February 26,
2007 are as follows:
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Name
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Age
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Principal Position with Allergan
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David E.I. Pyott
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Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
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F. Michael Ball
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President, Allergan
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James F. Barlow
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Senior Vice President, Corporate
Controller
(Principal Accounting Officer)
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Raymond H. Diradoorian
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Executive Vice President, Global
Technical Operations
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Jeffrey L. Edwards
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Executive Vice President, Finance
and Business Development, Chief Financial Officer
(Principal Financial Officer)
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Douglas S. Ingram, Esq.
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Executive Vice President, Chief
Administrative Officer, General Counsel and Secretary
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Scott M. Whitcup, M.D.
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Executive Vice President,
Research & Development
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Officers are appointed by and hold office at the pleasure of the
Board of Directors.
Mr. Pyott has been Allergans Chief Executive Officer
since January 1998 and in 2001 became the Chairman of the Board.
Mr. Pyott also served as Allergans President from
January 1998 until February 2006. Previously, he was head of the
Nutrition Division and a member of the executive committee of
Novartis AG, a publicly-traded company focused on the research
and development of products to protect and improve health and
well-being, from 1995 until December 1997. From 1992 to 1995,
Mr. Pyott was President and Chief Executive Officer of
Sandoz Nutrition Corp., Minneapolis, Minnesota, a predecessor to
Novartis, and General Manager of Sandoz Nutrition, Barcelona,
Spain, from 1990 to 1992. Prior to that, Mr. Pyott held
various positions within the Sandoz Nutrition group from 1980.
Mr. Pyott is also a member of the board of directors of
Avery Dennison Corporation, a publicly-traded company focused on
pressure-sensitive technology and self-adhesive solutions,
Edwards Lifesciences Corporation, a
publicly-traded
company focused on products and technologies to treat advanced
cardiovascular disease, Pacific Mutual Holding Company, a
leading California-based life insurer, the ultimate parent
company of Pacific Life and Pacific LifeCorp, the parent
stockholding company of Pacific Life. Mr. Pyott is a member
of the Directors Board of The Paul Merage School of
Business at the University of California, Irvine (UCI) and is
chair of the Chief Executive Roundtable for UCI. Mr. Pyott
serves on the board of directors and the Executive Committee of
the California Healthcare Institute, and the Board of the
Biotechnology Industry Organization. Mr. Pyott also serves
as a member of the board of directors of the
Pan-American
Ophthalmological Foundation, the International Council of
Ophthalmology Foundation, the Cosmetic Surgery Foundation and as
a member of the Advisory Board for the Foundation of the
American Academy of Ophthalmology.
Mr. Ball has been President, Allergan since February 2006.
Mr. Ball was Executive Vice President and President,
Pharmaceuticals from October 2003 until February 2006. Prior to
that, Mr. Ball was Corporate Vice President and President,
North America Region and Global Eye Rx Business since May 1998
and prior to that was Corporate Vice President and President,
North America Region since April 1996. He joined Allergan in
1995 as Senior Vice President, U.S. Eye Care after
12 years with Syntex Corporation, a multinational
pharmaceutical company, where he held a variety of positions
including President, Syntex Inc. Canada and Senior Vice
President, Syntex Laboratories. Mr. Ball serves on the
board of directors of SimpleTech, Inc., a
publicly-traded
manufacturer and marketer of computer memory and hard drive
storage solutions, and Intralase Corp., a
publicly-traded
company that designs, develops and manufactures ultra-fast laser
technology used in refractive and corneal surgery.
Mr. Barlow has been Senior Vice President, Corporate
Controller since February 2005. Mr. Barlow joined Allergan
in January 2002 as Vice President, Corporate Controller. Prior
to joining Allergan, Mr. Barlow served as Chief Financial
Officer of Wynn Oil Company, a division of Parker Hannifin
Corporation. Prior to Wynn Oil Company, Mr. Barlow was
Treasurer and Controller at Wynns International, Inc., a
supplier of automotive and industrial components and specialty
chemicals, from July 1990 to September 2000. Before working for
Wynns
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International, Inc., Mr. Barlow was Vice President,
Controller from 1986 to 1990 for Ford Equipment Leasing Company.
From 1983 to 1985 Mr. Barlow worked for the accounting firm
Deloitte, Haskins and Sells.
Mr. Diradoorian has served as Allergans Executive
Vice President, Global Technical Operations since February 2006.
From April 2005 to February 2006, Mr. Diradoorian served as
Senior Vice President, Global Technical Operations. From
February 2001 to April 2005, Mr. Diradoorian served as Vice
President, Global Engineering and Technology.
Mr. Diradoorian joined Allergan in July 1981. Prior to
joining Allergan, Mr. Diradoorian held positions at
American Hospital Supply and with the Los Angeles Dodgers
baseball team.
Mr. Edwards has been Executive Vice President, Finance and
Business Development, Chief Financial Officer since September
2005. Prior to that, Mr. Edwards was Corporate Vice
President, Corporate Development since March 2003 and previously
served as Senior Vice President Treasury, Tax, and Investor
Relations. He joined Allergan in 1993. Prior to joining
Allergan, Mr. Edwards was with Banque Paribas and Security
Pacific National Bank, where he held various senior level
positions in the credit and business development functions.
Mr. Ingram has been Executive Vice President, Chief
Administrative Officer, General Counsel and Secretary, as well
as our Chief Ethics Officer, since October 2006. From October
2003 through October 2006, Mr. Ingram served as Executive
Vice President, General Counsel and Secretary, as well as our
Chief Ethics Officer. Mr. Ingram currently manages the
Global Legal Affairs organization, Global Regulatory Affairs,
Compliance and Internal Audit, Corporate Communications, Global
Trade Compliance, the Global Human Resources organization and
the Information Technology organization. Prior to that,
Mr. Ingram served as Corporate Vice President, General
Counsel and Secretary, as well as our Chief Ethics Officer,
since July 2001. Prior thereto he was Senior Vice President and
General Counsel since January 2001, and Assistant Secretary
since November 1998. Prior to that, Mr. Ingram was
Associate General Counsel from August 1998, Assistant General
Counsel from January 1998 and Senior Attorney and Chief
Litigation Counsel from March 1996, when he first joined
Allergan. Prior to joining Allergan, Mr. Ingram was, from
August 1988 to March 1996, an attorney with the law firm of
Gibson, Dunn & Crutcher. Mr. Ingram serves as a
member of the board of directors of Volcom, Inc., a
publicly-traded
designer and distributor of clothing and accessories.
Dr. Whitcup has been Executive Vice President, Research and
Development since July 2004. Dr. Whitcup joined Allergan in
January 2000 as Vice President, Development, Ophthalmology. In
January 2004, Dr. Whitcup became Allergans Senior
Vice President, Development, Ophthalmology. From 1993 until
2000, Dr. Whitcup served as the Clinical Director of the
National Eye Institute at the National Institutes of Health. As
Clinical Director, Dr. Whitcups leadership was vital
in building the clinical research program and promoting new
ophthalmic therapeutic discoveries. Dr. Whitcup is a
faculty member at the Jules Stein Eye Institute/David Geffen
School of Medicine at the University of California, Los Angeles.
Dr. Whitcup serves on the board of directors of Avanir
Pharmaceuticals, a
publicly-traded
pharmaceutical company.
We operate in a rapidly changing environment that involves a
number of risks. The following discussion highlights some of
these risks and others are discussed elsewhere in this report.
These and other risks could materially and adversely affect our
business, financial condition, prospects, operating results or
cash flows. The following risk factors are not an exhaustive
list of the risks associated with our business. New factors may
emerge or changes to these risks could occur that could
materially affect our business.
We operate in a highly competitive business.
The pharmaceutical and medical device industries are highly
competitive and they require an ongoing, extensive search for
technological innovation. They also require, among other things,
the ability to effectively discover, develop, test and obtain
regulatory approvals for products, as well as the ability to
effectively commercialize, market and promote approved products,
including communicating the effectiveness, safety and value of
products to actual and prospective customers and medical
professionals.
Many of our competitors have greater resources than we have.
This enables them, among other things, to make greater research
and development investments and spread their research and
development costs, as well as their
24
marketing and promotion costs, over a broader revenue base. Our
competitors may also have more experience and expertise in
obtaining marketing approvals from the FDA and other regulatory
authorities. In addition to product development, testing,
approval and promotion, other competitive factors in the
pharmaceutical and medical device industries include industry
consolidation, product quality and price, product technology,
reputation, customer service and access to technical information.
It is possible that developments by our competitors could make
our products or technologies less competitive or obsolete. Our
future growth depends, in part, on our ability to develop
products which are more effective. For instance, for our eye
care products to be successful, we must be able to manufacture
and effectively market those products and persuade a sufficient
number of eye care professionals to use or continue to use our
current products and the new products we may introduce. Glaucoma
must be treated over an extended period and doctors may be
reluctant to switch a patient to a new treatment if the
patients current treatment for glaucoma remains effective.
Sales of our existing products may decline rapidly if a new
product is introduced by one of our competitors or if we
announce a new product that, in either case, represents a
substantial improvement over our existing products. Similarly,
if we fail to make sufficient investments in research and
development programs, our current and planned products could be
surpassed by more effective or advanced products developed by
our competitors.
Until December 2000,
Botox®
was the only neuromodulator approved by the FDA. At that time,
the FDA approved
Myobloc®,
a neuromodulator formerly marketed by Elan Pharmaceuticals and
now marketed by Solstice Neurosciences, Inc. Beaufour Ipsen Ltd.
is seeking FDA approval of its
Dysport®
neuromodulator for certain therapeutic indications, and Medicis,
its licensee for the United States, Canada and Japan, is seeking
approval of
Reloxin®
for cosmetic indications. Beaufour Ipsen has marketed
Dysport®
in Europe since 1991, prior to our European commercialization of
Botox®
in 1992. In June 2006, Beaufour Ipsen received the marketing
authorization for a cosmetic indication for
Dysport®
in Germany. In 2007, Beaufour Ipsen granted an exclusive
development and marketing license for
Dysport®
to Galderma in the European Union, Russia, Eastern Europe and
the Middle East, and first rights of negotiation for other
countries around the world, except the United States, Canada and
Japan.
Reloxin®
is also currently under review for use in aesthetic medicine
indications by the French regulatory authorities as part of an
application for a license across the European Union.
Mentor Corporation is conducting clinical trials for a competing
neuromodulator in the United States. In addition, we are aware
of competing neuromodulators currently being developed and
commercialized in Asia, Europe, South America and other markets.
A Chinese entity received approval to market a botulinum toxin
in China in 1997, and we believe that it has launched or is
planning to launch its botulinum toxin product in other lightly
regulated markets in Asia, South America and Central America.
These lightly regulated markets may not require adherence to the
FDAs current Good Manufacturing Practice, or cGMP,
regulations, or the regulatory requirements of the European
Medical Evaluation Agency or other regulatory agencies in
countries that are members of the Organization for Economic
Cooperation and Development. Therefore, companies operating in
these markets may be able to produce products at a lower cost
than we can. In addition, Merz received approval from German
authorities for
Xeomin®
and launched its product in July 2005, and a Korean botulinum
toxin,
Neuronox®,
was approved for sale in Korea in June 2006. The company,
Medy-Tox Inc., received exportation approval from Korean
authorities in early 2005. In February 2007, Q-Med announced a
worldwide license for
Neuronox®,
with the exception of certain countries in Asia where Medy-Tox
may retain the marketing rights. Our sales of
Botox®
could be materially and negatively impacted by this competition
or competition from other companies that might obtain FDA
approval or approval from other regulatory authorities to market
a neuromodulator.
Mentor Corporation is our principal competitor in the United
States for breast implants. Mentor announced that, like us, it
received FDA approval in November 2006 to sell its silicone
breast implants. The conditions under which Mentor is allowed to
market its silicone breast implants in the United States are
similar to ours, including indications for use and the
requirement to conduct post-marketing studies. If patients or
physicians prefer Mentors breast implant products to ours
or perceive that Mentors breast implant products are safer
than ours, our sales of breast implants could materially suffer.
We are aware of several companies conducting clinical studies of
breast implant products in the United States. Internationally,
we compete with several manufacturers, including Mentor
Corporation, Silimed, Medicor Corporation, Poly Implant
Prostheses, Nagor, Laboratories Sebbin, and LPI.
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Medicis Pharmaceutical Corporation began marketing
Restylane®,
a dermal filler, in January 2004. Through our purchase of
Inamed, we acquired the rights to sell a competing dermal
filler,
Juvédermtm,
in the United States, Canada and Australia and
Hydrafilltm
in certain European countries.
Juvédermtm
was approved by the FDA for sale in the United States in June
2006, and we announced nationwide availability of
Juvédermtm
in January 2007. We cannot assure you that
Juvédermtm
will offer equivalent or greater facial aesthetic benefits to
competitive dermal filler products, that it will be competitive
in price or gain acceptance in the marketplace.
Ethicon Endo-Surgery, Inc., a Johnson & Johnson
company, announced an early 2007 premarket filing target for FDA
approval of its gastric band product, SAGB Quick Close (Swedish
Adjustable Gastric Band), which will compete against our
LAP-BAND®
System upon entry to the U.S. market. The
LAP-BAND®
System also competes with surgical obesity procedures, including
gastric bypass, vertical banded gastroplasty, sleeve
gastrectomy, and biliopancreatic diversion.
We also face competition from generic drug manufacturers in the
United States and internationally. For instance, Falcon
Pharmaceuticals, Ltd., an affiliate of Alcon Laboratories, Inc.,
attempted to obtain FDA approval for a brimonidine product to
compete with our
Alphagan®
P product. However, pursuant to our March 2006 settlement
with Alcon, Alcon agreed not to sell, offer for sale or
distribute its brimonidine product until September 30,
2009, or earlier if specified market conditions occur. The
primary market condition will have occurred if the extent to
which prescriptions of
Alphagan®
P have been converted to other brimonidine-containing
products we market has increased to a specified threshold. In
February 2007, we received a paragraph 4 Hatch-Waxman Act
certification from Excela Pharmsci in which it purports to have
sought FDA approval to market a generic brimonidine 0.15%
ophthalmic solution.
Changes
in the consumer marketplace and economic conditions may
adversely affect sales or the profitability of our
products.
Facial aesthetic products, such as
Botox®
Cosmetic and dermal fillers, obesity intervention products and,
to a significant extent, breast implants, are products based on
consumer choice. If we fail to anticipate, identify or react to
competitive products or if consumer preferences in the cosmetic
marketplace shift to alternative treatments, we may experience a
decline in demand for these products. In addition, the popular
media has at times in the past produced, and may continue in the
future to produce, negative reports and publicity regarding the
efficacy, safety or side effects of these products. Consumer
perceptions of these products may be negatively impacted by
these reports and for other reasons, including the use of
unapproved botulinum toxins that result in injury, which may
cause demand to decline.
Breast augmentations,
Botox®
Cosmetic and dermal fillers are also typically elective
aesthetic procedures. Other than federally-mandated coverage and
reimbursement for post-mastectomy reconstructive surgery, breast
augmentations and other cosmetic procedures are not typically
covered by insurance. Adverse changes in the economy may cause
consumers to reassess their spending choices and reduce the
demand for these procedures, and this shift could have an
adverse effect on our sales and profitability.
Reimbursement for obesity surgery, including use of our
products, is available to various degrees in most of our
international markets. In the United States, coverage and
reimbursement by insurance plans are increasing, but not widely
available to all insured patients. Adverse changes in the
economy could have an adverse effect on consumer spending and
governmental health care resources. This shift could have an
adverse effect on the sales and profitability of our obesity
intervention business.
Changes in applicable tax laws may adversely affect sales or the
profitability of
Botox®,
Botox®
Cosmetic, our dermal fillers or breast implants. Because
Botox®
and
Botox®
Cosmetic are pharmaceutical products, we generally do not
collect or pay state sales or other tax on sales of
Botox®
or
Botox®
Cosmetic. We could be required to collect and pay state sales or
other tax associated with prior, current or future years on
sales of
Botox®
or
Botox®
Cosmetic, our dermal fillers or breast implants. In addition to
any retroactive taxes and corresponding interest and penalties
that could be assessed, if we were required to collect or pay
state sales or other tax associated with current or future years
on sales of
Botox®,
Botox®
Cosmetic, our dermal fillers or breast implants, our sales of,
or our profitability from,
Botox®,
Botox®
Cosmetic, our dermal fillers or breast implants could be
adversely affected due to the increased cost associated with
those products.
26
We
could experience difficulties obtaining or creating the raw
materials needed to produce our products and interruptions in
the supply of raw materials could disrupt our manufacturing and
cause our sales and profitability to decline.
The loss of a material supplier or the interruption of our
manufacturing processes could adversely affect our ability to
manufacture or sell many of our products. We obtain the
specialty chemicals that are the active pharmaceutical
ingredients in certain of our products from single sources, who
must maintain compliance with the FDAs cGMP regulations.
If we experience difficulties acquiring sufficient quantities of
these materials from our existing suppliers, or if our suppliers
are found to be non-compliant with the cGMPs, obtaining the
required regulatory approvals, including from the FDA or the
European Medical Evaluation Agency (EMEA), to use alternative
suppliers may be a lengthy and uncertain process. A lengthy
interruption of the supply of one or more of these materials
could adversely affect our ability to manufacture and supply
products, which could cause our sales and profitability to
decline. In addition, the manufacturing process to create the
raw material necessary to produce
Botox®
is technically complex and requires significant lead-time. Any
failure by us to forecast demand for, or to maintain an adequate
supply of, the raw material and finished product could result in
an interruption in the supply of
Botox®
and a resulting decrease in sales of the product.
We also rely on a single supplier for silicone raw materials
used in some of our products, including breast implants.
Although we have an agreement with this supplier to transfer the
necessary formulations to us in the event that it cannot meet
our requirements, we cannot guarantee that we would be able to
produce or obtain a sufficient amount of quality silicone raw
materials in a timely manner. We depend on third party
manufacturers for silicone molded components. These third party
manufacturers must maintain compliance with FDAs Quality
System Regulation, or QSR, which sets forth the current good
manufacturing practice standard for medical devices and requires
manufacturers to follow design, testing and control
documentation and air quality assurance procedures during the
manufacturing process. Any material reduction in our raw
material supply or a failure by our third party manufacturers to
maintain compliance with the QSR could result in decreased sales
of our products and a decease in our revenues. Additionally,
certain of our manufacturing processes are only performed at one
location worldwide.
Our
future success depends upon our ability to develop new products,
and new indications for existing products, that achieve
regulatory approval for commercialization.
For our business model to be successful, we must continually
develop, test and manufacture new products or achieve new
indications for the use of our existing products. Prior to
marketing, these new products and product indications must
satisfy stringent regulatory standards and receive requisite
approvals or clearances from regulatory authorities in the
United States and abroad. The development, regulatory review and
approval, and commercialization processes are time consuming,
costly and subject to numerous factors that may delay or prevent
the development, approval or clearance, and commercialization of
new products, including legal actions brought by our
competitors. To obtain approval or clearance of new indications
or products in the United States, we must submit, among other
information, the results of preclinical and clinical studies on
the new indication or product candidate to the FDA. The number
of preclinical and clinical studies that will be required for
FDA approval varies depending on the new indication or product
candidate, the disease or condition for which the new indication
or product candidate is in development and the regulations
applicable to that new indication or product candidate. Even if
we believe that the data collected from clinical trials of new
indications for our existing products or for our product
candidates are promising, the FDA may find such data to be
insufficient to support approval of the new indication or
product. The FDA can delay, limit or deny approval of a new
indication or product candidate for many reasons, including:
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a determination that the new indication or product candidate is
not safe and effective;
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the FDA may interpret our preclinical and clinical data in
different ways than we do;
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the FDA may not approve our manufacturing processes or
facilities;
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the FDA may require us to perform post-marketing clinical
studies; or
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the FDA may change its approval policies or adopt new
regulations.
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Products that we are currently developing, other future product
candidates or new indications for our existing products may or
may not receive the regulatory approvals or clearances necessary
for marketing or may receive such
27
approvals or clearances only after delay or unanticipated costs.
Delays or unanticipated costs in any part of the process or our
inability to obtain timely regulatory approval for our products,
including those attributable to, among other things, our failure
to maintain manufacturing facilities in compliance with all
applicable regulatory requirements, including the cGMPs and QSR,
could cause our operating results to suffer and our stock price
to decrease. We are also required to pass pre-approval reviews
and plant inspections of our and our suppliers facilities
to demonstrate our compliance with the cGMPs and QSR.
Further, even if we receive FDA and other regulatory approvals
for a new indication or product, the product may later exhibit
adverse effects that limit or prevent its widespread use or that
force us to withdraw the product from the market or to revise
our labeling to limit the indications for which the product may
be prescribed. In addition, even if we receive the necessary
regulatory approvals, we cannot assure you that new products or
indications will achieve market acceptance. Our future
performance will be affected by the market acceptance of
products such as
Lumigan®,
Alphagan®
P,
Combigantm,
for which we received an approvable letter from the FDA in
December 2006,
Restasis®,
Acular
LS®,
Zymar®,
Botox®,
Juvédermtm,
Ganfort®,
our
Lumigan®/timolol
combination, as well as silicone breast implant products, new
indications for
Botox®
and new products such as
Posurdex®
and memantine. We cannot assure you that these or any other
compounds or products that we are developing for
commercialization will be approved by the FDA or foreign
regulatory bodies for marketing or that we will be able to
commercialize them on terms that will be profitable, or at all.
If any of our products cannot be successfully or timely
commercialized, our operating results could be materially
adversely affected.
Our
product development efforts may not result in commercial
products.
We intend to continue an aggressive research and development
program. Successful product development in the pharmaceutical
and medical device industry is highly uncertain, and very few
research and development projects produce a commercial product.
Product candidates that appear promising in the early phases of
development, such as in early human clinical trials, may fail to
reach the market for a number of reasons, such as:
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the product candidate did not demonstrate acceptable clinical
trial results even though it demonstrated positive preclinical
trial results;
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the product candidate was not effective in treating a specified
condition or illness;
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the product candidate had harmful side effects in humans or
animals;
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the necessary regulatory bodies, such as the FDA, did not
approve the product candidate for an intended use;
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the product candidate was not economical for us to manufacture
and commercialize;
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other companies or people have or may have proprietary rights to
the product candidate, such as patent rights, and will not let
us sell it on reasonable terms, or at all;
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the product candidate is not cost effective in light of existing
therapeutics or alternative devices; and
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certain of our licensors or partners may fail to effectively
conduct clinical development or clinical manufacturing
activities.
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Several of our product candidates have failed or been
discontinued at various stages in the product development
process. Of course, there may be other factors that prevent us
from marketing a product. We cannot guarantee we will be able to
produce commercially successful products. Further, clinical
trial results are frequently susceptible to varying
interpretations by scientists, medical personnel, regulatory
personnel, statisticians, and others, which may delay, limit, or
prevent further clinical development or regulatory approvals of
a product candidate. Also, the length of time that it takes for
us to complete clinical trials and obtain regulatory approval
for product marketing has in the past varied by product and by
the intended use of a product. We expect that this will likely
be the case with future product candidates and we cannot predict
the length of time to complete necessary clinical trials and
obtain regulatory approval.
If we
are unable to obtain and maintain adequate protection for our
intellectual property rights associated with the technologies
incorporated into our products, our business and results of
operations could suffer.
Our success depends in part on our ability to obtain patents or
rights to patents, protect trade secrets and other proprietary
technologies and processes, and prevent others from infringing
on our patents, trademarks, service
28
marks and other intellectual property rights. Upon the
expiration or loss of patent protection for a product, we can
lose a significant portion of sales of that product in a very
short period of time as other companies manufacture generic
forms of our previously protected product at lower cost, without
having had to incur significant research and development costs
in formulating the product. Therefore, our future financial
success may depend in part on obtaining patent protection for
technologies incorporated into our products. We cannot assure
you that such patents will be issued, or that any existing or
future patents will be of commercial benefit. In addition, it is
impossible to anticipate the breadth or degree of protection
that any such patents will afford, and we cannot assure you that
any such patents will not be successfully challenged in the
future. If we are unsuccessful in obtaining or preserving patent
protection, or if any of our products rely on unpatented
proprietary technology, we cannot assure you that others will
not commercialize products substantially identical to those
products. Generic drug manufacturers are currently challenging
the patents covering certain of our products, and we expect that
they will continue to do so in the future.
We believe that the protection of our trademarks and service
marks is an important factor in product recognition and in our
ability to maintain or increase market share. If we do not
adequately protect our rights in our various trademarks and
service marks from infringement, their value to us could be lost
or diminished, seriously impairing our competitive position.
Moreover, the laws of certain foreign countries do not protect
our intellectual property rights to the same extent as do the
laws of the United States. In addition to intellectual property
protections afforded to trademarks, service marks and
proprietary know-how by the various countries in which our
proprietary products are sold, we seek to protect our
trademarks, service marks and proprietary know-how through
confidentiality and proprietary information agreements with
third parties, including our partners, customers, employees and
consultants. These agreements may not provide meaningful
protection or adequate remedies for violation of our rights in
the event of unauthorized use or disclosure of confidential
information. It is possible that these agreements will be
breached or that they will not be enforceable in every instance,
and that we will not have adequate remedies for any such breach.
It is also possible that our trade secrets will become known or
independently developed by our competitors.
Third parties may challenge, invalidate, or circumvent our
patents and patent applications relating to our products,
product candidates and technologies. Challenges may result in
potentially significant harm to our business. The cost of
responding to these challenges and the inherent costs to defend
the validity of our patents, including the prosecution of
infringements and the related litigation, could be substantial
and can preclude or delay commercialization of products. Such
litigation also could require a substantial commitment of our
managements time. For certain of our product candidates,
third parties may have patents or pending patents that they
claim prevent us from commercializing certain product candidates
in certain territories. Our success depends in part on our
ability to obtain and defend patent rights and other
intellectual property rights that are important to the
commercialization of our products and product candidates. For
additional information on our material patents, see
Patents, Trademarks and Licenses in Item 1 of
Part I of this report, Business.
We may
be subject to intellectual property litigation and infringement
claims, which could cause us to incur significant expenses and
losses or prevent us from selling our products.
We cannot assure you that our products will not infringe patents
or other intellectual property rights held by third parties. In
the event we discover that we may be infringing third party
patents or other intellectual property rights, we may not be
able to obtain licenses from those third parties on commercially
attractive terms or at all. We may have to defend, and have
defended, against charges that we violated patents or the
proprietary rights of third parties. Litigation is costly and
time-consuming, and diverts the attention of our management and
technical personnel. In addition, if we infringe the
intellectual property rights of others, we could lose our right
to develop, manufacture or sell products or could be required to
pay monetary damages or royalties to license proprietary rights
from third parties. An adverse determination in a judicial or
administrative proceeding or a failure to obtain necessary
licenses could prevent us from manufacturing or selling our
products, which could harm our business, financial condition,
prospects, results of operations and cash flows. See Item 3
of Part I of this report, Legal Proceedings and
Note 12, Commitments and Contingencies, in the
notes to the consolidated financial statements listed under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules, for information concerning
our current intellectual property litigation.
29
Importation
of products from Canada and other countries into the United
States and intra-European Union trade may lower the prices we
receive for our products.
In the United States, some of our pharmaceutical products are
subject to competition from lower priced versions of those
products and competing products from Canada, Mexico and other
countries where government price controls or other market
dynamics result in lower prices. Our products that require a
prescription in the United States are often available to
consumers in these other markets without a prescription, which
may cause consumers to further seek out our products in these
lower priced markets. The ability of patients and other
customers to obtain these lower priced imports has grown
significantly as a result of the Internet, an expansion of
pharmacies in Canada and elsewhere targeted to American
purchasers, the increase in
U.S.-based
businesses affiliated with Canadian pharmacies marketing to
American purchasers, and other factors. These foreign imports
are illegal under current U.S. law, with the sole exception
of limited quantities of prescription drugs imported for
personal use. However, the volume of imports continues to rise
due to the limited enforcement resources of the FDA and the
U.S. Customs Service, and there is increased political
pressure to permit the imports as a mechanism for expanding
access to lower priced medicines.
In December 2003, Congress enacted the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003. This law
contains provisions that may change U.S. import laws and
expand consumers ability to import lower priced versions
of our products and competing products from Canada, where there
are government price controls. These changes to U.S. import
laws will not take effect unless and until the Secretary of
Health and Human Services certifies that the changes will lead
to substantial savings for consumers and will not create a
public health safety issue. The Secretary of Health and Human
Services has not made such a certification. However, it is
possible that the current Secretary or a subsequent Secretary
could make such a certification in the future. As directed by
Congress, a task force on drug importation conducted a
comprehensive study regarding the circumstances under which drug
importation could be safely conducted and the consequences of
importation on the health, medical costs and development of new
medicines for U.S. consumers. The task force issued its
report in December 2004, finding that there are significant
safety and economic issues that must be addressed before
importation of prescription drugs is permitted. In addition,
federal legislative proposals have been made to implement the
changes to the U.S. import laws without any certification,
and to broaden permissible imports in other ways. Even if the
changes to the U.S. import laws do not take effect, and
other changes are not enacted, imports from Canada and elsewhere
may continue to increase due to market and political forces, and
the limited enforcement resources of the FDA, the
U.S. Customs Service and other government agencies. For
example, Public Law Number
109-295,
which was signed into law in October 2006 and provides
appropriations for the Department of Homeland Security for the
2007 fiscal year, expressly prohibits the U.S. Customs
Services from using funds to prevent individuals from importing
from Canada less than a
90-day
supply of a prescription drug for personal use, when the drug
otherwise complies with the Federal Food, Drug and Cosmetic Act.
A bipartisan group of U.S. Senators also recently
introduced The Pharmaceutical Market and Drug Safety Act
of 2007, which, as proposed, would permit the importation
of lower cost prescription drugs by FDA-approved foreign
pharmacies, and U.S. licensed pharmacies and wholesalers.
Further, certain state and local governments have implemented
importation schemes for their citizens, and, in the absence of
federal action to curtail such activities, we expect other
states and local governments to launch importation efforts.
The importation of foreign products adversely affects our
profitability in the United States. This impact could become
more significant in the future, and the impact could be even
greater if there is a further change in the law or if state or
local governments take further steps to import products from
abroad.
Our
business will continue to expose us to risks of environmental
liabilities.
Our product development programs and manufacturing processes
involve the controlled use of hazardous materials, chemicals and
toxic compounds. These programs and processes expose us to risks
that an accidental contamination could lead to noncompliance
with environmental laws, regulatory enforcement actions and
claims for personal injury and property damage. If an accident
or environmental discharge occurs, or if we discover
contamination caused by prior operations, including by prior
owners and operators of properties we acquire, we could be
liable for cleanup obligations, damages and fines. The
substantial unexpected costs we may incur could have a
significant and adverse effect on our business and results of
operations.
30
We may
experience losses due to product liability claims, product
recalls or corrections.
The design, development, manufacture and sale of our products
involve an inherent risk of product liability or other claims by
consumers and other third parties. We have in the past been, and
continue to be, subject to various product liability claims and
lawsuits. In addition, we have in the past and may in the future
recall or issue field corrections related to our products due to
manufacturing deficiencies, labeling errors or other safety or
regulatory reasons. We cannot assure you that we will not in the
future experience material losses due to product liability
claims, lawsuits, product recalls or corrections.
We have assumed Inameds product liability risks, including
any product liability for its past and present manufacturing of
breast implant products. The manufacture and sale of breast
implant products entails significant risk of product liability
claims due to potential allegations of possible disease
causation, transmission, complications and other health factors,
rupture, deflation or other product failure. See Item 3 of
Part I of this report, Legal Proceedings and
Note 12, Commitments and Contingencies, in the
notes to the consolidated financial statements listed under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules, for information concerning
our current products liability litigation. Historically, other
breast implant manufacturers that suffered such claims in the
1990s were forced to cease operations or even to declare
bankruptcy.
Additionally, recent FDA marketing approval for our silicone
breast implants requires that we monitor patients in our core
study out to 10 years if there has been explantation
without replacement; patients in the core study receive
MRIs at seven and nine years; we conduct a large,
10 year postapproval study; and we conduct additional
smaller studies, including a study aimed at ensuring patients
are adequately informed about the risks of our silicone breast
implants and that the format and content of patient labeling is
adequate. Our competitor, Mentor, is similarly required to
conduct such postapproval studies. We are seeking marketing
approval for other silicone breast implants in the United
States, and if we obtain this approval, it may similarly be
subject to significant restrictions and requirements, including
the need for a patient registry, follow up MRIs, and
substantial Phase IV clinical trial commitments.
We also face a substantial risk of product liability claims from
our eye care, neuromodulator and skin care products and may face
similar risks associated with our obesity intervention and
facial aesthetics products. Additionally, our pharmaceutical and
medical device products may cause, or may appear to cause,
serious adverse side effects or potentially dangerous drug
interactions if misused or improperly prescribed. We are subject
to adverse event reporting regulations that require us to report
to the FDA or similar bodies in other countries if our products
are associated with a death or serious injury. These adverse
events, among others, could result in additional regulatory
controls, such as the performance of costly post-approval
clinical studies or revisions to our approved labeling, which
could limit the indications or patient population for our
products or could even lead to the withdrawal of a product from
the market. Furthermore, any adverse publicity associated with
such an event could cause consumers to seek alternatives to our
products, which may cause our sales to decline, even if our
products are ultimately determined not to have been the primary
cause of the event.
Negative
publicity concerning the safety of our products may harm our
sales and we may be forced to withdraw products.
Physicians and potential and existing patients may have a number
of concerns about the safety of our products, including
Botox®,
breast implants, eye care pharmaceuticals, skin care products,
obesity intervention products and facial dermal fillers, whether
or not such concerns have a basis in generally accepted science
or peer-reviewed scientific research. Negative
publicity whether accurate or inaccurate
about our products, based on, for example, news about
Botox®,
breast implant litigation, regulatory activities and
developments, or bovine spongiform encephalopathy (BSE) or
Creutzfeld-Jacob, or mad cow disease, whether
involving us or a competitor, or new government regulation,
could materially reduce market acceptance of our products and
could result in product withdrawals. In addition, significant
negative publicity could result in an increased number of
product liability claims, whether or not these claims have a
basis in scientific fact. Furthermore, any adverse publicity
associated with such an event could cause consumers to seek
alternatives to our products, which may cause our sales to
decline, even if our products are ultimately determined not to
have been the primary cause of the event.
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Health
care initiatives and other third-party payor cost-containment
pressures could cause us to sell our products at lower prices,
resulting in decreased revenues.
Some of our products are purchased or reimbursed by state and
federal government authorities, private health insurers and
other organizations, such as health maintenance organizations,
or HMOs, and managed care organizations, or MCOs. Third party
payors increasingly challenge pharmaceutical and other medical
device product pricing. There also continues to be a trend
toward managed healthcare in the United States. Pricing
pressures by third-party payors and the growth of organizations
such as HMOs and MCOs could result in lower prices
and/or a
reduction in demand for our products.
In addition, legislative proposals and enactments to reform
healthcare and government insurance programs, including the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, or MMA, and the Deficit Reduction Act of 2005, or DRA,
could significantly influence the manner in which pharmaceutical
products and medical devices are prescribed and purchased. For
example, effective January 1, 2006, the MMA established a
new Medicare outpatient prescription drug benefit under
Part D. The MMA also established a competitive acquisition
program, or CAP, in which physicians who administer drugs in
their offices are offered an option to acquire drugs covered
under the Medicare Part B benefit from vendors who are
selected in a competitive bidding process. Implementation of the
CAP began in July 2006. Further, the DRA requires the Centers
for Medicare and Medicaid Services to amend certain formulas
used to calculate pharmacy reimbursement under Medicaid. These
changes could lead to reduced payments to pharmacies for certain
pharmaceutical products. Such cost containment measures and
healthcare reforms could adversely affect our ability to sell
our products.
Furthermore, individual states have become increasingly
aggressive in passing legislation and implementing regulations
designed to control pharmaceutical product pricing, including
price or patient reimbursement constraints, discounts,
restrictions on certain product access, and to encourage
importation from other countries and bulk purchasing.
Legally-mandated price controls on payment amounts by
third-party payors or other restrictions could negatively and
materially impact our revenues and financial condition. We
encounter similar regulatory and legislative issues in most
countries outside the United States.
We expect there will continue to be federal and state laws
and/or
regulations, proposed and implemented, that could limit the
amounts that foreign, federal and state governments will pay for
health care products and services. The extent to which future
legislation or regulations, if any, relating to the health care
industry or third-party coverage and reimbursement may be
enacted or what effect such legislation or regulation would have
on our business remains uncertain. Such measures or other health
care system reforms that are adopted could have a material
adverse effect on our ability to successfully commercialize our
products or could limit or eliminate our spending on development
projects and affect our ultimate profitability.
In addition, regional healthcare authorities and individual
hospitals are increasingly using bidding procedures to determine
what pharmaceutical and medical device products and which
suppliers will be included in their prescription drug and other
health care programs. This can reduce demand for our products or
put pressure on our product pricing, which could negatively
affect our revenues and profitability.
We are
subject to risks arising from currency exchange rates, which
could increase our costs and may cause our profitability to
decline.
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar.
Therefore, fluctuations in foreign currency exchange rates
affect our operating results. We cannot assure you that future
exchange rate movements, inflation or other related factors will
not have a material adverse effect on our sales or operating
expenses.
32
We are
subject to risks associated with doing business
internationally.
Our business is subject to certain risks inherent in
international business, many of which are beyond our control.
These risks include, among other things:
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adverse changes in tariff and trade protection measures;
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unexpected changes in foreign regulatory requirements, including
quality standards and other certification requirements;
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potentially negative consequences from changes in or
interpretations of tax laws;
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differing labor regulations;
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changing economic conditions in countries where our products are
sold or manufactured or in other countries;
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differing local product preferences and product requirements;
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exchange rate risks;
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restrictions on the repatriation of funds;
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political unrest and hostilities;
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product liability, intellectual property and other claims;
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new export license requirements;
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differing degrees of protection for intellectual
property; and
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|
difficulties in coordinating and managing foreign operations.
|
Any of these factors, or any other international factors, could
have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that
we can successfully manage these risks or avoid their effects.
The
consolidation of drug wholesalers and other wholesaler actions
could increase competitive and pricing pressures on
pharmaceutical manufacturers, including us.
We sell our pharmaceutical products primarily through
wholesalers. These wholesale customers comprise a significant
part of the distribution network for pharmaceutical products in
the United States. This distribution network is continuing to
undergo significant consolidation marked by mergers and
acquisitions. As a result, a smaller number of large wholesale
distributors control a significant share of the market. We
expect that consolidation of drug wholesalers will increase
competitive and pricing pressures on pharmaceutical
manufacturers, including us. In addition, wholesalers may apply
pricing pressure through
fee-for-service
arrangements, and their purchases may exceed customer demand,
resulting in reduced wholesaler purchases in later quarters. We
cannot assure you that we can manage these pressures or that
wholesaler purchases will not decrease as a result of this
potential excess buying.
Our
failure to attract and retain key managerial, technical, selling
and marketing personnel could adversely affect our
business.
Our success depends upon our retention of key managerial,
technical, selling and marketing personnel. The loss of the
services of key personnel might significantly delay or prevent
the achievement of our development and strategic objectives.
We must continue to attract, train and retain managerial,
technical, selling and marketing personnel. Competition for such
highly skilled employees in our industry is high, and we cannot
be certain that we will be successful in recruiting or retaining
such personnel. We also believe that our success depends to a
significant extent on the ability of our key personnel to
operate effectively, both individually and as a group. If we are
unable to identify, hire and integrate new employees in a timely
and cost-effective manner, our operating results may suffer.
We may
acquire companies in the future and these acquisitions could
disrupt our business.
As part of our business strategy, we regularly consider and, as
appropriate, make acquisitions of technologies, products and
businesses that we believe are complementary to our business.
Acquisitions typically entail many risks and could result in
difficulties in integrating the operations, personnel,
technologies and products of the companies
33
acquired, some of which may result in significant charges to
earnings. If we are unable to successfully integrate our
acquisitions with our existing business, we may not obtain the
advantages that the acquisitions were intended to create, which
may materially adversely affect our business, results of
operations, financial condition and cash flows, our ability to
develop and introduce new products and the market price of our
stock. In connection with acquisitions, we could experience
disruption in our business or employee base, or key employees of
companies that we acquire may seek employment elsewhere,
including with our competitors. Furthermore, the products of
companies we acquire may overlap with our products or those of
our customers, creating conflicts with existing relationships or
with other commitments that are detrimental to the integrated
businesses.
Uncertainties
exist in integrating the business and operations of Inamed and
Cornéal into our own.
We are currently integrating certain of Inameds and
Cornéals functions and operations into our own,
although there can be no assurance that we will be successful in
this endeavor. There are inherent challenges in integrating the
operations that could result in a delay or the failure to
achieve the anticipated synergies and, therefore, any potential
cost savings and increases in earnings. Issues that must be
addressed in integrating the operations of Inamed and
Cornéal into our own include, among other things:
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conforming standards, controls, procedures and policies,
business cultures and compensation structures between the
companies;
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conforming information technology and accounting systems;
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consolidating corporate and administrative infrastructures;
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consolidating sales and marketing operations;
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retaining existing customers and attracting new customers;
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retaining key employees;
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identifying and eliminating redundant and underperforming
operations and assets;
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minimizing the diversion of managements attention from
ongoing business concerns;
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separating the facial aesthetics and ophthalmic surgical
businesses of Cornéal and executing the divesture of the
ophthalmic surgical business;
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coordinating geographically dispersed organizations;
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managing tax costs or inefficiencies associated with integrating
the operations of the combined company; and
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making any necessary modifications to operating control
standards to comply with the Sarbanes-Oxley Act of 2002 and the
rules and regulations promulgated thereunder.
|
If we are not able to adequately address these challenges, we
may not realize the anticipated benefits of the integration of
the companies. Actual cost and sales synergies, if achieved at
all, may be lower than we expect and may take longer to achieve
than we anticipate.
Compliance
with the extensive government regulations to which we are
subject is expensive and time consuming, and may result in the
delay or cancellation of product sales, introductions or
modifications.
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our
product development and manufacturing capabilities. All
companies that manufacture, market and distribute
pharmaceuticals and medical devices, including us, are subject
to extensive, complex, costly and evolving regulation by federal
governmental authorities, principally by the FDA and the
U.S. Drug Enforcement Administration, or DEA, and similar
foreign and state government agencies. Failure to comply with
the regulatory requirements of the FDA, DEA and other U.S. and
foreign regulatory agencies may subject a company to
administrative or judicially imposed sanctions, including, among
others, a refusal to approve a pending application to market a
new product or a new indication for an existing product. The
Federal Food, Drug, and Cosmetic Act, the Controlled Substances
Act and other domestic and foreign statutes and regulations
govern or influence the research, testing, manufacturing,
packing, labeling, storing, record keeping, safety,
effectiveness, approval, advertising, promotion, sale and
distribution of our products. Under certain of these
regulations, we are subject to periodic inspection of our
facilities, production processes and control operations
and/or the
testing of our products by the FDA, the DEA and other
authorities, to confirm that we are in compliance with all
applicable
34
regulations, including FDA cGMP regulations with respect to drug
and biologic products and the QSR with respect to medical device
products. The FDA conducts pre-approval and post-approval
reviews and plant inspections of us and our suppliers to
determine whether our record keeping, production processes and
controls, personnel and quality control are in compliance with
the cGMPs, the QSR and other FDA regulations. We are also
required to perform extensive audits of our vendors, contract
laboratories and suppliers to ensure that they are compliant
with these requirements. In addition, in order to commercialize
our products or new indications for an existing product, we must
demonstrate that the product or new indication is safe and
effective, and that our and our suppliers manufacturing
facilities are compliant with applicable regulations, to the
satisfaction of the FDA and other regulatory agencies.
The process for obtaining governmental approval to manufacture
and to commercialize pharmaceutical and medical device products
is rigorous, typically takes many years and is costly, and we
cannot predict the extent to which we may be affected by
legislative and regulatory developments. We are dependent on
receiving FDA and other governmental approvals prior to
manufacturing, marketing and distributing our products. We may
fail to obtain approval from the FDA or other governmental
authorities for our product candidates, or we may experience
delays in obtaining such approvals, due to varying
interpretations of data or our failure to satisfy rigorous
efficacy, safety and manufacturing quality standards.
Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our
products, or will take post-approval action limiting or revoking
our ability to sell our products, or that the rate, timing and
cost of such approvals will adversely affect our product
introduction plans, results of operations and stock price.
Despite the time and expense exerted, regulatory approval is
never guaranteed.
Even after we obtain regulatory approval for a product candidate
or new indication, we are subject to extensive regulation,
including ongoing compliance with the FDAs cGMP and QSR
regulations, completion of post-marketing clinical studies
mandated by the FDA, and compliance with regulations relating to
labeling, advertising, marketing and promotion. In addition, we
are subject to adverse event reporting regulations that require
us to report to the FDA if our products are associated with a
death or serious injury. If we or any third party that we
involve in the testing, packing, manufacture, labeling,
marketing and distribution of our products fail to comply with
any such regulations, we may be subject to, among other things,
warning letters, product seizures, recalls, fines or other civil
penalties, injunctions, suspension or revocation of approvals,
operating restrictions
and/or
criminal prosecution. The FDA recently has increased its
enforcement activities related to the advertising and promotion
of pharmaceutical, biological and medical device products. In
particular, the FDA has expressed concern regarding the
pharmaceutical industrys compliance with the agencys
regulations and guidance governing
direct-to-consumer
advertising, and has increased its scrutiny of such promotional
materials. The FDA may limit or, with respect to certain
products, terminate our dissemination of
direct-to-consumer
advertisements in the future, which could cause sales of those
products to decline. Physicians may prescribe pharmaceutical and
biologic products, and utilize medical device products for uses
that are not described in a products labeling or differ
from those tested by us and approved by the FDA. While such
off-label uses are common and the FDA does not
regulate a physicians choice of treatment, the FDA does
restrict a manufacturers communications on the subject of
off-label use. Companies cannot actively
promote FDA-approved pharmaceutical, biologic or medical
device products for off-label uses, but they may disseminate to
physicians articles published in peer-reviewed journals. To the
extent allowed by law, we disseminate peer-reviewed articles on
our products to targeted physicians. If, however, our
promotional activities fail to comply with the FDAs or
another regulatory bodys regulations or guidelines, we may
be subject to warnings from, or enforcement action by, the FDA
or another enforcement agency.
From time to time, legislative or regulatory proposals are
introduced that could alter the review and approval process
relating to our products. It is possible that the FDA or other
governmental authorities will issue additional regulations
further restricting the sale of our present or proposed
products. Any change in legislation or regulations that govern
the review and approval process relating to our current and
future products could make it more difficult and costly to
obtain approval for new products, or to produce, market, and
distribute existing products.
35
If we
market products in a manner that violates health care fraud and
abuse laws, we may be subject to civil or criminal
penalties.
The Federal health care program anti-kickback statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting, or receiving remuneration to induce or in return for
purchasing, leasing, ordering, or arranging for the purchase,
lease or order of any health care item or service reimbursable
under Medicare, Medicaid or other federally financed health care
programs. This statute has been interpreted to apply to
arrangements between pharmaceutical manufacturers, on the one
hand, and prescribers, purchasers and formulary managers, on the
other hand. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to
induce prescribing, purchases or recommendations may be subject
to scrutiny if they do not qualify for an exemption or safe
harbor.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Pharmaceutical companies have been prosecuted under these laws
for a variety of alleged promotional and marketing activities,
such as allegedly providing free product to customers with the
expectation that the customers would bill federal programs for
the product; reporting to pricing services inflated average
wholesale prices that were then used by federal programs to set
reimbursement rates; engaging in
off-label
promotion that caused claims to be submitted to Medicaid for
non-covered off-label uses; and submitting inflated best price
information to the Medicaid Rebate Program.
HIPAA created two new federal crimes: health care
fraud, and false statements relating to health care matters. The
health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program,
including private payors. The false statements statute prohibits
knowingly and willfully falsifying, concealing or covering up a
material fact or making any materially false, fictitious or
fraudulent statement in connection with the delivery of or
payment for health care benefits, items or services.
The majority of states also have statutes or regulations similar
to these federal laws, which apply to items and services
reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. In addition, some
states have laws that require pharmaceutical companies to adopt
comprehensive compliance programs. For example, under California
law, pharmaceutical companies must comply with both the April
2003 Office of Inspector General Compliance Program Guidance for
Pharmaceutical Manufacturers and the July 2002 PhRMA Code on
Interactions with Healthcare Professionals. We have adopted and
implemented a compliance program which we believe satisfies the
requirements of California law.
Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturers products
from reimbursement under government programs, criminal fines and
imprisonment. Because of the breadth of these laws and the
narrowness of the safe harbors, it is possible that some of our
business activities could be subject to challenge under one or
more of such laws. For example, we and several other
pharmaceutical companies are currently subject to suits by
governmental entities in several jurisdictions, including Erie,
Oswego and Schenectady Counties in New York and in Alabama
alleging that we and these other companies, through promotional,
discounting and pricing practices, reported false and inflated
average wholesale prices or wholesale acquisition costs and
failed to report best prices as required by federal and state
rebate statutes, resulting in the plaintiffs overpaying for
certain medications. If our past or present operations are found
to be in violation of any of the laws described above or other
similar governmental regulations to which we are subject, we may
be subject to the applicable penalty associated with the
violation which could adversely affect our ability to operate
our business and our financial results.
If our
collaborative partners do not perform, we will be unable to
develop and market products as anticipated.
We have entered into collaborative arrangements with third
parties to develop and market certain products, including our
arrangement with GlaxoSmithKline to market
Botox®
in Japan and China and certain other products in the United
States. We cannot assure you that these collaborations will be
successful, lead to significant sales of our products in our
partners territories or lead to the creation of additional
products. If we fail to maintain our
36
existing collaborative arrangements or fail to enter into
additional collaborative arrangements, our licensing revenues
and/or the
number of products from which we could receive future revenues
could decline.
Our dependence on collaborative arrangements with third parties
subjects us to a number of risks. These collaborative
arrangements may not be on terms favorable to us. Agreements
with collaborative partners typically allow partners significant
discretion in marketing our products or electing whether or not
to pursue any of the planned activities. We cannot fully control
the amount and timing of resources our collaborative partners
may devote to products based on the collaboration, and our
partners may choose to pursue alternative products to the
detriment of our collaboration. In addition, our partners may
not perform their obligations as expected. Business
combinations, significant changes in a collaborative
partners business strategy, or its access to financial
resources may adversely affect a partners willingness or
ability to complete its obligations. Moreover, we could become
involved in disputes with our partners, which could lead to
delays or termination of the collaborations and time-consuming
and expensive litigation or arbitration. Even if we fulfill our
obligations under a collaborative agreement, our partner can
terminate the agreement under certain circumstances. If any
collaborative partners were to terminate or breach our
agreements with them, or otherwise fail to complete their
obligations in a timely manner, we could be materially and
adversely affected.
Unanticipated
changes in our tax rates or exposure to additional income tax
liabilities could affect our profitability.
We are subject to income taxes in both the United States and
numerous foreign jurisdictions. Our effective tax rate could be
adversely affected by changes in the mix of earnings in
countries with different statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in or
interpretations of tax laws, including pending tax law changes,
changes in our manufacturing activities and changes in our
future levels of research and development spending. In addition,
we are subject to the continuous examination of our income tax
returns by the Internal Revenue Service and other state and
foreign tax authorities. We regularly assess the likelihood of
outcomes resulting from these examinations to determine the
adequacy of our estimated income tax liabilities. There can be
no assurance that the outcomes from these continuous
examinations will not have an adverse effect on our provision
for income taxes and estimated income tax liabilities.
The
terms of our debt agreements impose many restrictions on us.
Failure to comply with these restrictions could result in
acceleration of our substantial debt. Were this to occur, we
might not have, or be able to obtain, sufficient cash to pay our
accelerated indebtedness.
Our total indebtedness as of December 31, 2006 was
approximately $1,708.4 million. This indebtedness may limit
our flexibility in planning for, or reacting to, changes in our
business and the industry in which it operates and,
consequently, place us at a competitive disadvantage to our
competitors. The operating and financial restrictions and
covenants in our debt agreements may adversely affect our
ability to finance future operations or capital needs or to
engage in new business activities. For example, our debt
agreements restrict our ability to, among other things:
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incur liens or engage in sale lease-back transactions; and
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engage in consolidations, mergers, and asset sales.
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In addition, our debt agreements include financial covenants
that we maintain certain financial ratios. As a result of these
covenants and ratios, we have certain limitations on the manner
in which we can conduct our business, and we may be restricted
from engaging in favorable business activities or financing
future operations or capital needs. Accordingly, these
restrictions may limit our ability to successfully operate our
business. Failure to comply with the financial covenants or to
maintain the financial ratios contained in our debt agreements
could result in an event of default that could trigger
acceleration of our indebtedness. We cannot assure you that our
future operating results will be sufficient to ensure compliance
with the covenants in our debt agreements or to remedy any such
default. In addition, in the event of any default and related
acceleration of obligations, we may not have or be able to
obtain sufficient funds to make any accelerated payments.
37
Litigation
may harm our business or otherwise distract our
management.
Substantial, complex or extended litigation could cause us to
incur large expenditures and distract our management. For
example, lawsuits by employees, stockholders, customers or
competitors could be very costly and substantially disrupt our
business. Disputes from time to time with such companies or
individuals are not uncommon, and we cannot assure you that that
we will always be able to resolve such disputes out of court or
on terms favorable to us.
Our
publicly-filed SEC reports are reviewed by the SEC from time to
time and any significant changes required as a result of any
such review may result in material liability to us and have a
material adverse impact on the trading price of our common
stock.
The reports of publicly-traded companies are subject to review
by the Securities and Exchange Commission from time to time for
the purpose of assisting companies in complying with applicable
disclosure requirements and to enhance the overall effectiveness
of companies public filings, and comprehensive reviews of
such reports are now required at least every three years under
the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at
any time. While we believe that our previously filed SEC reports
comply, and we intend that all future reports will comply in all
material respects with the published rules and regulations of
the SEC, we could be required to modify or reformulate
information contained in prior filings as a result of an SEC
review. Any modification or reformulation of information
contained in such reports could be significant and could result
in material liability to us and have a material adverse impact
on the trading price of our common stock.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our operations are conducted in owned and leased facilities
located throughout the world. We believe our present facilities
are adequate for our current needs. Our headquarters and primary
administrative and research facilities, which we own, are
located in Irvine, California. We lease additional facilities in
California to provide administrative, research and raw material
support, manufacturing, warehousing and distribution. We own one
facility in Texas for manufacturing and warehousing.
Outside of the United States, we own, lease and operate various
facilities for manufacturing and warehousing. Those facilities
are located in Brazil, France, Ireland, Poland and Costa Rica.
Other material facilities include leased facilities for
administration in Australia, Brazil, Canada, France, Germany,
Hong Kong, Ireland, Italy, Japan, Spain and the United Kingdom.
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Item 3.
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Legal
Proceedings
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The information required by this Item is incorporated herein by
reference to Note 12, Commitments and
Contingencies, in our notes to the consolidated financial
statements listed under Item 15 of Part IV of this
report, Exhibits and Financial Statement Schedules.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
We did not submit any matter during the fourth quarter of the
fiscal year covered by this report to a vote of security
holders, through the solicitation of proxies or otherwise.
38
PART II
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Item 5.
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Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The following table shows the quarterly price range of our
common stock and the cash dividends declared per share of common
stock during the periods listed.
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2006
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|
2005
|
Calendar Quarter
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Low
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High
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Div.
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Low
|
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High
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Div.
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First
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|
$
|
105.02
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|
$
|
117.99
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|
|
$
|
0.10
|
|
|
$
|
69.60
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|
|
$
|
81.16
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|
|
$
|
0.10
|
|
Second
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|
92.57
|
|
|
|
109.31
|
|
|
|
0.10
|
|
|
|
69.01
|
|
|
|
86.29
|
|
|
|
0.10
|
|
Third
|
|
|
102.80
|
|
|
|
115.63
|
|
|
|
0.10
|
|
|
|
83.36
|
|
|
|
95.43
|
|
|
|
0.10
|
|
Fourth
|
|
|
105.84
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|
|
|
123.02
|
|
|
|
0.10
|
|
|
|
85.90
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|
|
|
110.50
|
|
|
|
0.10
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Our common stock is listed on the New York Stock Exchange and is
traded under the symbol AGN. In newspapers, stock
information is frequently listed as Alergn.
The approximate number of stockholders of record was 5,752 as of
February 9, 2007.
On January 30, 2007, our Board of Directors declared a cash
dividend of $0.10 per share, payable March 9, 2007 to
stockholders of record on February 16, 2007.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information included under Item 12 of Part III of
this report, Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters, is
hereby incorporated by reference into this Item 5 of
Part II of this report.
Issuer
Purchases of Equity Securities
The following table discloses the purchases of our equity
securities during the fourth fiscal quarter of 2006.
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Total Number of
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Maximum Number (or
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Shares Purchased
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Approximate Dollar
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|
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Total Number
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as Part of Publicly
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Value) of Shares that May
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of Shares
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Average Price
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Announced Plans
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Yet Be Purchased Under
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Period
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Purchased(1)
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Paid per Share
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or Programs
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the Plans or Programs(2)
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October 1, 2006 to
October 31, 2006
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|
0
|
|
|
$
|
N/A
|
|
|
|
0
|
|
|
|
6,966,844
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|
November 1, 2006 to
November 30, 2006
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0
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|
|
$
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N/A
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|
|
0
|
|
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7,571,156
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|
December 1, 2006 to
December 31, 2006
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0
|
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|
$
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N/A
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|
|
|
0
|
|
|
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7,712,756
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Total
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0
|
|
|
$
|
N/A
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|
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|
0
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|
|
N/A
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(1) |
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We maintain an evergreen stock repurchase program, which we
first announced on September 28, 1993. Under the stock
repurchase program, we may maintain up to 9.2 million
repurchased shares in our treasury account at any one time. As
of December 31, 2006, we held approximately
1.5 million treasury shares under this program. |
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(2) |
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The following share numbers reflect the maximum number of shares
that may be purchased under our stock repurchase program and are
as of the end of each of the respective periods. |
39
|
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Item 6.
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Selected
Financial Data
|
SELECTED
CONSOLIDATED FINANCIAL DATA
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|
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Year Ended December 31,
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2006
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|
2005
|
|
2004
|
|
2003
|
|
2002
|
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(in millions, except per share data)
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|
Summary of
Operations
|
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Product net sales
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|
$
|
3,010.1
|
|
|
$
|
2,319.2
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|
$
|
2,045.6
|
|
|
$
|
1,755.4
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|
|
$
|
1,385.0
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Other revenues
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|
|
53.2
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|
|
|
23.4
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|
|
|
13.3
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|
9.4
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|
10.5
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Research service revenues
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|
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|
|
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|
16.0
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|
|
|
40.3
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total revenues
|
|
|
3,063.3
|
|
|
|
2,342.6
|
|
|
|
2,058.9
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|
|
|
1,780.8
|
|
|
|
1,435.8
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|
Operating costs and expenses:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (excludes
amortization of acquired intangible assets)
|
|
|
575.7
|
|
|
|
385.3
|
|
|
|
381.7
|
|
|
|
316.9
|
|
|
|
221.4
|
|
Cost of research services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.5
|
|
|
|
36.6
|
|
Selling, general and administrative
|
|
|
1,333.4
|
|
|
|
936.8
|
|
|
|
791.7
|
|
|
|
705.9
|
|
|
|
633.9
|
|
Research and development
|
|
|
1,055.5
|
|
|
|
388.3
|
|
|
|
342.9
|
|
|
|
762.6
|
|
|
|
232.7
|
|
Amortization of acquired intangible
assets
|
|
|
79.6
|
|
|
|
17.5
|
|
|
|
8.2
|
|
|
|
5.0
|
|
|
|
1.1
|
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118.7
|
|
Restructuring charges (reversal)
and asset write-offs, net
|
|
|
22.3
|
|
|
|
43.8
|
|
|
|
7.0
|
|
|
|
(0.4
|
)
|
|
|
62.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3.2
|
)
|
|
|
570.9
|
|
|
|
527.4
|
|
|
|
(23.7
|
)
|
|
|
129.0
|
|
Non-operating (loss) income
|
|
|
(16.3
|
)
|
|
|
28.3
|
|
|
|
4.7
|
|
|
|
(5.8
|
)
|
|
|
(39.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations before income taxes and minority interest
|
|
|
(19.5
|
)
|
|
|
599.2
|
|
|
|
532.1
|
|
|
|
(29.5
|
)
|
|
|
89.8
|
|
(Loss) earnings from continuing
operations
|
|
|
(127.4
|
)
|
|
|
403.9
|
|
|
|
377.1
|
|
|
|
(52.5
|
)
|
|
|
64.0
|
|
Earnings from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.2
|
|
Net (loss) earnings
|
|
$
|
(127.4
|
)
|
|
$
|
403.9
|
|
|
$
|
377.1
|
|
|
$
|
(52.5
|
)
|
|
$
|
75.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.87
|
)
|
|
$
|
3.08
|
|
|
$
|
2.87
|
|
|
$
|
(0.40
|
)
|
|
$
|
0.49
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.09
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.87
|
)
|
|
$
|
3.01
|
|
|
$
|
2.82
|
|
|
$
|
(0.40
|
)
|
|
$
|
0.49
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
2,130.3
|
|
|
$
|
1,825.6
|
|
|
$
|
1,376.0
|
|
|
$
|
928.2
|
|
|
$
|
1,200.2
|
|
Working capital
|
|
|
1,472.2
|
|
|
|
781.6
|
|
|
|
916.4
|
|
|
|
544.8
|
|
|
|
796.6
|
|
Total assets
|
|
|
5,767.1
|
|
|
|
2,850.5
|
|
|
|
2,257.0
|
|
|
|
1,754.9
|
|
|
|
1,806.6
|
|
Long-term debt, excluding current
portion
|
|
|
1,606.4
|
|
|
|
57.5
|
|
|
|
570.1
|
|
|
|
573.3
|
|
|
|
526.4
|
|
Total stockholders equity
|
|
|
3,143.1
|
|
|
|
1,566.9
|
|
|
|
1,116.2
|
|
|
|
718.6
|
|
|
|
808.3
|
|
Certain reclassifications of prior year amounts have been made
to conform with the current year presentation. Beginning in
2006, we report amortization of acquired intangible assets on a
separate line in our consolidated statements of operations,
which includes the amortization of the intangible assets
acquired in connection with the Inamed acquisition, as well as
the amortization of other intangible assets previously reported
in cost of sales, selling, general and administrative expenses,
and research and development expenses. Beginning in 2006, we
report other revenues on a separate line in our consolidated
statements of operations, which primarily include royalties and
reimbursement income in connection with various contractual
agreements. These other revenue amounts were previously included
in selling, general and administrative expenses. The financial
data above also has been recast to reflect the results of
operations and financial positions of our ophthalmic surgical
and contact lens care businesses as a discontinued operation
following our spin-off of Advanced Medical Optics, Inc., or AMO.
The results of operations for our discontinued operations
include allocations of certain Allergan expenses to those
operations. These amounts have been allocated on the basis that
is considered by management to reflect most fairly or reasonably
the utilization of the services provided to, or the benefit
obtained by, those operations.
40
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This financial review presents our operating results for each of
the three years in the period ended December 31, 2006, and
our financial condition at December 31, 2006. Except for
the historical information contained herein, the following
discussion contains forward-looking statements which are subject
to known and unknown risks, uncertainties and other factors that
may cause our actual results to differ materially from those
expressed or implied by such forward-looking statements. We
discuss such risks, uncertainties and other factors throughout
this report and specifically under Item 1A of Part I
of this report, Risk Factors. In addition, the
following review should be read in connection with the
information presented in our consolidated financial statements
and the related notes to our consolidated financial statements.
Critical
Accounting Policies, Estimates and Assumptions
The preparation and presentation of financial statements in
conformity with U.S. generally accepted accounting
principles requires us to establish policies and to make
estimates and assumptions that affect the amounts reported in
our consolidated financial statements. In our judgment, the
accounting policies, estimates and assumptions described below
have the greatest potential impact on our consolidated financial
statements. Accounting assumptions and estimates are inherently
uncertain and actual results may differ materially from our
estimates.
Revenue
Recognition
We recognize revenue from product sales when goods are shipped
and title and risk of loss transfer to our customers. A
substantial portion of our revenue is generated by the sale of
specialty pharmaceutical products (primarily eye care
pharmaceuticals and skin care products) to wholesalers within
the United States, and we have a policy to attempt to maintain
average U.S. wholesaler inventory levels at an amount less
than eight weeks of our net sales. A portion of our revenue is
generated from consigned inventory of breast implants maintained
at physician, hospital and clinic locations. These customers are
contractually obligated to maintain a specific level of
inventory and to notify us upon the use of consigned inventory.
Revenue for consigned inventory is recognized at the time we are
notified by the customer that the product has been used.
Notification is usually through the replenishing of the
inventory, and we periodically review consignment inventories to
confirm the accuracy of customer reporting.
We generally offer cash discounts to customers for the early
payment of receivables. Those discounts are recorded as a
reduction of revenue and accounts receivable in the same period
that the related sale is recorded. The amounts reserved for cash
discounts were $2.3 million and $1.8 million at
December 31, 2006 and 2005, respectively. Provisions for
cash discounts deducted from consolidated sales in 2006, 2005
and 2004 were $30.9 million, $26.6 million and
$22.5 million, respectively. We permit returns of product
from most product lines by any class of customer if such product
is returned in a timely manner, in good condition and from
normal distribution channels. Return policies in certain
international markets and for certain medical device products,
primarily breast implants, provide for more stringent guidelines
in accordance with the terms of contractual agreements with
customers. We do not provide a right of return on our facial
aesthetics product line. Our estimates for sales returns are
based upon the historical patterns of products returned matched
against the sales from which they originated, and
managements evaluation of specific factors that may
increase the risk of product returns. The amount of allowances
for sales returns recognized in our consolidated balance sheets
at December 31, 2006 and 2005 were $20.1 million and
$5.1 million, respectively. Provisions for sales returns
deducted from consolidated sales were $146.5 million,
$30.6 million and $25.4 million in 2006, 2005 and
2004, respectively. The increase in the allowance for sales
returns at December 31, 2006 compared to December 31,
2005 and the increase in the provision for sales returns in 2006
compared to 2005 and 2004 was primarily due to the acquired
Inamed medical device products, primarily breast implants, which
generally have a significantly higher rate of return than
specialty pharmaceutical products. Historical allowances for
cash discounts and product returns have been within the amounts
reserved or accrued.
We participate in various managed care sales rebate and other
incentive programs, the largest of which relates to Medicaid and
Medicare. Sales rebate and other incentive programs also include
chargebacks, which are contractual discounts given primarily to
federal government agencies, health maintenance organizations,
pharmacy
41
benefits managers and group purchasing organizations. Sales
rebates and incentive accruals reduce revenue in the same period
that the related sale is recorded and are included in
Other accrued expenses in our consolidated balance
sheets. The amounts accrued for sales rebates and other
incentive programs were $71.2 million and
$71.9 million at December 31, 2006 and 2005,
respectively. Provisions for sales rebates and other incentive
programs deducted from consolidated sales were
$175.6 million, $167.4 million and $144.7 million
in 2006, 2005 and 2004, respectively. The increase in the
provision for sales rebates and other incentive programs during
2006 and 2005 compared to the corresponding prior year is
primarily due to the increase in U.S. specialty
pharmaceutical sales, principally eye care pharmaceutical
products which are subject to such rebate and incentive
programs. In addition, an increase in our published list prices
in the United States for pharmaceutical products, which occurred
for several of our products early in 2006 and 2005, generally
results in higher provisions for sales rebates and other
incentive programs deducted from consolidated sales.
Our procedures for estimating amounts accrued for sales rebates
and other incentive programs at the end of any period are based
on available quantitative data and are supplemented by
managements judgment with respect to many factors,
including but not limited to, current market dynamics, changes
in contract terms, changes in sales trends, an evaluation of
current laws and regulations and product pricing.
Quantitatively, we use historical sales, product utilization and
rebate data and apply forecasting techniques in order to
estimate our liability amounts. Qualitatively, managements
judgment is applied to these items to modify, if appropriate,
the estimated liability amounts. There are inherent risks in
this process. For example, customers may not achieve assumed
utilization levels; customers may misreport their utilization to
us; and actual movements of the U.S. Consumer Price
Index Urban (CPI-U), which affect our rebate
programs with U.S. federal and state government agencies,
may differ from those estimated. On a quarterly basis,
adjustments to our estimated liabilities for sales rebates and
other incentive programs related to sales made in prior periods
have not been material and have generally been less than 0.5% of
consolidated product net sales. An adjustment to our estimated
liabilities of 0.5% of consolidated product net sales on a
quarterly basis would result in an increase or decrease to net
sales and earnings before income taxes of approximately
$4 million to $5 million. The sensitivity of our
estimates can vary by program and type of customer.
Additionally, there is a significant time lag between the date
we determine the estimated liability and when we actually pay
the liability. Due to this time lag, we record adjustments to
our estimated liabilities over several periods, which can result
in a net increase to earnings or a net decrease to earnings in
those periods. Material differences may result in the amount of
revenue we recognize from product sales if the actual amount of
rebates and incentives differ materially from the amounts
estimated by management.
We recognize license fees, royalties and reimbursement income
for services provided as other revenues based on the facts and
circumstances of each contractual agreement. In general, we
recognize income upon the signing of a contractual agreement
that grants rights to products or technology to a third party if
we have no further obligation to provide products or services to
the third party after entering into the contract. We defer
income under contractual agreements when we have further
obligations that indicate that a separate earnings process has
not culminated.
Pensions
We sponsor various pension plans in the United States and abroad
in accordance with local laws and regulations. Our
U.S. pension plans account for a large majority of our
aggregate pension plans net periodic benefit costs and
projected benefit obligations. In connection with these plans,
we use certain actuarial assumptions to determine the
plans net periodic benefit costs and projected benefit
obligations, the most significant of which are the expected
long-term rate of return on assets and the discount rate.
Our assumption for the weighted average expected long-term rate
of return on assets in our U.S. pension plans for
determining the net periodic benefit cost is 8.25% for 2006,
which is the same rate used for 2005 and 2004. Our assumptions
for the weighted average expected long-term rate of return on
assets in our
non-U.S. pension
plans were 6.19%, 6.89% and 6.88% for 2006, 2005 and 2004,
respectively. We determine, based upon recommendations from our
pension plans investment advisors, the expected rate of
return using a building block approach that considers
diversification and rebalancing for a long-term portfolio of
invested assets. Our investment advisors study historical market
returns and preserve long-term historical relationships between
equities and fixed income in a manner consistent with the
widely-accepted capital market principle that assets with higher
volatility generate a greater return over the long run. They
also evaluate market factors such as inflation and interest
rates before
42
long-term
capital market assumptions are determined. The expected rate of
return is applied to the market-related value of plan assets. As
a sensitivity measure, the effect of a 0.25% decline in our rate
of return on assets assumptions for our U.S. and
non-U.S. pension
plans would increase our expected 2007 pre-tax pension benefit
cost by approximately $1.2 million.
The weighted average discount rates used to calculate our U.S.
and
non-U.S. pension
benefit obligations at December 31, 2006 were 5.90% and
4.65%, respectively, and at December 31, 2005 were 5.60%
and 4.24%, respectively. We determine the discount rate largely
based upon an index of high-quality fixed income investments
(for our U.S. plans, we use the U.S. Moodys Aa
Corporate Long Bond Index and for our
non-U.S. plans,
we use the iBoxx Corporate AA 10+ Year Index and the
iBoxx £ Corporate AA 15+ Year Index) and, for our
U.S. plans, a constructed hypothetical portfolio of high
quality fixed income investments with maturities that mirror the
pension benefit obligations at the plans measurement date.
As a sensitivity measure, the effect of a 0.25% decline in the
discount rate assumption for our U.S and
non-U.S. pension
plans would increase our expected 2007 pre-tax pension benefit
costs by approximately $3.7 million and increase our
pension plans projected benefit obligations at
December 31, 2006 by approximately $27.0 million.
In the fourth quarter of 2006, we adopted the balance sheet
recognition and reporting provisions of Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans,
which required us to recognize the funded status, which is the
difference between the fair value of plan assets and the
projected benefit obligations, of our defined benefit pension
and other postretirement benefit plans in our December 31,
2006 consolidated balance sheet. We discuss this change in
accounting principle and the impact on our consolidated
financial statements under Item 7A of Part II of this
report, Recently Adopted Accounting Standards.
Share-Based
Awards
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised), Share-Based
Payment (SFAS No. 123R), which requires
measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors.
Under SFAS No. 123R, the fair value of share-based
payment awards is estimated at the grant date using an option
pricing model, and the portion that is ultimately expected to
vest is recognized as compensation cost over the requisite
service period. Prior to the adoption of
SFAS No. 123R, we accounted for share-based awards
using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), as allowed under
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123). Under the intrinsic value method,
no share-based compensation cost was recognized for awards to
employees or directors if the exercise price of the award was
equal to the fair market value of the underlying stock on the
date of grant.
We adopted SFAS No. 123R using the modified
prospective application method. Under the modified prospective
application method, prior periods are not retrospectively
revised for comparative purposes. The valuation provisions of
SFAS No. 123R apply to new awards and awards that were
outstanding on the adoption effective date that are subsequently
modified or cancelled. Estimated compensation expense for awards
outstanding and unvested on the adoption effective date is
recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure
purposes under SFAS No. 123.
Pre-tax share-based compensation expense recognized under
SFAS No. 123R for the year ended December 31,
2006 was $69.6 million, which consisted of compensation
related to employee and director stock options of
$48.6 million, employee and director restricted share
awards of $9.2 million, and $11.8 million related to
stock contributed to employee benefit plans. Pre-tax share-based
compensation expense recognized under APB No. 25 for the
year ended December 31, 2005 was $13.6 million, which
consisted of compensation related to employee and director
restricted share awards of $4.1 million and
$9.5 million related to stock contributed to employee
benefit plans. Pre-tax share-based compensation expense
recognized under APB No. 25 for the year ended
December 31, 2004 was $11.5 million, which consisted
of compensation related to employee and director restricted
share awards of $2.3 million and $9.2 million related
to stock contributed to employee benefit plans. There was no
share-based compensation expense recognized during 2005 and 2004
related to employee or director stock options. The income
43
tax benefit related to recognized share-based compensation was
$25.3 million, $4.9 million and $3.9 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
We use the Black-Scholes option-pricing model to estimate the
fair value of share-based awards. The determination of fair
value using the Black-Scholes model is affected by our stock
price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but
are not limited to, our expected stock price volatility and
projected employee stock option exercise behaviors. Prior to the
adoption of SFAS No. 123R, we used an estimated stock
price volatility based upon our five year historical average.
Upon adoption of SFAS No. 123R, we changed our
estimated volatility calculation to an equal weighting of our
ten year historical average and the average implied volatility
of
at-the-money
options traded in the open market. We estimate employee stock
option exercise behavior based on actual historical exercise
activity and assumptions regarding future exercise activity of
unexercised, outstanding options.
We recognize share-based compensation cost over the requisite
service period using the straight-line single option method.
Since share-based compensation under SFAS No. 123R is
recognized only for those awards that are ultimately expected to
vest, we have applied an estimated forfeiture rate to unvested
awards for the purpose of calculating compensation cost.
SFAS No. 123R requires these estimates to be revised,
if necessary, in future periods if actual forfeitures differ
from the estimates. Changes in forfeiture estimates impact
compensation cost in the period in which the change in estimate
occurs. In the pro forma information required under
SFAS No. 123 prior to January 1, 2006, we
accounted for forfeitures as they occurred.
On November 10, 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3, Transitional Election Related to
Accounting for Tax Effects of Share-Based Payment Awards. We
have elected to adopt the alternative transition method provided
in this FASB Staff Position for calculating the tax effects of
share-based compensation pursuant to SFAS No. 123R.
The alternative transition method includes a simplified method
to establish the beginning balance additional paid-in capital
pool (APIC Pool) related to tax effects of employee share-based
compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123R.
Income
Taxes
Income taxes are determined using an estimated annual effective
tax rate, which is generally less than the U.S. federal
statutory rate, primarily because of lower tax rates in certain
non-U.S. jurisdictions
and research and development (R&D) tax credits available in
the United States. Our effective tax rate may be subject to
fluctuations during the year as new information is obtained,
which may affect the assumptions we use to estimate our annual
effective tax rate, including factors such as our mix of pre-tax
earnings in the various tax jurisdictions in which we operate,
valuation allowances against deferred tax assets, reserves for
uncertain tax positions, utilization of R&D tax credits and
changes in or interpretation of tax laws in jurisdictions where
we conduct operations. We recognize deferred tax assets and
liabilities for temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities,
along with net operating loss and tax credit carryforwards. We
record a valuation allowance against our deferred tax assets to
reduce the net carrying value to an amount that we believe is
more likely than not to be realized. When we establish or reduce
the valuation allowance against our deferred tax assets, our
income tax expense will increase or decrease, respectively, in
the period such determination is made.
Valuation allowances against our deferred tax assets were
$20.8 million and $44.1 million at December 31,
2006 and 2005, respectively. Changes in the valuation allowances
are recognized in the provision for income taxes as incurred and
are generally included as a component of the estimated annual
effective tax rate. The decrease in the amount of valuation
allowances at December 31, 2006 compared to
December 31, 2005 is primarily due to a $17.2 million
reversal of the valuation allowance against a deferred tax asset
that we have determined is now realizable. As a result of this
determination, we have filed a refund claim for a prior year
with the U.S. Internal Revenue Service. This refund claim
relates to the deductibility of certain capitalized intangible
assets associated with our retinoid portfolio that we
transferred to a third party in 2004. The balance of the net
decrease in the valuation allowance at December 31, 2006
compared to December 31, 2005 is primarily due to a
decrease in the valuation allowance related to deferred tax
assets for certain capitalized intangible assets that became
realizable due to the completion of a federal tax audit in the
United States, and the abandonment of certain intangible assets
for
44
tazarotene oral technologies that will result in a current tax
deduction. Material differences in the estimated amount of
valuation allowances may result in an increase or decrease in
the provision for income taxes if the actual amounts for
valuation allowances required against deferred tax assets differ
from the amounts we estimate.
We have not provided for withholding and U.S. taxes for the
unremitted earnings of certain
non-U.S.
subsidiaries because we have currently reinvested these earnings
indefinitely in these foreign operations. At December 31,
2006, we had approximately $725.5 million in unremitted
earnings outside the United States for which withholding and
U.S. taxes were not provided. Income tax expense would be
incurred if these funds were remitted to the United States. It
is not practicable to estimate the amount of the deferred tax
liability on such unremitted earnings. Upon remittance, certain
foreign countries impose withholding taxes that are then
available, subject to certain limitations, for use as credits
against our U.S. tax liability, if any. We annually update
our estimate of unremitted earnings outside the United States
after the completion of each fiscal year.
Purchase
Price Allocation
The allocation of the purchase price for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the identifiable tangible and intangible
assets acquired, including in-process research and development,
and liabilities assumed based on their respective fair values
under the provisions of Statement of Financial Accounting
Standards No. 141, Business Combinations
(SFAS No. 141). Additionally, we must determine
whether an acquired entity is considered to be a business or a
set of net assets, because a portion of the purchase price can
only be allocated to goodwill in a business combination.
On March 23, 2006, we acquired Inamed Corporation, or
Inamed, and we engaged an independent third-party valuation firm
to assist us in determining the estimated fair values of
in-process research and development, identifiable intangible
assets and certain tangible assets. Appraisals inherently
require significant estimates and assumptions, including but not
limited to, determining the timing and estimated costs to
complete the in-process R&D projects, projecting regulatory
approvals, estimating future cash flows, and developing
appropriate discount rates. We believe the estimated fair values
assigned to the Inamed assets acquired and liabilities assumed
are based on reasonable assumptions. However, the fair value
estimates for the purchase price allocation may change during
the allowable allocation period under SFAS No. 141,
which is up to one year from the acquisition date, if additional
information becomes available that would require changes to our
estimates.
Operations
Headquartered in Irvine, California, we are a technology-driven,
global health care company that discovers, develops and
commercializes specialty pharmaceutical and medical device
products for the ophthalmic, neurological, facial aesthetics,
medical dermatological, breast aesthetics, obesity intervention
and other specialty markets. We are a pioneer in specialty
pharmaceutical research, targeting products and technologies
related to specific disease areas such as glaucoma, retinal
disease, dry eye, psoriasis, acne and movement disorders.
Additionally, we discover, develop and market medical devices,
aesthetics-related pharmaceuticals, and
over-the-counter
products. Within these areas, we are an innovative leader in
saline and silicone gel-filled breast implants, dermal facial
fillers and obesity intervention products, therapeutic and other
prescription products, and to a limited degree,
over-the-counter
products that are sold in more than 100 countries around the
world. We are also focusing research and development efforts on
new therapeutic areas, including gastroenterology, neuropathic
pain and genitourinary diseases. At December 31, 2006, we
employed approximately 6,772 persons around the world. Our
principal markets are the United States, Europe, Latin America
and Asia Pacific.
Results
of Operations
Following our June 2002 spin-off of AMO and through the first
fiscal quarter of 2006, we operated our business on the basis of
a single reportable segment specialty
pharmaceuticals. Due to the Inamed acquisition, beginning in the
second fiscal quarter of 2006, we operated our business on the
basis of two reportable segments specialty
pharmaceuticals and medical devices. The specialty
pharmaceuticals segment produces a broad range of pharmaceutical
products, including: ophthalmic products for glaucoma therapy,
ocular inflammation, infection, allergy and dry eye; skin care
products for acne, psoriasis and other prescription and
over-the-counter
45
dermatological products; and
Botox®
for certain therapeutic and aesthetic indications. The medical
devices segment produces breast implants for aesthetic
augmentation and reconstructive surgery; facial aesthetics
products; and the
LAP-BAND®
System designed to treat severe and morbid obesity and the
BIBtm
System for the treatment of obesity. We provide global marketing
strategy teams to coordinate the development and execution of a
consistent marketing strategy for our products in all geographic
regions that share similar distribution channels and customers.
Management evaluates our business segments and various global
product portfolios on a revenue basis, which is presented below.
We also report sales performance using the non-GAAP financial
measure of constant currency sales. Constant currency sales
represent current period reported sales, adjusted for the
translation effect of changes in average foreign exchange rates
between the current period and the corresponding period in the
prior year. We calculate the currency effect by comparing
adjusted current period reported sales, calculated using the
monthly average foreign exchange rates for the corresponding
period in the prior year, to the actual current period reported
sales. We routinely evaluate our net sales performance at
constant currency so that sales results can be viewed without
the impact of changing foreign currency exchange rates, thereby
facilitating
period-to-period
comparisons of our sales. Generally, when the U.S. dollar
either strengthens or weakens against other currencies, the
growth at constant currency rates will be higher or lower,
respectively, than growth reported at actual exchange rates.
46
The following tables compare net sales by product line within
each reportable segment and certain selected pharmaceutical
products for the years ended December 31, 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Change in
|
|
Percent Change in
|
|
|
December 31,
|
|
Product Net Sales
|
|
Product Net Sales
|
|
|
2006
|
|
2005
|
|
Total
|
|
Performance
|
|
Currency
|
|
Total
|
|
Performance
|
|
Currency
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Pharmaceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$
|
1,530.6
|
|
|
$
|
1,321.7
|
|
|
$
|
208.9
|
|
|
$
|
200.0
|
|
|
$
|
8.9
|
|
|
|
15.8
|
%
|
|
|
15.1
|
%
|
|
|
0.7
|
%
|
Botox/Neuromodulator
|
|
|
982.2
|
|
|
|
830.9
|
|
|
|
151.3
|
|
|
|
145.1
|
|
|
|
6.2
|
|
|
|
18.2
|
%
|
|
|
17.5
|
%
|
|
|
0.7
|
%
|
Skin Care
|
|
|
125.7
|
|
|
|
120.2
|
|
|
|
5.5
|
|
|
|
5.4
|
|
|
|
0.1
|
|
|
|
4.6
|
%
|
|
|
4.5
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Pharmaceuticals
|
|
|
2,638.5
|
|
|
|
2,272.8
|
|
|
|
365.7
|
|
|
|
350.5
|
|
|
|
15.2
|
|
|
|
16.1
|
%
|
|
|
15.4
|
%
|
|
|
0.7
|
%
|
Other*
|
|
|
|
|
|
|
46.4
|
|
|
|
(46.4
|
)
|
|
|
(46.4
|
)
|
|
|
|
|
|
|
(100.0
|
)%
|
|
|
(100.0
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty Pharmaceuticals
|
|
|
2,638.5
|
|
|
|
2,319.2
|
|
|
|
319.3
|
|
|
|
304.1
|
|
|
|
15.2
|
|
|
|
13.8
|
%
|
|
|
13.1
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Devices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breast Aesthetics
|
|
|
177.2
|
|
|
|
|
|
|
|
177.2
|
|
|
|
177.2
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Obesity Intervention
|
|
|
142.3
|
|
|
|
|
|
|
|
142.3
|
|
|
|
142.3
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Facial Aesthetics
|
|
|
52.1
|
|
|
|
|
|
|
|
52.1
|
|
|
|
52.1
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Medical Devices
|
|
|
371.6
|
|
|
|
|
|
|
|
371.6
|
|
|
|
371.6
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product net sales
|
|
$
|
3,010.1
|
|
|
$
|
2,319.2
|
|
|
$
|
690.9
|
|
|
$
|
675.7
|
|
|
$
|
15.2
|
|
|
|
29.8
|
%
|
|
|
29.1
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic product net sales
|
|
|
67.4
|
%
|
|
|
67.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International product net sales
|
|
|
32.6
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$
|
295.9
|
|
|
$
|
277.2
|
|
|
$
|
18.7
|
|
|
$
|
16.9
|
|
|
$
|
1.8
|
|
|
|
6.7
|
%
|
|
|
6.1
|
%
|
|
|
0.6
|
%
|
Lumigan Franchise
|
|
|
327.5
|
|
|
|
267.6
|
|
|
|
59.9
|
|
|
|
57.8
|
|
|
|
2.1
|
|
|
|
22.4
|
%
|
|
|
21.6
|
%
|
|
|
0.8
|
%
|
Other Glaucoma
|
|
|
16.3
|
|
|
|
18.0
|
|
|
|
(1.7
|
)
|
|
|
(1.9
|
)
|
|
|
0.2
|
|
|
|
(9.2
|
)%
|
|
|
(10.4
|
)%
|
|
|
1.2
|
%
|
Restasis
|
|
|
270.2
|
|
|
|
190.9
|
|
|
|
79.3
|
|
|
|
79.2
|
|
|
|
0.1
|
|
|
|
41.6
|
%
|
|
|
41.5
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Change in
|
|
Percent Change in
|
|
|
December 31,
|
|
Product Net Sales
|
|
Product Net Sales
|
|
|
2005
|
|
2004
|
|
Total
|
|
Performance
|
|
Currency
|
|
Total
|
|
Performance
|
|
Currency
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Pharmaceuticals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$
|
1,321.7
|
|
|
$
|
1,137.1
|
|
|
$
|
184.6
|
|
|
$
|
170.3
|
|
|
$
|
14.3
|
|
|
|
16.2
|
%
|
|
|
15.0
|
%
|
|
|
1.2
|
%
|
Botox/Neuromodulator
|
|
|
830.9
|
|
|
|
705.1
|
|
|
|
125.8
|
|
|
|
118.1
|
|
|
|
7.7
|
|
|
|
17.8
|
%
|
|
|
16.7
|
%
|
|
|
1.1
|
%
|
Skin Care
|
|
|
120.2
|
|
|
|
103.4
|
|
|
|
16.8
|
|
|
|
16.7
|
|
|
|
0.1
|
|
|
|
16.2
|
%
|
|
|
16.2
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Pharmaceuticals
|
|
|
2,272.8
|
|
|
|
1,945.6
|
|
|
|
327.2
|
|
|
|
305.1
|
|
|
|
22.1
|
|
|
|
16.8
|
%
|
|
|
15.7
|
%
|
|
|
1.1
|
%
|
Other*
|
|
|
46.4
|
|
|
|
100.0
|
|
|
|
(53.6
|
)
|
|
|
(53.8
|
)
|
|
|
0.2
|
|
|
|
(53.6
|
)%
|
|
|
(53.8
|
)%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty Pharmaceuticals
|
|
$
|
2,319.2
|
|
|
$
|
2,045.6
|
|
|
$
|
273.6
|
|
|
$
|
251.3
|
|
|
$
|
22.3
|
|
|
|
13.4
|
%
|
|
|
12.3
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic product net sales
|
|
|
67.5
|
%
|
|
|
69.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International product net sales
|
|
|
32.5
|
%
|
|
|
30.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$
|
277.2
|
|
|
$
|
268.9
|
|
|
$
|
8.3
|
|
|
$
|
6.1
|
|
|
$
|
2.2
|
|
|
|
3.1
|
%
|
|
|
2.3
|
%
|
|
|
0.8
|
%
|
Lumigan Franchise
|
|
|
267.6
|
|
|
|
232.9
|
|
|
|
34.7
|
|
|
|
32.5
|
|
|
|
2.2
|
|
|
|
14.9
|
%
|
|
|
13.9
|
%
|
|
|
1.0
|
%
|
Other Glaucoma
|
|
|
18.0
|
|
|
|
19.1
|
|
|
|
(1.1
|
)
|
|
|
(1.6
|
)
|
|
|
0.5
|
|
|
|
(5.9
|
)%
|
|
|
(8.5
|
)%
|
|
|
2.6
|
%
|
Restasis
|
|
|
190.9
|
|
|
|
99.8
|
|
|
|
91.1
|
|
|
|
90.9
|
|
|
|
0.2
|
|
|
|
91.2
|
%
|
|
|
91.0
|
%
|
|
|
0.2
|
%
|
|
|
|
* |
|
Other specialty pharmaceuticals sales primarily consist of sales
to Advanced Medical Optics, Inc., or AMO, pursuant to a
manufacturing and supply agreement entered into as part of the
June 2002 AMO spin-off that terminated as scheduled in June
2005. |
47
Product
Net Sales
The $690.9 million increase in product net sales in 2006
compared to 2005 primarily resulted from $371.6 million of
medical device product net sales in 2006 following the Inamed
acquisition and an increase of $319.3 million in our
specialty pharmaceuticals product net sales. The increase in
specialty pharmaceuticals product net sales is due primarily to
increases in sales of our eye care pharmaceuticals and
Botox®
product lines, partially offset by a decrease in other specialty
pharmaceuticals sales, primarily consisting of contract sales to
AMO that terminated as scheduled in June 2005.
Eye care pharmaceuticals sales increased in 2006 compared to
2005 primarily because of strong growth in sales of
Restasis®,
our therapeutic for the treatment of chronic dry eye disease, an
increase in sales of our glaucoma drug
Lumigan®,
growth in sales of eye drop products, primarily
Refresh®,
an increase in sales of
Elestat®,
our topical antihistamine used for the prevention of itching
associated with allergic conjunctivitis, an increase in sales of
Combigantm
in Europe, Latin America and Canada, an increase in new product
sales of
Alphagan®
P 0.1%, our recently introduced next generation of
Alphagan®
for the treatment of glaucoma that was launched in the United
States in the first quarter of 2006, strong sales growth of
Zymar®,
a newer anti-infective, and an increase in sales of Acular
LS®,
our newer non-steriodal anti-inflammatory. This increase in eye
care pharmaceuticals sales was partially offset by lower sales
of
Alphagan®
P 0.15% due to a general decline in U.S. wholesaler
demand and the negative effect of generic
Alphagan®
competition, a decrease in sales of
Acular®,
our older generation anti-inflammatory, and lower sales of other
glaucoma products. We continue to believe that generic
formulations of
Alphagan®
will have a negative effect on future net sales of our
Alphagan®
franchise. We estimate the majority of the increase in our eye
care pharmaceuticals sales was due to a shift in sales mix to a
greater percentage of higher priced products, and an overall net
increase in the volume of product sold. We increased the
published list prices for certain eye care pharmaceutical
products in the United States, ranging from five percent to nine
percent, effective January 22, 2006. We increased the
published U.S. list price for
Lumigan®
by five percent,
Restasis®
by seven percent,
Alphagan®
P 0.15% by five percent,
Zymar®
by seven percent, and Acular
LS®
by nine percent. This increase in prices had a positive net
effect on our U.S. sales for 2006, but the actual net
effect is difficult to determine due to the various managed care
sales rebate and other incentive programs in which we
participate. Wholesaler buying patterns and the change in dollar
value of prescription product mix also affected our reported net
sales dollars, although we are unable to determine the impact of
these effects. We have a policy to attempt to maintain average
U.S. wholesaler inventory levels of our specialty
pharmaceutical products at an amount less than eight weeks of
our net sales. At December 31, 2006, based on available
external and internal information, we believe the amount of
average U.S. wholesaler inventories of our specialty
pharmaceutical products was near the lower end of our stated
policy levels.
Botox®
sales increased in 2006 compared to 2005 primarily due to strong
growth in demand in the United States and in international
markets, excluding Japan, for both cosmetic and therapeutic use.
Effective January 1, 2006, we increased the published price
for
Botox®
and
Botox®
Cosmetic in the United States by approximately four percent,
which we believe had a positive effect on our U.S. sales
growth in 2006, primarily related to sales of
Botox®
Cosmetic. In the United States, the actual net effect from the
increase in price for sales of
Botox®
for therapeutic use is difficult to determine, primarily due to
rebate programs with U.S. federal and state government
agencies. International
Botox®
sales benefited from strong sales growth for both cosmetic and
therapeutic use in Europe, Latin America and Asia Pacific
outside Japan. This increase in international
Botox®
sales was partially offset by a $38.8 million decrease
in international sales of
Botox®
for therapeutic use in Japan, where we recently adopted a third
party license and distribution business model as a result of our
long-term agreement with GlaxoSmithKline, or GSK, that commenced
in September 2005. Based on internal information and
assumptions, we estimate in 2006 that
Botox®
therapeutic sales accounted for approximately 52% of total
consolidated
Botox®
net sales and cosmetic sales accounted for approximately 48% of
total consolidated
Botox®
net sales. Therapeutic and cosmetic net sales increased by
approximately 8% and 32%, respectively in 2006 compared to 2005.
The growth rate in
Botox®
therapeutic net sales was negatively impacted in 2006 by the
$38.8 million reduction in net sales in Japan in 2006
compared to 2005 due to our long-term agreement with GSK.
Excluding this net sales reduction of $38.8 million in
Japan, therapeutic
Botox®
net sales increased by 17% in 2006 compared to 2005. We believe
our worldwide market share for neuromodulators, including
Botox®,
is currently over 85%.
Skin care sales increased in 2006 compared to 2005 primarily due
to higher sales of
Tazorac®,
Zorac®,
Avage®
and MD
Forte®.
Net sales of
Tazorac®,
Zorac®
and
Avage®
increased $4.3 million, or 4.9%, to
$91.2 million in
48
2006, compared to $86.9 million in 2005. The increase in
sales of
Tazorac®,
Zorac®
and
Avage®
resulted primarily from our increasing the published
U.S. list price for these products by nine percent
effective January 14, 2006.
Net sales from medical device products were $371.6 million
in 2006. Product net sales consisted of $177.2 million
related to breast aesthetics, $142.3 million for obesity
intervention and $52.1 million for facial aesthetics.
Medical device product net sales have been included in our
consolidated product net sales effective March 23, 2006,
the date of the Inamed acquisition. Breast aesthetics net sales
primarily consist of saline-filled and silicone gel-filled
breast implants and tissue expanders for use in breast
reconstruction, augmentation and revisions. Obesity intervention
net sales primarily consist of devices used for minimally
invasive long-term treatments of obesity such as our
LAP-BAND®
System and
BIBtm
System. Facial aesthetics net sales primarily consist of dermal
filler products used to correct facial wrinkles, which include
collagen and hyaluronic acid-based injectable products.
The $273.6 million increase in net sales in 2005 compared
to 2004 was primarily the result of increases in sales of our
eye care pharmaceuticals,
Botox®
and skin care product lines, partially offset by a decrease in
other non-pharmaceutical sales to AMO.
Eye care pharmaceuticals sales increased in 2005 compared to
2004 primarily because of strong growth in sales in the United
States of
Restasis®,
our drug for the treatment of chronic dry eye disease, an
increase in sales of our glaucoma drug
Lumigan®,
growth in sales of our
Alphagan®
franchise, primarily from our international operations and new
product sales from
Combigantm
which was in the launch phase in Canada and Brazil during 2005,
a strong increase in sales of eye drop products, primarily
Refresh®,
growth in sales of
Zymar®,
a newer anti-infective, an increase in sales of
Elestat®,
our topical antihistamine used for the prevention of itching
associated with allergic conjunctivitis, and an increase in
sales of Acular
LS®,
our newer non-steroidal anti-inflammatory. This increase in
sales was partially offset by a decrease in sales of
Ocuflox®,
our older generation anti-infective that is experiencing generic
competition in the United States,
Acular®,
our older generation anti-inflammatory, and other glaucoma
products. We continue to believe that generic formulations of
Alphagan®
will have a negative impact on future net sales of our
Alphagan®
franchise. We estimate the majority of the change in our eye
care pharmaceutical sales was due to mix and volume changes;
however, we increased the published list prices for certain eye
care pharmaceutical products in the United States, ranging from
three and one-half percent to nine percent, effective
February 5, 2005. We increased the published U.S. list
price for
Lumigan®
by seven percent,
Restasis®
by three and one-half percent and
Alphagan®
P by five percent. This increase in prices had a
subsequent positive net effect on our U.S. sales during
2005 compared to 2004, but the actual net effect is difficult to
determine due to the various managed care sales rebate and other
incentive programs in which we participate. Wholesaler buying
patterns and the change in dollar value of prescription product
mix also affected our reported net sales dollars. We have a
policy to attempt to maintain average U.S. wholesaler
inventory levels of our products at an amount less than eight
weeks of our net sales. At December 31, 2005, based on
available external and internal information, we believe the
amount of average U.S. wholesaler inventories of our
products was near the lower end of our stated policy levels.
Botox®
sales increased in 2005 compared to 2004 primarily as a result
of strong growth in demand in the United States and in
international markets for both therapeutic and cosmetic uses.
Based on internal information and assumptions, we estimate that
in 2005,
Botox®
therapeutic sales accounted for approximately 57% of total
consolidated
Botox®
net sales and cosmetic sales accounted for approximately 43% of
total consolidated
Botox®
net sales. Therapeutic and cosmetic net sales grew approximately
16% and 21%, respectively, in 2005 compared to 2004. Effective
January 4, 2005, we increased the published price for
Botox®
and
Botox®
Cosmetic in the United States by approximately four percent,
which we believe had a positive effect on our U.S. sales
growth in 2005. International
Botox®
sales also benefited from strong sales growth in Europe,
especially in Germany, the United Kingdom, Spain, Italy and the
Nordics, growth in sales in smaller distribution markets
serviced by our European export sales group, and an increase in
sales in Canada, Mexico, Japan and Australia. We believe our
worldwide market share in 2005 for neuromodulators, including
Botox®,
was over 85%.
Skin care sales increased in 2005 compared to 2004 primarily due
to higher sales of
Tazorac®
in the United States and new product sales generated from
Prevagetm
antioxidant cream, which we launched in January 2005. Net sales
of
Tazorac®,
Zorac®
and
Avage®
increased $11.8 million, or 15.7%, to $86.9 million in
2005 compared to $75.1 million in 2004. We increased the
published U.S. list price for
Tazorac®
by nine percent effective February 5, 2005.
49
Foreign currency changes increased product net sales by
$15.2 million in 2006 compared to 2005, primarily due to
the strengthening of the euro, British Pound, Canadian dollar
and Brazilian real, partially offset by the weakening of the
Australian dollar and other Asian and Latin America currencies
compared to the U.S. dollar. The $22.3 million
increase in net sales from the impact of foreign currency
changes in 2005 compared to 2004 was due primarily to the
strengthening of the Brazilian real, Canadian dollar, British
Pound, Australian dollar, Mexican peso, the euro and other Latin
American currencies compared to the U.S. dollar.
U.S. sales as a percentage of total product net sales
decreased by 0.1 percentage points to 67.4% compared to
U.S. sales of 67.5% in 2005, due primarily to the impact of
sales of medical device products, which have a lower amount of
U.S. sales as a percentage of total product net sales
compared to our pharmaceutical products, and a decrease in
U.S. other non-pharmaceutical sales, partially offset by an
increase in
U.S. Botox®
sales as a percentage of total pharmaceutical product net sales.
U.S. sales in 2005 as a percentage of total product net
sales declined 1.6 percentage points to 67.5% compared to
U.S. sales of 69.1% in 2004, due primarily to a decrease in
U.S. other non-pharmaceutical sales and an increase in
international
Botox®
and eye care pharmaceutical sales, principally in Europe, as a
percentage of total product net sales.
Other
Revenues
Other revenues increased $29.8 million to
$53.2 million in 2006 compared to $23.4 million in
2005. Other revenues increased $10.1 million to
$23.4 million in 2005 compared to $13.3 million in
2004. The increase in other revenues in 2006 compared to 2005 is
primarily related to an increase of approximately
$18.0 million in royalty income earned principally from
sales of
Botox®
in Japan by GSK under a license agreement and other
miscellaneous royalty agreements, and an increase of
approximately $11.8 million in reimbursement income, earned
primarily from services provided in connection with contractual
agreements related to the development and promotion of
Botox®
in Japan and China, the co-promotion of GSKs products
Imitrex Statdose
System®
and
Amerge®
in the United States to neurologists, and services performed
under a co-promotion agreement for a third-party skin care
product. The increase in other revenues in 2005 compared to 2004
is primarily related to an increase in reimbursement income of
$12.4 million associated with services provided in
connection with contractual agreements related to the
development of
Posurdex®
for the ophthalmic specialty market in Japan, the development
and promotion of
Botox®
in Japan and China, and services performed under a co-promotion
agreement for a third-party skin care product, partially offset
by a decline in royalty income of $2.3 million, due
primarily to a decrease in royalty receipts related to patents
for the use of botulinum toxin type B for cervical dystonia.
Income
and Expenses
The following table sets forth the relationship to product net
sales of various items in our consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Product net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Other revenues
|
|
|
1.7
|
|
|
|
1.0
|
|
|
|
0.7
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excludes
amortization of acquired intangible assets)
|
|
|
19.1
|
|
|
|
16.6
|
|
|
|
18.7
|
|
Selling, general and administrative
|
|
|
44.3
|
|
|
|
40.4
|
|
|
|
38.7
|
|
Research and development
|
|
|
35.1
|
|
|
|
16.7
|
|
|
|
16.8
|
|
Amortization of acquired
intangible assets
|
|
|
2.6
|
|
|
|
0.8
|
|
|
|
0.4
|
|
Restructuring charges
|
|
|
0.7
|
|
|
|
1.9
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(0.1
|
)
|
|
|
24.6
|
|
|
|
25.8
|
|
Other, net
|
|
|
(0.5
|
)
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income
taxes and minority interest
|
|
|
(0.6
|
)%
|
|
|
25.8
|
%
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(4.2
|
)%
|
|
|
17.4
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Cost
of Sales
Cost of sales increased $190.4 million, or 49.4%, in 2006
to $575.7 million, or 19.1% of product net sales, compared
to $385.3 million, or 16.6% of product net sales in 2005.
Cost of sales in dollars increased in 2006 compared to 2005
primarily as a result of the 29.8% increase in product net sales
and the increase in the mix of medical device product net sales
relative to total product net sales. Our cost of sales as a
percentage of product net sales for 2006 increased
2.5 percentage points from our cost of sales percentage in
2005, primarily as a result of incremental cost of sales of
$47.9 million associated with the Inamed acquisition
purchase accounting fair-market value inventory adjustment that
was fully recognized as cost of sales in 2006, sales of our
medical device products, which generally have a higher cost of
sales percentage compared to our specialty pharmaceutical
products and a small increase in our cost of sales percentage
for
Botox®.
Cost of sales in 2006 also includes $0.9 million related to
integration and transition costs associated with the Inamed
acquisition and $3.0 million of costs associated with stock
option compensation. The increase in the cost of sales
percentage in 2006 compared to 2005 was partially offset by the
$46.4 million decrease in other non-pharmaceutical sales,
primarily contract manufacturing sales related to AMO, which had
a significantly higher cost of sales percentage than our
pharmaceutical sales.
Cost of sales increased $3.6 million, or 0.9%, in 2005 to
$385.3 million, or 16.6% of product net sales, compared to
$381.7 million, or 18.7% of product net sales in 2004. Cost
of sales in dollars increased in 2005 compared to 2004 primarily
as a result of the 16.8% increase in pharmaceutical product net
sales, partially offset by a decrease in other
non-pharmaceutical sales of $53.6 million. As a percentage
of product net sales, cost of sales decreased by
2.1 percentage points in 2005 compared to 2004 primarily as
a result of the decrease in other non-pharmaceutical sales,
primarily contract manufacturing sales, which had a
significantly higher cost of sales percentage than our
pharmaceutical sales. The decrease in cost of sales percentage
in 2005 compared to 2004 was partially offset by a small
increase in the cost of sales percentage of our eye care
pharmaceuticals,
Botox®
and skin care product lines.
Selling,
General and Administrative
Selling, general and administrative, or SG&A, expenses
increased $396.6 million, or 42.3%, to
$1,333.4 million, or 44.3% of product net sales in 2006
compared to $936.8 million, or 40.4% of product net sales
in 2005. The increase in SG&A expenses in dollars primarily
relates to increased SG&A expenses associated with the
Inamed acquisition, an increase in selling expenses, principally
personnel costs driven by the expansion of our U.S. facial
aesthetics, neuroscience and ophthalmology sales forces and our
European glaucoma sales force to promote growth in consolidated
product sales, especially for
Restasis®,
Lumigan®,
Combigantm,
Botox®
and
Botox®
Cosmetic, and to support our agreement with GSK to
promote GSKs Imitrex Statdose
System®
and
Amerge®
products in the United States. SG&A also increased in 2006
compared to 2005 due to an increase in marketing expenses
supporting our expanded selling efforts, higher general and
administrative expenses, primarily incentive compensation costs,
legal costs and bank fees, an increase in integration and
transition costs related to the Inamed acquisition of
$19.6 million, additional costs associated with stock
option compensation of $34.6 million, and a
$1.9 million increase in transition and duplicate operating
expenses associated with the restructuring and streamlining of
our European operations, to $5.7 million in 2006, which
includes a loss of $3.4 million on the sale of our Mougins,
France facility, compared to $3.8 million in 2005. In
addition, SG&A expenses increased in 2006 compared to 2005
due to pre-tax gains in 2005 totaling $14.2 million that
did not recur in 2006. These gains in 2005 consisted of a
$7.9 million pre-tax gain on the sale of our contact lens
care and surgical distribution business in India to a subsidiary
of AMO, a $5.7 million pre-tax gain on the sale of assets
primarily used for contract manufacturing and the former
distribution of AMO related products at our manufacturing
facility in Ireland, and a $0.6 million pre-tax gain from
the sale of a former manufacturing plant in Argentina. SG&A
expenses in 2006 also included a $28.5 million contribution
to The Allergan Foundation compared to a $2.0 million
contribution in 2005. SG&A expenses as a percentage of
product net sales increased in 2006 compared to 2005 due
primarily to higher selling expenses and general and
administrative costs, partially offset by lower promotion
expenses as a percentage of product net sales.
Selling, general and administrative expenses increased
$145.1 million, or 18.3%, to $936.8 million in 2005,
or 40.4% of product net sales, compared to $791.7 million,
or 38.7% of product net sales in 2004. The increase in SG&A
expenses in 2005 in dollars compared to 2004 was primarily a
result of an increase in promotion costs associated with
direct-to-consumer
advertising in the United States for
Restasis®,
Botox®
Cosmetic, and to a lesser
51
extent, the hyperhidrosis indication for
Botox®,
an increase in selling expenses, principally personnel costs,
and marketing expenses supporting the increase in consolidated
sales, especially for
Restasis®,
Botox®
and
Botox®
Cosmetic, a small increase in the cost of providing product
samples, and higher general and administrative expenses,
primarily incentive compensation, legal costs, information
services, corporate development expenses and charitable
donations. We made a $2.0 million contribution to The
Allergan Foundation in 2005, but did not make a similar
contribution in 2004. SG&A expenses also increased due to an
increase in co-promotion costs related to sales of
Elestat®,
costs associated with expanding our
Botox®
sales force in Europe driven by separating the therapeutic and
aesthetic businesses, and our eye care pharmaceuticals and
Botox®
sales forces in the United States, and the non-recurrence of a
favorable settlement of a patent dispute amounting to
$2.4 million in the first quarter of 2004. SG&A
expenses were also negatively impacted in 2005 by implementation
and transition related expenses and duplicate operating expenses
associated with the restructuring and streamlining of our
European operations, which totaled $3.8 million, and by an
increase in the translated U.S. dollar value of foreign
currency denominated expenses, especially in Europe and Latin
America. This increase in SG&A expenses during 2005 compared
to 2004 was partially offset by a $7.9 million pre-tax gain
on the sale of our contact lens care and surgical products
distribution business in India to a subsidiary of AMO, and a
$5.7 million pre-tax gain on the sale of assets primarily
used for contract manufacturing and the former distribution of
AMO related products at our manufacturing facility in Ireland.
As a percentage of product net sales, SG&A expenses
increased in 2005 compared to 2004 due primarily to higher
promotion and marketing expenses, and general and administrative
expenses as a percentage of product net sales, partially offset
by lower selling expenses, higher miscellaneous operating income
and the pre-tax gains from the sale of assets as a percentage of
net sales.
Research
and Development
Research and development, or R&D, expenses increased
$667.2 million, or 171.8%, to $1,055.5 million in
2006, or 35.1% of product net sales, compared to
$388.3 million, or 16.7% of product net sales in 2005. For
the year ended December 31, 2006, R&D expenses include
a charge of $579.3 million for in-process R&D acquired
in the Inamed acquisition. In-process R&D represents an
estimate of the fair value of purchased in-process technology
for Inamed projects that, as of the Inamed acquisition date
(March 23, 2006), had not reached technical feasibility and
had no alternative future uses in their current state. Excluding
the effect of the $579.3 million in-process R&D charge,
R&D expenses increased by $87.9 million, or 22.6%, to
$476.2 million in 2006, or 15.8% of product net sales,
compared to $388.3 million, or 16.7% of product net sales
in 2005. The increase in R&D expenses, excluding the
$579.3 million in-process R&D charge, was primarily a
result of higher rates of investment in our eye care
pharmaceuticals and
Botox®
product lines, increased spending for new pharmaceutical
technologies, the addition of development expenses associated
with our medical device products acquired in the Inamed
acquisition, and $11.0 million of additional costs
associated with stock option compensation, partially offset by a
decline in spending for our skin care product line. R&D
expenses in 2006 include $0.2 million of integration and
transition costs related to the Inamed acquisition and
$0.5 million of transition and duplicate operating expenses
related to the restructuring and streamlining of our operations
in Europe. Included in our spending for research and development
in 2005 is approximately $10.4 million in costs, which did
not recur in 2006, associated with two third party technology
and license agreements and a buy-out of a license agreement as
discussed below in the analysis of R&D expenses in 2005
compared to 2004. Spending increases in 2006 compared to 2005
were primarily driven by an increase in clinical trial costs
associated with
Posurdex®,
memantine, and certain
Botox®
indications for overactive bladder, migraine headache and benign
prostatic hypertrophy. The decrease in R&D expenses,
excluding the in-process R&D charge, as a percentage of
product net sales in 2006 compared to 2005 was primarily due to
our medical device products acquired in the acquisition of
Inamed, which have a lower level of R&D spend as a
percentage of product net sales relative to our specialty
pharmaceutical products.
R&D expenses increased $45.4 million, or 13.2%, to
$388.3 million in 2005, or 16.7% of product net sales,
compared to $342.9 million, or 16.8% of product net sales
in 2004. R&D spending in dollars increased in 2005 compared
to 2004 primarily as a result of higher rates of investment in
our eye care pharmaceuticals and
Botox®
product lines and new technologies, partially offset by lower
spending for our skin care product line. Spending increases in
2005 compared to 2004 were primarily driven by an increase in
clinical trial costs associated with our
Posurdex®
technology and certain
Botox®
indications for overactive bladder and migraine headache. Also
included in our spending for research and development in 2005 is
$7.4 million in costs associated with two new third party
52
technology license and development agreements associated with
in-process technologies and $3.0 million related to the
buy-out of a license agreement with Johns Hopkins University
associated with ongoing
Botox®
research activities.
Amortization
of Acquired Intangible Assets
Amortization of acquired intangible assets increased
$62.1 million to $79.6 million in 2006, or 2.6% of
product net sales, compared to $17.5 million, or 0.8% of
product net sales in 2005. This increase in amortization expense
in dollars and as a percentage of product net sales in 2006
compared to 2005 is primarily due to a $58.6 million
increase in amortization of intangible assets related to the
Inamed acquisition and capitalized payments to third party
licensors related to achievement of regulatory approvals to
commercialize
Juvédermtm
dermal filler products in the United States and Australia.
Amortization of acquired intangible assets increased
$9.3 million to $17.5 million in 2005, or 0.8% of
product net sales, compared to $8.2 million, or 0.4% of
product net sales in 2004. The increase in amortization expense
in 2005 compared to 2004 was primarily due to an increase in
amortization of intangible assets associated with a royalty
buy-out agreement relating to
Restasis®.
Restructuring
Charges, Integration Costs, and Transition and Duplicate
Operating Expenses
Restructuring charges in 2006 were $22.3 million compared
to $43.8 million in 2005 and $7.0 million in 2004. The
$21.5 million decrease in restructuring charges in 2006
compared to 2005 is due primarily to a decline in restructuring
activities related to the streamlining of our European
operations and the termination of our manufacturing and supply
agreement with AMO, which terminated as scheduled in June 2005,
partially offset by an increase in restructuring costs
associated with the integration of the Inamed operations that we
acquired in 2006. The $36.8 million increase in
restructuring charges in 2005 compared to 2004 was due primarily
to activities associated with the streamlining of our European
operations, the termination of our manufacturing and supply
agreement with AMO, and the restructuring and streamlining of
our operations in Japan.
Restructuring
and Integration of Inamed Operations
In connection with the Inamed acquisition on March 23,
2006, we initiated a global restructuring and integration plan
to merge Inameds operations with our operations and to
capture synergies through the centralization of certain general
and administrative and commercial functions. Specifically, the
restructuring and integration activities involve eliminating
certain general and administrative positions, moving key
commercial Inamed business functions to our locations around the
world, integrating Inameds distributor operations with our
existing distribution network and integrating Inameds
information systems with our information systems.
We have incurred, and anticipate that we will continue to incur,
charges relating to severance, relocation and one-time
termination benefits, payments to public employment and training
programs, integration and transition costs, and contract
termination costs in connection with the restructuring and
integration of our Inamed operations. We currently estimate that
the total pre-tax charges resulting from the restructuring,
including integration and transition costs, will be between
$61.0 million and $75.0 million, all of which are
expected to be cash expenditures. In addition to the pre-tax
charges, we expect to incur capital expenditures of
approximately $20.0 million to $25.0 million,
primarily related to the integration of information systems.
The foregoing estimates are based on assumptions relating to,
among other things, a reduction of approximately 59 positions,
principally general and administrative positions at Inamed
locations. These workforce reduction activities began in the
second quarter of 2006 and are expected to be substantially
completed by the close of the fourth quarter of 2007. Charges
associated with the workforce reduction, including severance,
relocation and one-time termination benefits, and payments to
public employment and training programs, are currently expected
to total approximately $7.0 million to $9.0 million.
Estimated charges include estimates for contract and lease
termination costs, including the termination of duplicative
distributor arrangements. Contract and lease termination costs
are expected to total approximately $29.0 million to
$36.0 million. We began to record these costs in the second
quarter of 2006 and expect to continue to incur them up through
and including the fourth quarter of 2007.
53
We also expect to pay an additional amount of approximately
$1.5 million to $2.0 million for taxes related to
intercompany transfers of trade businesses and net assets.
During the year ended December 31, 2006, we recorded
pre-tax restructuring charges of $13.5 million,
$20.7 million of integration and transition costs and
$1.6 million for income tax costs related to intercompany
transfers of trade businesses and net assets, which we included
in our provision for income taxes. Restructuring charges
primarily consisted of employee severance, one-time termination
benefits, employee relocation, termination of duplicative
distributor agreements and other costs related to the
restructuring of the Inamed operations. Integration and
transition costs consisted primarily of salaries, travel,
communications, recruitment and consulting costs. Integration
and transition costs were reported in our 2006 consolidated
statement of operations as $0.9 million in cost of sales,
$19.6 million in SG&A expenses, and $0.2 million
in R&D expenses.
The following table presents the cumulative restructuring
activities related to the Inamed operations through
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
Employee
|
|
and Lease
|
|
|
|
|
Severance
|
|
Termination Costs
|
|
Total
|
|
|
(in millions)
|
|
Net charge during 2006
|
|
$
|
6.1
|
|
|
$
|
7.4
|
|
|
$
|
13.5
|
|
Spending
|
|
|
(2.1
|
)
|
|
|
(2.5
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
(included in Other accrued expenses)
|
|
$
|
4.0
|
|
|
$
|
4.9
|
|
|
$
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 30, 2007, our Board of Directors approved an
additional plan to restructure and eventually sell or close our
collagen manufacturing facility in Fremont, California that we
acquired in the Inamed acquisition. This plan is the result of a
reduction in anticipated future market demand for human and
bovine collagen products. In connection with the restructuring
and eventual sale or closure of the facility, we estimate that
total pre-tax charges for severance, lease termination and
contract settlement costs will be between $6.0 million and
$8.0 million, all of which are expected to be cash
expenditures. The foregoing estimates are based on assumptions
relating to, among other things, a reduction of approximately 69
positions, consisting principally of manufacturing positions at
our facility. We expect to begin to record these costs in the
first quarter of 2007 and expect to continue to incur them up
through and including the fourth quarter of 2008. Prior to any
closure of our facility, we intend to manufacture a sufficient
quantity of inventories of our collagen products to meet
estimated market demand through 2010.
Restructuring
and Streamlining of Operations in Japan
On September 30, 2005, we entered into a long-term
agreement with GSK to develop and promote our
Botox®
product in Japan and China. Under the terms of this agreement,
we licensed to GSK all clinical development and commercial
rights to
Botox®
in Japan and China. As a result of this agreement, we initiated
a plan in October 2005 to restructure and streamline our
operations in Japan. We substantially completed the
restructuring activities as of June 30, 2006. As of
December 31, 2006, we recorded cumulative pre-tax
restructuring charges of $1.9 million ($2.3 million in
2005 and a net reversal of $0.4 million in 2006). There are
no remaining accrued liabilities for restructuring and
streamlining of our operations in Japan at December 31,
2006.
Restructuring
and Streamlining of European Operations
Effective January 2005, our Board of Directors approved the
initiation and implementation of a restructuring of certain
activities related to our European operations to optimize
operations, improve resource allocation and create a scalable,
lower cost and more efficient operating model for our European
research and development and commercial activities.
Specifically, the restructuring involved moving key European
research and development and select commercial functions from
our Mougins, France and other European locations to our Irvine,
California, Marlow, United Kingdom and Dublin, Ireland
facilities and streamlining functions in our European management
services group. The workforce reduction began in the first
quarter of 2005 and was substantially completed by the close of
the second quarter of 2006.
54
As of December 31, 2006, we substantially completed all
activities related to the restructuring and streamlining of our
European operations and recorded cumulative pre-tax
restructuring charges of $37.5 million, primarily related
to severance, relocation and one-time termination benefits,
payments to public employment and training programs, contract
termination costs and capital and other asset-related expenses.
During the years ended December 31, 2006 and 2005, we
recorded $8.6 million and $28.9 million, respectively,
of restructuring charges related to our European operations.
Additionally, as of December 31, 2006, we have incurred
cumulative transition and duplicate operating expenses of
$11.8 million relating primarily to legal, consulting,
recruiting, information system implementation costs and taxes
related to the European restructuring activities. Duplicate
operating expenses are costs incurred during the transition
period to ensure that job knowledge and skills are properly
transferred to new employees. For the year ended
December 31, 2006, we recorded $6.2 million of
transition and duplicate operating expenses, including a
$3.4 million loss related to the sale of our Mougins,
France facility, consisting of $5.7 million in selling,
general and administrative expenses and $0.5 million in
research and development expenses. For the year ended
December 31, 2005, we recorded $5.6 million of
transition and duplicate operating expenses, consisting of
$0.3 million in cost of sales, $3.8 million in
selling, general and administrative expenses and
$1.5 million in research and development expenses.
The following table presents the cumulative restructuring
activities related to our European operations through
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Other
|
|
|
|
|
Severance
|
|
Costs
|
|
Total
|
|
|
(in millions)
|
|
Net charge during 2005
|
|
$ |
25.9
|
|
|
$
|
3.0
|
|
|
$
|
28.9
|
|
Assets written off
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Spending
|
|
|
(10.7
|
)
|
|
|
(2.8
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
15.2
|
|
|
|
|
|
|
|
15.2
|
|
Net charge during 2006
|
|
|
4.6
|
|
|
|
4.0
|
|
|
|
8.6
|
|
Spending
|
|
|
(15.7
|
)
|
|
|
(0.8
|
)
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
(included in Other accrued expenses for employee severance and
in Other liabilities for other costs)
|
|
$
|
4.1
|
|
|
$
|
3.2
|
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
of Manufacturing and Supply Agreement with Advanced Medical
Optics
In October 2004, our Board of Directors approved certain
restructuring activities related to the scheduled termination in
June 2005 of our manufacturing and supply agreement with AMO,
which we spun-off in June 2002. Under the manufacturing and
supply agreement, which was entered into in connection with the
AMO spin-off, we agreed to manufacture certain contact lens care
products and VITRAX, a surgical viscoelastic, for AMO for a
period of up to three years ending in June 2005. As part of the
scheduled termination of the manufacturing and supply agreement,
we eliminated certain manufacturing positions at our Westport,
Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing
facilities.
As of December 31, 2005, we substantially completed all
activities related to the termination of the manufacturing and
supply agreement. As of December 31, 2006, we recorded
cumulative pre-tax restructuring charges of $22.2 million
($7.1 million in 2004, $14.5 million in 2005 and
$0.6 million in 2006). There are no remaining accrued
liabilities for the termination of our manufacturing and supply
agreement with AMO at December 31, 2006.
Operating
Income (Loss)
Management evaluates business segment performance on an
operating income (loss) basis exclusive of general and
administrative expenses and other indirect costs, restructuring
charges, in-process research and development expenses,
amortization of identifiable intangible assets related to the
Inamed acquisition and certain other adjustments, which are not
allocated to our business segments for performance assessment by
our chief
55
operating decision maker. Other adjustments excluded from our
business segments for purposes of performance assessment
represent income or expenses that do not reflect, according to
established company-defined criteria, operating income or
expenses associated with our core business activities.
General and administrative expenses, other indirect costs and
other adjustments not allocated to our business segments for
purposes of performance assessment consisted of the following
items: for 2006, general and administrative expenses of
$244.8 million, integration and transition costs related to
Inamed operations of $20.7 million, a purchase accounting
fair-market value inventory adjustment related to the Inamed
acquisition of $47.9 million, transition and duplicate
operating expenses relating to the restructuring and
streamlining of our operations in Europe of $6.2 million, a
contribution to The Allegan Foundation of $28.5 million,
and other net indirect costs of $3.6 million; for 2005,
general and administrative expenses of $159.0 million,
transition and duplicate operating expenses relating to the
restructuring and streamlining of our operations in Europe of
$5.6 million, pre-tax gains totaling $14.2 million on
the sale of our contact lens care and surgical distribution
business in India, the sale of assets at our manufacturing
facility in Ireland and the sale of a former manufacturing plant
in Argentina, the buyout of a license agreement of
$3.0 million, and other net indirect income of
$5.2 million; and for 2004, general and administrative
expenses of $149.3 million, a favorable settlement of a
patent dispute of $2.4 million, and other net indirect
costs of $3.4 million.
The following table presents operating income (loss) for each
reportable segment for the years ended December 31, 2006,
2005 and 2004 and a reconciliation of our segments operating
income to consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
(in millions)
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty pharmaceuticals
|
|
$
|
888.8
|
|
|
$
|
762.9
|
|
|
$
|
684.7
|
|
Medical devices
|
|
|
119.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segments
|
|
|
1,008.7
|
|
|
|
762.9
|
|
|
|
684.7
|
|
General and administrative
expenses, other indirect costs and other adjustments
|
|
|
351.7
|
|
|
|
148.2
|
|
|
|
150.3
|
|
In-process research and development
|
|
|
579.3
|
|
|
|
|
|
|
|
|
|
Amortization of acquired
intangible assets(a)
|
|
|
58.6
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
22.3
|
|
|
|
43.8
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (loss) income
|
|
$
|
(3.2
|
)
|
|
$
|
570.9
|
|
|
$
|
527.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents amortization of identifiable intangible assets
related to the Inamed acquisition. |
Our consolidated operating loss for the year ended
December 31, 2006 was $3.2 million, or (0.1)% of
product net sales, compared to consolidated operating income of
$570.9 million, or 24.6% of product net sales in 2005. The
$574.1 million decrease in consolidated operating income
was due to the $190.4 million increase in cost of sales,
$396.6 million increase in SG&A expenses,
$667.2 million increase in R&D expenses, and
$62.1 million increase in amortization of acquired
intangible assets, partially offset by the $690.9 million
increase in product net sales, $29.8 million increase in
other revenues and $21.5 million decrease in restructuring
charges.
Our specialty pharmaceuticals segment operating income in 2006
was $888.8 million, compared to operating income of
$762.9 million in 2005. The $125.9 million increase in
specialty pharmaceuticals segment operating income was due
primarily to an increase in product net sales of our eye care
pharmaceuticals and
Botox®
product lines, partially offset by an increase in cost of sales,
including the effect of a small increase in our cost of sales
percentage for
Botox®,
an increase in selling and marketing expenses, primarily due to
increased personnel costs, and an increase in research and
development expenses.
The increase in our medical device segment operating income of
$119.9 million for the year ended December 31, 2006
was due to the Inamed acquisition.
56
Our consolidated operating income was $570.9 million, or
24.6% of product net sales in 2005, compared to operating income
of $527.4 million, or 25.8% of product net sales in 2004.
The $43.5 million increase in operating income in 2005
compared to 2004 was due primarily to the $273.6 million
increase in product net sales and an increase in other revenues
of $10.1 million, partially offset by the $3.6 million
increase in cost of sales, $145.1 million increase in
SG&A expenses, $45.4 million increase in R&D
expenses, $9.3 million increase in amortization of acquired
intangible assets and $36.8 million increase in
restructuring charges.
Our specialty pharmaceuticals segment operating income in 2005
was $762.9 million, compared to operating income of
$684.7 million in 2004. The $78.2 million increase in
specialty pharmaceuticals segment operating income was due
primarily to an increase in product net sales of our eye care
pharmaceuticals and
Botox®
product lines and a positive benefit from the change in total
mix as a result of the decline in contract manufacturing sales
which had a significantly higher cost of sales percentage than
our pharmaceutical sales, partially offset by an increase in
cost of sales, an increase in selling expenses, primarily due to
increased personnel costs, an increase in promotion expenses
associated with
direct-to-consumer
advertising, and an increase in research and development
expenses.
Non-Operating
Income and Expenses
Total net non-operating expenses for the year ended
December 31, 2006 were $16.3 million compared to net
non-operating income of $28.3 million in 2005. Interest
income in 2006 was $48.9 million compared to interest
income of $35.4 million in 2005. The increase in interest
income in 2006 was primarily due to higher average cash
equivalent balances earning interest of approximately
$139 million and an increase in average interest rates
earned on all cash equivalent balances earning interest of
approximately 1.44% in 2006 compared to 2005. The increase in
interest income in 2006 compared to 2005 was partially offset by
a $4.9 million reversal of previously recognized estimated
statutory interest income related to a matter involving the
expected recovery of previously paid state income taxes, which
became recoverable due to a favorable state tax court decision
that became final in 2004. Interest income in 2005 included the
recognition of $2.1 million of statutory interest income
related to that same state tax court decision. Interest expense
increased $47.8 million to $60.2 million in 2006
compared to $12.4 million in 2005, primarily due to an
increase in borrowings to fund the Inamed acquisition and the
write-off of unamortized debt origination fees of
$4.4 million due to the redemption of our zero coupon
convertible senior notes due 2022, partially offset by a
$4.9 million reversal of previously accrued statutory
interest expense associated with the resolution of several
significant uncertain income tax audit issues. Interest expense
in 2005 also includes a $7.3 million reversal of statutory
interest expense associated with the resolution of several
significant uncertain income tax audit issues.
Gains on investments of $0.3 million in 2006 and
$0.8 million in 2005 resulted from the sale of
miscellaneous third party equity investments. At
December 31, 2006, we had a carrying amount of
$7.1 million (with a cost basis of $5.0 million) in
third party equity investments with public and privately held
companies. These investments are subject to review for other
than temporary declines in fair value on a quarterly basis.
During 2006, we recorded a net unrealized loss on derivative
instruments of $0.3 million compared to a net unrealized
gain of $1.1 million in 2005. Other, net expense was
$5.0 million in 2006 compared to Other, net income of
$3.4 million in 2005. In 2006, Other, net expense primarily
includes $2.7 million of costs for the settlement of a
previously disclosed contingency involving non-income taxes in
Brazil and net realized losses from foreign currency
transactions of $3.2 million. In 2005, Other, net primarily
includes a gain of $3.5 million for the receipt of a
technology transfer fee related to the assignment of a third
party patent licensing arrangement covering the use of botulinum
toxin type B for cervical dystonia and net realized losses from
foreign currency transactions of $1.0 million.
Total net non-operating income in 2005 was $28.3 million
compared to net non-operating income of $4.7 million in
2004. Interest income in 2005 was $35.4 million compared to
interest income of $14.1 million in 2004. The increase in
interest income in 2005 compared to 2004 was primarily due to
higher average cash equivalent balances earning interest of
approximately $323 million and an increase in average
interest rates earned on all cash equivalent balances earning
interest of approximately 1.82% in 2005 compared to 2004.
Interest income in 2005 also benefited from the recognition of
$2.1 million of statutory interest income related to the
expected
57
recovery of previously paid state income taxes, which became
recoverable due to a favorable state court decision that became
final during 2004. Interest expense decreased to
$12.4 million in 2005 compared to interest expense of
$18.1 million in 2004, primarily due to a reversal during
2005 of $7.3 million of previously accrued statutory
interest expense associated with a reduction in accrued income
taxes payable related to the resolution of several significant
uncertain income tax audit issues, and the non-recurrence in
2005 of a $3.1 million adjustment to interest expense
recorded in 2004 related to the accelerated amortization of
certain debt issuance costs. This decrease in interest expense
in 2005 was partially offset by an increase in interest expense
related to additional foreign borrowings in Ireland required to
effectuate the repatriation of dividends that occurred during
the third quarter of 2005.
Gains on investments of $0.8 million in 2005 and
$0.3 million in 2004 resulted from the sale of
miscellaneous third party equity investments.
During 2005, we recorded a net unrealized gain on derivative
instruments of $1.1 million compared to net unrealized
losses of $0.4 million during 2004. Other net income was
$3.4 million in 2005 compared to other net income of
$8.8 million in 2004. In 2005, Other, net income primarily
includes a gain of $3.5 million for the receipt of a
technology transfer fee related to the assignment of a third
party patent licensing arrangement covering the use of botulinum
toxin type B for cervical dystonia and net realized losses from
foreign currency transactions of $1.0 million. In 2004,
Other, net primarily includes a realized gain of
$6.5 million related to an agreement with ISTA
Pharmaceuticals, Inc. to revise its previous
Vitrase®
product collaboration agreement and a realized gain of
$5.0 million for the receipt of a technology transfer fee
related to the assignment of a third party patent licensing
arrangement covering the use of botulinum toxin type B for
cervical dystonia.
Income
Taxes
Our effective tax rate in 2006 was 551.3% compared to the
effective tax rate of 32.1% in 2005. Included in our operating
loss for 2006 are pre-tax charges of $579.3 million for
in-process R&D acquired in the Inamed acquisition, a
$47.9 million charge to cost of sales associated with the
Inamed purchase accounting fair-market value inventory
adjustment rollout, total integration, transition and duplicate
operating expenses of $26.9 million related to the Inamed
acquisition and restructuring and streamlining of our European
operations, a $28.5 million contribution to The Allergan
Foundation and total restructuring charges of
$22.3 million. In 2006, we recorded income tax benefits of
$15.7 million related to the Inamed purchase accounting
fair-market value inventory adjustment rollout,
$9.1 million related to total integration, transition and
duplicate operating expenses, $11.3 million related to the
contribution to The Allergan Foundation, and $3.5 million
related to total restructuring charges. Also included in the
provision for income taxes in 2006 is a $17.2 million
reduction in the provision for income taxes due to the reversal
of the valuation allowance against a deferred tax asset that we
have determined is now realizable. As a result of this
determination, we have filed a refund claim for a prior year
with the U.S. Internal Revenue Service. The refund claim relates
to the deductibility of certain capitalized intangible assets
associated with our retinoid portfolio that we transferred to a
third party in 2004. Also included in the provision for income
taxes in 2006 is a reduction of $14.5 million in estimated
income taxes payable primarily due to the resolution of several
significant previously uncertain income tax audit issues
associated with the completion of an audit by the
U.S. Internal Revenue Service for tax years 2000 to 2002, a
$2.8 million reduction in income taxes payable previously
estimated for the 2005 repatriation of foreign earnings that had
been permanently re-invested outside the United States, a
beneficial change of $1.2 million for the expected income
tax benefit for previously paid state income taxes, which became
recoverable due to a favorable state court decision concluded in
2004, an unfavorable adjustment of $3.9 million for a
previously filed income tax return currently under examination
and a provision for income taxes of $1.6 million related to
intercompany transfers of trade businesses and net assets
associated with the Inamed acquisition. Excluding the impact of
the total pre-tax charges of $704.9 million and the total
net income tax benefits of $69.8 million for the items
discussed above, our adjusted effective tax rate for 2006 was
25.9%. We believe that the use of an adjusted effective tax rate
provides a more meaningful measure of the impact of income taxes
on our results of operations because it excludes the effect of
certain discrete items that are not included as part of our core
business activities.
58
The calculation of our 2006 adjusted effective tax rate is
summarized below:
|
|
|
|
|
|
|
2006
|
|
|
(in millions)
|
|
Earnings before income taxes and
minority interest, as reported
|
|
$
|
(19.5
|
)
|
In-process R&D expense
|
|
|
579.3
|
|
Inamed fair-market inventory
rollout
|
|
|
47.9
|
|
Total integration, transition and
duplicate operating expenses
|
|
|
26.9
|
|
Contribution to The Allergan
Foundation
|
|
|
28.5
|
|
Total restructure charges
|
|
|
22.3
|
|
|
|
|
|
|
|
|
$
|
685.4
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes, as
reported
|
|
$
|
107.5
|
|
Income tax (provision) benefit for:
|
|
|
|
|
Inamed fair-market inventory
rollout
|
|
|
15.7
|
|
Total integration, transition and
duplicate operating expenses
|
|
|
9.1
|
|
Contribution to The Allergan
Foundation
|
|
|
11.3
|
|
Total restructure charges
|
|
|
3.5
|
|
Reduction in valuation allowance
associated with a refund claim
|
|
|
17.2
|
|
Resolution of uncertain income tax
audit issues
|
|
|
14.5
|
|
Adjustment to estimated taxes on
2005 repatriation of foreign earnings
|
|
|
2.8
|
|
Recovery of previously paid state
income taxes
|
|
|
1.2
|
|
Unfavorable adjustment for
previously filed tax return currently under examination
|
|
|
(3.9
|
)
|
Intercompany transfers of trade
businesses and net assets
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
$
|
177.3
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted effective tax rate
|
|
|
25.9
|
%
|
|
|
|
|
|
Our effective tax rate in 2005 was 32.1% compared to the
effective tax rate of 28.9% in 2004. Included in our operating
income in 2005 are pre-tax restructuring charges of
$43.8 million, transition/duplicate operating expenses
associated with the European restructuring activities of
$5.6 million, a gain of $7.9 million on the sale of
our distribution business in India and a gain of
$5.7 million on the sale of assets used primarily for
contract manufacturing of AMO products. In 2005, we recorded
income tax benefits of $7.6 million related to the pre-tax
restructuring charges and $1.1 million related to
transition/duplicate operating expenses, and a provision for
income taxes of $1.7 million on the gain on sale of the
distribution business in India and $0.6 million on the gain
on sale of assets used primarily for contract manufacturing.
Included in the provision for income taxes in 2005 is an
estimated $29.9 million income tax provision associated
with our decision to repatriate $674.0 million in
extraordinary dividends as defined by the American Jobs Creation
Act of 2004, or the Act, from unremitted foreign earnings that
were previously considered indefinitely reinvested by certain
non-U.S. subsidiaries.
Also included in the provision for income taxes in 2005 is an
estimated provision of $19.7 million associated with our
decision to repatriate approximately $85.8 million in
additional dividends above the base and extraordinary dividend
amounts, as defined by the Act, from unremitted foreign earnings
that were previously considered indefinitely reinvested. Also
included in the provision for income taxes in 2005 is a
$1.4 million beneficial change in estimate for the expected
income tax benefit for previously paid state income taxes, which
became recoverable due to a favorable state court decision that
became final during 2004, and an estimated $24.1 million
reduction in estimated income taxes payable primarily due to the
resolution of several significant previously uncertain income
tax audit issues, including the resolution of certain transfer
pricing issues for which an Advance Pricing Agreement, or APA,
was executed with the U.S. Internal Revenue Service during
the third quarter of 2005. The APA covers tax years 2002 through
2008. The $24.1 million reduction in estimated income taxes
payable also includes beneficial changes associated with other
transfer price settlements for a discontinued product line,
which was not covered by
59
the APA, the deductibility of transaction costs associated with
the 2002 spin-off of AMO and intangible asset issues related to
certain assets of Allergan Specialty Therapeutics, Inc. and
Bardeen Sciences Company, LLC, which we acquired in 2001 and
2003, respectively. This change in estimate relates to tax years
currently under examination or not yet settled through expiry of
the statute of limitations.
Excluding the impact of the pre-tax restructuring charges,
transition and duplicate operating expenses and gains from the
sale of the distribution business in India and the sale of
assets used for contract manufacturing, and the related income
tax provision (benefit) associated with these pre-tax amounts,
the provision for income taxes due to the extraordinary
dividends and additional dividends above the base and
extraordinary dividend amounts, the decrease in the provision
for income taxes resulting from the additional income tax
benefit for previously paid state income taxes which became
recoverable, and reduction in estimated income taxes payable due
to the resolution of several significant uncertain income tax
audit issues, our adjusted effective tax rate for 2005 was 27.5%.
The calculation of our 2005 adjusted effective tax rate is
summarized below:
|
|
|
|
|
|
|
2005
|
|
|
(in millions)
|
|
Earnings before income taxes and
minority interest, as reported
|
|
$
|
599.2
|
|
Restructure charges
|
|
|
43.8
|
|
Transition/duplicate operating
expenses associated with the European restructuring
|
|
|
5.6
|
|
Gain on sale of distribution
business in India
|
|
|
(7.9
|
)
|
Gain on sale of assets used for
contract manufacturing
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
$
|
635.0
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes, as
reported
|
|
$
|
192.4
|
|
Income tax (provision) benefit for:
|
|
|
|
|
Restructure charges
|
|
|
7.6
|
|
Transition/duplicate operating
expenses associated with the European restructuring
|
|
|
1.1
|
|
Gain on sale of distribution
business in India
|
|
|
(1.7
|
)
|
Gain on sale of assets used for
contract manufacturing
|
|
|
(0.6
|
)
|
Recovery of previously paid state
income taxes
|
|
|
1.4
|
|
Resolution of uncertain income tax
audit issues
|
|
|
24.1
|
|
Extraordinary dividend of
$674.0 million under the American Jobs Creation Act
of 2004
|
|
|
(29.9
|
)
|
Additional dividends of
$85.8 million above the base and extraordinary
dividend amounts
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
|
$
|
174.7
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted effective tax rate
|
|
|
27.5
|
%
|
|
|
|
|
|
Included in our operating income in 2004 are pre-tax
restructuring charges of $7.0 million primarily associated
with the scheduled termination of our manufacturing and supply
agreement with AMO. We recorded an income tax benefit of
$0.8 million related to these pre-tax restructuring
charges. Included in our provision for income taxes in 2004 is
an estimated $6.1 million income tax benefit for previously
paid state income taxes, which became recoverable due to a
favorable state court decision that became final during the
second quarter of 2004. Excluding the impact of the
$7.0 million pre-tax restructuring charges and related tax
benefit of $0.8 million, and the $6.1 million income
tax benefit from the state court decision, our adjusted
effective tax rate for 2004 was 29.8%.
The decrease in the adjusted effective tax rate to 25.9% in 2006
compared to the adjusted effective tax rate in 2005 of 27.5% is
primarily due to the beneficial tax rate effects from increased
U.S. deductions for interest expense and the amortization
of acquired intangible assets associated with the Inamed
acquisition, stock option
60
compensation expense, and an increase in the utilization of
R&D tax credits, partially offset by an increase in the mix
of earnings in higher tax rate jurisdictions.
The decrease in the adjusted effective tax rate to 27.5% in 2005
compared to the adjusted effective tax rate in 2004 of 29.8% is
primarily due to a tax rate benefit related to an increase in
the mix of our earnings generated in
non-U.S. jurisdictions
with low tax rates in 2005 compared to 2004, a decrease in the
valuation allowance related to a change in estimate of the
amount of realizable deferred tax assets in Japan stemming from
the recent licensing agreement with GlaxoSmithKline and an
increase in the expected income tax benefit from utilizing
available foreign tax credits, partially offset by a net
increase in the estimate for income taxes payable for certain
contingent income tax liabilities.
Net
Earnings (Loss)
Our net loss for the year ended December 31, 2006 was
$127.4 million compared to net earnings of
$403.9 million in 2005. The $531.3 million decrease in
net earnings was primarily the result of the decrease in
operating income of $574.1 million and the increase in net
non-operating expense of $44.6 million, partially offset by
a decrease in the provision for income taxes of
$84.9 million and a decrease in minority interest expense
of $2.5 million.
Net earnings in 2005 were $403.9 million compared to net
earnings of $377.1 million in 2004. The $26.8 million
increase in net earnings was primarily the result of the
$43.5 million increase in operating income and a
$23.6 million increase in total net non-operating income,
partially offset by an increase in the provision for income
taxes of $38.4 million.
Liquidity
and Capital Resources
We assess our liquidity by our ability to generate cash to fund
our operations. Significant factors in the management of
liquidity are: funds generated by operations; levels of accounts
receivable, inventories, accounts payable and capital
expenditures; the extent of our stock repurchase program; funds
required for acquisitions; adequate credit facilities; and
financial flexibility to attract long-term capital on
satisfactory terms.
Historically, we have generated cash from operations in excess
of working capital requirements. The net cash provided by
operating activities was $746.9 million in 2006 compared to
$424.6 million in 2005 and $548.5 million in 2004.
Cash flow from operating activities increased in 2006 compared
to 2005 primarily as a result of an increase in earnings from
operations, including the effect of adjusting for non-cash
items, a decrease in income taxes paid, a decrease in
contributions made to our pension plans, a decrease in cash
requirements for our inventories and a net decrease in cash
required to fund changes in other net operating assets and
liabilities, partially offset by an increase in cash required to
fund growth in our trade receivables, primarily in North America
and Europe. The decrease in income taxes paid in 2006 compared
to 2005 was primarily due to payments made in 2005 related to
the estimated U.S. income tax liability for the
repatriation of certain foreign earnings and advance payments in
anticipation of income tax audit settlements. We paid pension
contributions of $13.0 million in 2006 compared to
$49.6 million in 2005. The decrease in pension
contributions in 2006 compared to 2005 was primarily due to an
increase in the discount rates used to calculate our accumulated
benefit obligations as of September 30, 2006, the
measurement date for our pension plans, compared to the negative
impact of lower discount rates in 2005 compared to 2004 on the
calculation of our accumulated benefit obligations as of
September 30, 2005. Prior to 2006, our funding policy for
our funded pension plans was based upon our desire to maintain
plan assets in excess of accumulated benefit obligations in our
funded pension plans. Beginning in 2006, we changed our funding
policy for our funded pension plans to be based upon the greater
of: (i) annual service cost, administrative expenses, and a
seven year amortization of any funded deficit or surplus
relative to the projected benefit obligations or (ii) a 90%
minimum funded status for our accumulated benefit obligations.
In 2007, we expect to pay pension contributions of between
approximately $17.0 million and $18.0 million.
Cash flow from operating activities decreased in 2005 compared
to 2004, primarily as a result of higher income taxes paid, an
increase in contributions to our pension plans and an increase
in cash required to fund the growth in other current assets,
partially offset by an increase in earnings from operations,
including the effect of adjusting for non-cash items, and an
increase in other liabilities, primarily for deferred income
related to an up-front payment
61
received in connection with our licensing arrangement with
GlaxoSmithKline. The increase in income taxes paid is primarily
due to payments for the estimated U.S. income tax liability
for the repatriation of certain foreign earnings and advance
payments in anticipation of income tax audit settlements. We
paid pension contributions of $49.6 million in 2005
compared to $16.9 million in 2004. The increase in the
amount of pension contributions in 2005 compared to 2004 is
primarily due to the negative impact of lower discount rates on
the calculation of our accumulated benefit obligations as of
September 30, 2005, the measurement date for our pension
plans, and our desire to maintain plan assets in excess of
accumulated benefit obligations in our funded pension plans.
Net cash used in investing activities was $1,484.6 million
in 2006, compared to $182.1 million in 2005 and
$106.8 million in 2004. The increase in cash used in
investing activities in 2006 was primarily due to the Inamed
acquisition. The cash portion of the Inamed purchase price was
$1,328.7 million, net of cash acquired. Additionally, we
invested $131.4 million in new facilities and equipment
during 2006 compared to $78.5 million during 2005 and
$96.4 million in 2004. During 2006, we purchased additional
real property for approximately $20.0 million, consisting
of two office buildings contiguous to our main facility in
Irvine, California, and we capitalized $11.5 million as
intangible assets primarily related to milestone payments for
regulatory approvals to commercialize the
Juvédermtm
dermal filler family of products in the United States and
Australia. Capital expenditures during 2005 included the
purchase of approximately four acres of additional real property
contiguous to our main facility in Irvine, California, and
during 2004, the additions to property, plant and equipment
included costs to construct a new research and development
facility in Irvine, California. In 2005, we paid
$110.0 million in connection with a royalty buyout
agreement relating to
Restasis®,
our drug for the treatment of chronic dry eye disease, of which
$99.3 million was capitalized as an intangible licensing
asset, and $10.7 million was used to pay previously accrued
net royalty obligations. Net cash used in investing activities
also includes $18.4 million, $13.6 million and
$10.5 million to acquire software during 2006, 2005 and
2004, respectively. We currently expect to invest between
$130 million and $140 million in capital expenditures
for manufacturing equipment and facilities and other property,
plant and equipment during 2007.
Net cash provided by financing activities was
$803.0 million in 2006 compared to $160.3 million in
2005 and net cash used in financing activities of
$51.9 million in 2004. In order to fund part of the cash
portion of the Inamed purchase price, we borrowed
$825.0 million under a bridge credit facility entered into
in connection with the transaction. On April 12, 2006, we
completed concurrent private placements of $750 million in
aggregate principal amount of 1.50% Convertible Senior
Notes due 2026, or 2026 Convertible Notes, and $800 million
in aggregate principal amount of 5.75% Senior Notes due
2016, or 2016 Notes. We used part of the proceeds from these
debt issuances to repay all borrowings under the bridge credit
facility. Additionally, we received $182.7 million from the
sale of stock to employees, $13.0 million upon termination
of an interest rate swap contract related to the 2016 Notes and
$35.4 million in excess tax benefits from share-based
compensation. These amounts were partially offset by net
repayments of notes payable of $67.5 million, cash payments
of $20.2 million in offering fees related to the issuance
of the 2026 Convertible Notes and the 2016 Notes, cash paid on
the conversion of our zero coupon convertible senior notes due
2022, or 2022 Notes, of $521.9 million, repurchase of
approximately 2.9 million shares of our common stock for
approximately $307.8 million and $58.4 million in
dividends paid to stockholders. Net cash provided by financing
activities was $160.3 million in 2005, composed primarily
of a $157.0 million increase in notes payable and
$149.9 million of cash provided by the sale of stock to
employees, partially offset by $94.3 million of cash used
for the purchase of treasury stock and $52.3 million for
payment of dividends. Net cash used in financing activities was
$51.9 million in 2004, composed primarily of
$65.2 million for purchases of treasury stock,
$47.3 million for payment of dividends and
$23.0 million for net repayments of debt, partially offset
by $83.6 million of cash provided by the sale of stock to
employees.
On January 30, 2007, our Board of Directors declared a
quarterly cash dividend of $0.10 per share, payable
March 9, 2007 to stockholders of record on
February 16, 2007. We maintain an evergreen stock
repurchase program. Our evergreen stock repurchase program
authorizes us to repurchase our common stock for the primary
purpose of funding our stock-based benefit plans. Under the
stock repurchase program, we may maintain up to 9.2 million
repurchased shares in our treasury account at any one time. As
of December 31, 2006, we held approximately
1.5 million treasury shares under this program. We are
uncertain as to the level of stock repurchases, if any, to be
made in the future.
62
The 2026 Convertible Notes pay interest semi-annually at a rate
of 1.50% per annum and are convertible, at the holders
option, at an initial conversion rate of 7.8952 shares per
$1,000 principal amount of notes. In certain circumstances the
2026 Convertible Notes may be convertible into cash in an amount
equal to the lesser of their principal amount or their
conversion value. If the conversion value of the 2026
Convertible Notes exceeds their principal amount at the time of
conversion, we will also deliver common stock or, at our
election, a combination of cash and common stock for the
conversion value in excess of the principal amount. We will not
be permitted to redeem the 2026 Convertible Notes prior to
April 5, 2009, will be permitted to redeem the 2026
Convertible Notes from and after April 5, 2009 to
April 4, 2011 if the closing price of our common stock
reaches a specified threshold, and will be permitted to redeem
the 2026 Convertible Notes at any time on or after April 5,
2011. Holders of the 2026 Convertible Notes will also be able to
require us to redeem the 2026 Convertible Notes on April 1,
2011, April 1, 2016 and April 1, 2021 or upon a change
in control of us. The 2026 Convertible Notes mature on
April 1, 2026, unless previously redeemed by us or earlier
converted by the note holders.
The 2016 Notes were sold at 99.717% of par value with an
effective interest rate of 5.79%, and will pay interest
semi-annually at a rate of 5.75% per annum, and are redeemable
at any time at our option, subject to a make-whole provision
based on the present value of remaining interest payments at the
time of the redemption. The aggregate outstanding principal
amount of the 2016 Notes will be due and payable on
April 1, 2016, unless earlier redeemed by us. On
January 31, 2007, we entered into a nine-year, two-month
interest rate swap with a $300.0 million notional amount
with semi-annual settlements and quarterly interest rate reset
dates. The swap receives interest at a fixed rate of 5.75% and
pays interest at a variable interest rate equal to LIBOR plus
0.368%, and effectively converts $300.0 million of the 2016
Notes to a variable interest rate. Based on the structure of the
hedging relationship, the hedge meets the criteria for using the
short-cut method for a fair value hedge under the provisions of
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133).
At December 31, 2006, we had a committed long-term credit
facility, a commercial paper program, a medium term note
program, an unused debt shelf registration statement that we may
use for a new medium term note program and other issuances of
debt securities, and various foreign bank facilities. The
committed long-term credit facility allows for borrowings of up
to $800 million through March 2011. The commercial paper
program also provides for up to $600 million in borrowings.
The current medium term note program allows us to issue up to an
additional $6.5 million in registered notes on a
non-revolving basis. The debt shelf registration statement
provides for up to $350 million in additional debt
securities. Borrowings under the committed long-term credit
facility and medium-term note program are subject to certain
financial and operating covenants that include, among other
provisions, maintaining maximum leverage ratios and minimum
interest coverage ratios. Certain covenants also limit
subsidiary debt. We believe we were in compliance with these
covenants at December 31, 2006. As of December 31,
2006, we had $102.0 million in borrowings under our
committed long-term credit facility, $58.5 million in
borrowings outstanding under the medium term note program and no
borrowings under our commercial paper program.
During March 2006 and April 2006, holders of our 2022 Notes
began to exercise the conversion feature of the 2022 Notes. In
May 2006, we announced our intention to redeem the 2022 Notes.
Most holders elected to exercise the conversion feature of the
2022 Notes prior to redemption. Upon their conversion, we were
required to pay the accreted value of the 2022 Notes in cash and
had the option to pay the remainder of the conversion value in
cash or shares of our common stock. We exercised our option to
pay the remainder of the conversion value in shares of our
common stock. In connection with the conversion, we paid
approximately $505.3 million in cash for the accreted value
of the 2022 Notes and issued 2.1 million shares of our
common stock for the remainder of the conversion value. In
addition, holders of approximately $20.3 million of
aggregate principal at maturity of the 2022 Notes did not
exercise the conversion feature, and in May 2006 we paid the
accreted value (approximately $16.6 million) in cash to
redeem these 2022 Notes.
A significant amount of our existing cash and equivalents are
held by
non-U.S. subsidiaries.
We currently plan to use these funds in our operations outside
the United States. Withholding and U.S. taxes have not been
provided for unremitted earnings of certain
non-U.S. subsidiaries
because we have reinvested these earnings indefinitely in such
operations. As of December 31, 2006, we had approximately
$725.5 million in unremitted earnings outside the
63
United States for which withholding and U.S. taxes were not
provided. Tax costs would be incurred if these funds were
remitted to the United States.
In connection with our March 2006 Inamed acquisition, we
initiated a global restructuring and integration plan to merge
the Inamed operations with our operations and to capture
synergies through the centralization of certain general and
administrative functions. As of December 31, 2006, we
recorded pre-tax restructuring charges of $13.5 million,
$20.7 million of integration and transition costs and
$1.6 million of income tax costs related to intercompany
transfers of trade businesses and net assets, which we included
in our provision for income taxes. We currently estimate that
the total pre-tax charges resulting from the restructuring,
including integration and transition costs, will be between
$61.0 million and $75.0 million, all of which are
expected to be cash expenditures. In addition to the pre-tax
charges, we expect to incur capital expenditures of
approximately $20.0 million to $25.0 million,
primarily related to the integration of information systems, and
to pay an additional amount of approximately $1.5 million
to $2.0 million for taxes related to intercompany transfers
of trade businesses and net assets.
During 2006, we completed the restructuring and streamlining of
our operations in Japan. As of December 31, 2006, we
recorded cumulative pre-tax restructuring charges of
$1.9 million ($2.3 million in 2005 and a net reversal
of $0.4 million in 2006). There are no remaining accrued
liabilities for restructuring and streamlining of our operations
in Japan at December 31, 2006.
As of December 31, 2006, we substantially completed the
restructuring and streamlining of our European operations and
recorded cumulative pre-tax restructuring charges of
$37.5 million, primarily related to severance, relocation
and one-time termination benefits, payments to public employment
and training programs, contract termination costs and capital
and other asset-related expenses. Additionally, as of
December 31, 2006, we incurred cumulative transition and
duplicate operating expenses of $11.8 million relating
primarily to legal, consulting, recruiting, information system
implementation costs and taxes related to the European
restructuring activities. Future expenses related to the
restructuring and streamlining of our European operations, if
any, are not expected to be significant.
In the fourth quarter of 2006, we adopted the recognition and
disclosure provisions of Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans
(SFAS No. 158), which required us to recognize the
funded status of our defined benefit pension and other
postretirement benefit plans in our December 31, 2006
consolidated balance sheet. The adoption of
SFAS No. 158 had no impact on our liquidity or capital
resources for the year ended December 31, 2006. We discuss
the change in accounting principle and the impact on our
financial statements under Item 7A of Part II of this
report, Recently Adopted Accounting Standards.
On January 2, 2007, we consummated the acquisition of all
of the outstanding capital stock of Groupe Cornéal
Laboratoires and its subsidiaries, or Cornéal, pursuant to
a Stock Sale and Purchase Agreement, or Purchase Agreement,
dated October 31, 2006, by and among us, our indirect
wholly owned subsidiary Allergan Holdings France, SAS, and
Waldemar Kita, the controlling stockholder of Cornéal, the
European
Pre-Floatation
Fund II and the other minority stockholders of
Cornéal. Under the Purchase Agreement, we purchased the
outstanding capital stock of Cornéal for an aggregate
purchase price of approximately $233.9 million, subject to
possible post-closing adjustments based on a final determination
of Cornéals debt and cash levels. The acquisition
consideration was all cash, funded from current cash and
equivalents balances and our committed long-term credit facility.
On February 21, 2007, we completed the acquisition of
EndoArt SA. Under the terms of the agreement, we purchased all
the outstanding capital stock of EndoArt SA for an aggregate
purchase price of approximately $97.0 million, net of
excess cash. The acquisition consideration was all cash, funded
from current cash and equivalents balances.
We believe that the net cash provided by operating activities,
supplemented as necessary with borrowings available under our
existing credit facilities and existing cash and equivalents,
will provide us with sufficient resources to meet our expected
obligations, working capital requirements, debt service and
other cash needs over the next year.
64
Inflation
Although at reduced levels in recent years, inflation continues
to apply upward pressure on the cost of goods and services that
we use. The competitive and regulatory environments in many
markets substantially limit our ability to fully recover these
higher costs through increased selling prices. We continually
seek to mitigate the adverse effects of inflation through cost
containment and improved productivity and manufacturing
processes.
Foreign
Currency Fluctuations
Approximately 32.6% of our product net sales in 2006 were
derived from operations outside the United States, and a portion
of our international cost structure is denominated in currencies
other than the U.S. dollar. As a result, we are subject to
fluctuations in sales and earnings reported in U.S. dollars
due to changing currency exchange rates. We routinely monitor
our transaction exposure to currency rates and implement certain
economic hedging strategies to limit such exposure, as we deem
appropriate. The net impact of foreign currency fluctuations on
our sales was as follows: a $15.2 million increase in 2006,
a $22.3 million increase in 2005, and a $41.9 million
increase in 2004. The 2006 sales increase included
$7.8 million related to the Brazilian real,
$6.1 million related to the Canadian dollar,
$2.0 million related to the euro, and $1.0 million
related to the British Pound, partially offset by decreases of
$1.7 million primarily related to the Australian dollar and
other Asian and Latin American currencies. The 2005 sales
increase included $1.1 million related to the euro,
$5.2 million related to the Canadian dollar,
$1.3 million related to the Australian dollar,
$10.9 million related to the Brazilian real,
$1.2 million related to the Mexican peso and
$2.3 million related to other Latin American currencies.
The 2004 sales increase included $23.9 million related to
the euro, $4.5 million related to the British Pound,
$4.2 million related to the Canadian dollar,
$4.0 million related to the Australian dollar,
$2.0 million related to the Japanese yen and
$1.8 million related to the Brazilian real. See
Note 1, Summary of Significant Accounting
Policies, in the notes to the consolidated financial
statements listed under Item 15 of Part IV of this
report, Exhibits and Financial Statement Schedules,
for a description of our accounting policy on foreign currency
translation.
Inamed
Corporation
On March 23, 2006, we completed the acquisition of Inamed
Corporation, or Inamed, a global healthcare company that
develops, manufactures, and markets a diverse line of products,
including breast implants, a range of facial aesthetics, and
obesity intervention products.
The Inamed acquisition was completed pursuant to an agreement
and plan of merger, dated as of December 20, 2005, and
subsequently amended as of March 11, 2006, by and among us,
our wholly-owned subsidiary Banner Acquisition, Inc., and
Inamed, and an exchange offer made by Banner Acquisition to
acquire Inamed shares for either $84.00 in cash or 0.8498 of a
share of our common stock, subject to proration so that 45% of
the aggregate Inamed shares tendered were exchanged for cash and
55% of the aggregate Inamed shares tendered were exchanged for
shares of our common stock. In the exchange offer, we paid
approximately $1.31 billion in cash and issued
16,194,051 shares of common stock through Banner
Acquisition, acquiring approximately 93.86% of Inameds
outstanding common stock. Following the exchange offer, the
remaining outstanding shares of Inamed common stock were
acquired for approximately $81.7 million in cash and
1,010,576 shares of our common stock through the merger of
Banner Acquisition with and into Inamed in a merger in which
Inamed survived as our wholly-owned subsidiary. As a final step
in the plan of reorganization, we merged Inamed into Inamed,
LLC, our wholly-owned subsidiary. The consideration paid in the
merger does not include shares of common stock and cash that
were paid to option holders for outstanding options to purchase
shares of Inamed common stock, which were cancelled in the
merger and converted into the right to receive an amount of cash
equal to 45% of the in the money value of the option
and a number of shares of our common stock with a value equal to
55% of the in the money value of the option.
Subsequent to the merger, we issued 237,066 shares of
common stock and paid $17.9 million in cash to satisfy this
obligation to the option holders. We funded part of the cash
portion of the purchase price by borrowing $825.0 million
under our $1.1 billion bridge credit facility. In April
2006, we used the proceeds from the issuance of the 2016 Notes
to repay borrowings under the bridge credit facility. Also, we
subsequently terminated the bridge credit facility in April
2006. See Note 2, Inamed Acquisition, in the
notes to our consolidated financial statements listed under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules.
65
We believe the fair values assigned to the assets acquired and
liabilities assumed were based on reasonable assumptions. The
following table summarizes the estimated fair values of net
assets acquired:
|
|
|
|
|
|
|
(in millions)
|
|
Current assets
|
|
$
|
323.7
|
|
Property, plant and equipment
|
|
|
57.7
|
|
Identifiable intangible assets
|
|
|
971.9
|
|
In-process research and development
|
|
|
579.3
|
|
Goodwill
|
|
|
1,824.2
|
|
Other non-current assets,
primarily deferred tax assets
|
|
|
56.6
|
|
Accounts payable and accrued
liabilities(a)
|
|
|
(127.0
|
)
|
Deferred tax
liabilities current and non-current
|
|
|
(362.3
|
)
|
Other non-current liabilities
|
|
|
(33.4
|
)
|
|
|
|
|
|
|
|
$
|
3,290.7
|
|
|
|
|
|
|
|
|
|
(a) |
|
Accounts payable and accrued liabilities include approximately
$10.3 million of recognized liabilities related to the
involuntary termination and relocation of certain Inamed
employees in accordance with the Emerging Issues Task Force
(EITF) in EITF Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. |
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
In the normal course of business, our operations are exposed to
risks associated with fluctuations in foreign currency exchange
rates. We address these risks through controlled risk management
that includes the use of derivative financial instruments to
economically hedge or reduce these exposures. We do not enter
into financial instruments for trading or speculative purposes.
See Note 11, Financial Instruments, in the
notes to the consolidated financial statements listed under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules, for activities relating to
foreign currency risk management.
To ensure the adequacy and effectiveness of our foreign exchange
hedge positions, we continually monitor our foreign exchange
forward and option positions both on a stand-alone basis and in
conjunction with our underlying foreign currency exposures, from
an accounting and economic perspective.
However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, we
cannot assure you that such programs will offset more than a
portion of the adverse financial impact resulting from
unfavorable movements in foreign exchange rates. In addition,
the timing of the accounting for recognition of gains and losses
related to
mark-to-market
instruments for any given period may not coincide with the
timing of gains and losses related to the underlying economic
exposures and, therefore, may adversely affect our consolidated
operating results and financial position.
We record current changes in the fair value of open foreign
currency option contracts as Unrealized gain (loss) on
derivative instruments, net, and we record the gains and
losses realized from settled option contracts in Other,
net in the accompanying consolidated statements of
operations. The premium costs of purchased foreign exchange
option contracts are recorded in Other current
assets and are amortized to Other, net over
the life of the options. We have recorded all unrealized and
realized gains and losses from foreign currency forward
contracts through Other, net in the accompanying
consolidated statements of operations.
Interest
Rate Risk
Our interest income and expense is more sensitive to
fluctuations in the general level of U.S. interest rates
than to changes in rates in other markets. Changes in
U.S. interest rates affect the interest earned on our cash
and equivalents, interest expense on our debt as well as costs
associated with foreign currency contracts.
At December 31, 2006, we had approximately
$102.0 million of variable rate debt. If the interest rates
on our variable rate debt were to increase or decrease by 1% for
the year, annual interest expense would increase or
66
decrease by approximately $1.0 million based on the amount
of outstanding variable rate debt at December 31, 2006.
In February 2006, we entered into interest rate swap contracts
based on the
3-month
LIBOR with an aggregate notional amount of $800 million, a
swap period of 10 years and a starting swap rate of 5.198%.
We entered into these swap contracts as a cash flow hedge to
effectively fix the future interest rate for our
$800 million aggregate principal amount Senior Notes due
2016 issued in April 2006. In April 2006, we terminated the
interest rate swap contracts and received approximately
$13.0 million. The total gain is being amortized as a
reduction to interest expense over a 10 year period to
match the term of the 2016 Notes. As of December 31, 2006,
the remaining unrecognized gain, net of tax, of
$7.3 million is recorded as a component of accumulated
other comprehensive loss. At December 31, 2006, there are
no outstanding interest rate swap contracts.
On January 31, 2007, we entered into a nine-year, two-month
interest rate swap with a $300.0 million notional amount
with semi-annual settlements and quarterly interest rate reset
dates. The swap receives interest at a fixed rate of 5.75% and
pays interest at a variable interest rate equal to LIBOR plus
0.368%, and effectively converts $300.0 million of the 2016
Notes to a variable interest rate. Based on the structure of the
hedging relationship, the hedge meets the criteria for using the
short-cut method for a fair value hedge under the provisions of
SFAS No. 133.
The tables below present information about certain of our
investment portfolio and our debt obligations at
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Maturing in
|
|
Market
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Value
|
|
|
(in millions, except interest rates)
|
|
ASSETS
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
130.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130.0
|
|
|
$
|
130.0
|
|
Weighted Average Interest Rate
|
|
|
5.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.35
|
%
|
|
|
|
|
Commercial Paper
|
|
|
771.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771.0
|
|
|
|
771.0
|
|
Weighted Average Interest Rate
|
|
|
5.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.29
|
%
|
|
|
|
|
Foreign Time Deposits
|
|
|
288.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288.6
|
|
|
|
288.6
|
|
Weighted Average Interest Rate
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
Other Cash Equivalents
|
|
|
138.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138.7
|
|
|
|
138.7
|
|
Weighted Average Interest Rate
|
|
|
5.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.91
|
%
|
|
|
|
|
Total Cash
Equivalents
|
|
$
|
1,328.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,328.3
|
|
|
$
|
1,328.3
|
|
Weighted Average Interest
Rate
|
|
|
5.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.03
|
%
|
|
|
|
|
|
LIABILITIES
|
Debt
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
$
|
|
|
|
$
|
33.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
750.0
|
|
|
$
|
822.9
|
|
|
$
|
1,606.4
|
|
|
$
|
1,686.7
|
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
5.84
|
%
|
|
|
3.84
|
%
|
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
102.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.0
|
|
|
|
102.0
|
|
Weighted Average Interest Rate
|
|
|
5.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.46
|
%
|
|
|
|
|
Total Debt
Obligations
|
|
$
|
102.0
|
|
|
$
|
33.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
750.0
|
|
|
$
|
822.9
|
|
|
$
|
1,708.4
|
|
|
$
|
1,788.7
|
|
Weighted Average Interest
Rate
|
|
|
5.46
|
%
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
5.84
|
%
|
|
|
3.93
|
%
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Maturing in
|
|
Market
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Value
|
|
|
(in millions, except interest rates)
|
|
ASSETS
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
50.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50.0
|
|
|
$
|
50.0
|
|
Weighted Average Interest Rate
|
|
|
4.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.44
|
%
|
|
|
|
|
Commercial Paper
|
|
|
656.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656.0
|
|
|
|
656.0
|
|
Weighted Average Interest Rate
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.28
|
%
|
|
|
|
|
Other Cash Equivalents
|
|
|
554.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554.6
|
|
|
|
554.6
|
|
Weighted Average Interest Rate
|
|
|
4.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.41
|
%
|
|
|
|
|
Total Cash
Equivalents
|
|
$
|
1,260.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,260.6
|
|
|
$
|
1,260.6
|
|
Weighted Average Interest
Rate
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.34
|
%
|
|
|
|
|
|
LIABILITIES
|
Debt
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
$
|
520.0
|
|
|
$
|
|
|
|
$
|
32.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25.0
|
|
|
$
|
577.5
|
|
|
$
|
851.2
|
|
Weighted Average Interest Rate
|
|
|
1.25
|
%
|
|
|
|
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
7.47
|
%
|
|
|
1.84
|
%
|
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
169.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.6
|
|
|
|
169.6
|
|
Weighted Average Interest Rate
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.63
|
%
|
|
|
|
|
Total Debt
Obligations
|
|
$
|
689.6
|
|
|
$
|
|
|
|
$
|
32.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25.0
|
|
|
$
|
747.1
|
|
|
$
|
1,020.8
|
|
Weighted Average Interest
Rate
|
|
|
2.08
|
%
|
|
|
|
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
7.47
|
%
|
|
|
2.47
|
%
|
|
|
|
|
Contractual
Obligations and Commitments
The table below presents information about our contractual
obligations and commitments at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
Less than
|
|
|
|
|
|
than Five
|
|
|
|
|
One Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Years
|
|
Total
|
|
|
(in millions)
|
|
Notes payable, convertible notes
and long-term debt obligations
|
|
$
|
102.0
|
|
|
$
|
33.5
|
|
|
$
|
750.0
|
|
|
$
|
822.9
|
|
|
$
|
1,708.4
|
|
Operating lease obligations
|
|
|
30.7
|
|
|
|
39.7
|
|
|
|
23.2
|
|
|
|
64.1
|
|
|
|
157.7
|
|
Purchase obligations
|
|
|
126.3
|
|
|
|
46.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
173.1
|
|
Other long-term liabilities
(excluding deferred income) reflected on our consolidated
balance sheet
|
|
|
|
|
|
|
34.0
|
|
|
|
34.0
|
|
|
|
123.3
|
|
|
|
191.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
259.0
|
|
|
$
|
153.7
|
|
|
$
|
807.5
|
|
|
$
|
1,010.3
|
|
|
$
|
2,230.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
Our Certificate of Incorporation, as amended, provides that we
will indemnify, to the fullest extent permitted by the Delaware
General Corporation Law, each person that is involved in or is,
or is threatened to be, made a party to any action, suit or
proceeding by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director
or officer of Allergan or was serving at our request as a
director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise. We
have also entered into contractual indemnity agreements with
each of our directors and executive officers, pursuant to which
we have agreed to indemnify such directors and executive
officers against any payments they are required to make as a
result of a claim brought against such executive officer or
director in such capacity, excluding claims (i) relating to
the action or inaction of a director or executive officer that
resulted in such director or executive officer gaining personal
profit or advantage, (ii) for an accounting of profits made
from the purchase or sale of our securities within the
68
meaning of Section 16(b) of the Securities Exchange Act of
1934 or similar provisions of any state law or (iii) that
are based upon or arise out of such directors or executive
officers knowingly fraudulent, deliberately dishonest or
willful misconduct. The maximum potential amount of future
payments that we could be required to make under these
indemnification provisions is unlimited. However, we have
purchased directors and officers liability insurance
policies intended to reduce our monetary exposure and to enable
us to recover a portion of any future amounts paid. We have not
previously paid any material amounts to defend lawsuits or
settle claims as a result of these indemnification provisions.
As a result, we believe the estimated fair value of these
indemnification arrangements is minimal.
We customarily agree in the ordinary course of our business to
indemnification provisions in agreements with clinical trials
investigators in our drug development programs, in sponsored
research agreements with academic and
not-for-profit
institutions, in various comparable agreements involving parties
performing services for us in the ordinary course of business,
and in our real estate leases. We also customarily agree to
certain indemnification provisions in our drug discovery and
development collaboration agreements. With respect to our
clinical trials and sponsored research agreements, these
indemnification provisions typically apply to any claim asserted
against the investigator or the investigators institution
relating to personal injury or property damage, violations of
law or certain breaches of our contractual obligations arising
out of the research or clinical testing of our compounds or drug
candidates. With respect to real estate lease agreements, the
indemnification provisions typically apply to claims asserted
against the landlord relating to personal injury or property
damage caused by us, to violations of law by us or to certain
breaches of our contractual obligations. The indemnification
provisions appearing in our collaboration agreements are
similar, but in addition provide some limited indemnification
for the collaborator in the event of third party claims alleging
infringement of intellectual property rights. In each of the
above cases, the term of these indemnification provisions
generally survives the termination of the agreement. The maximum
potential amount of future payments that we could be required to
make under these provisions is generally unlimited. We have
purchased insurance policies covering personal injury, property
damage and general liability intended to reduce our exposure for
indemnification and to enable us to recover a portion of any
future amounts paid. We have not previously paid any material
amounts to defend lawsuits or settle claims as a result of these
indemnification provisions. As a result, we believe the
estimated fair value of these indemnification arrangements is
minimal.
Foreign
Currency Risk
Overall, we are a net recipient of currencies other than the
U.S. dollar and, as such, benefit from a weaker dollar and
are adversely affected by a stronger dollar relative to major
currencies worldwide. Accordingly, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may
negatively affect our consolidated revenues or operating costs
and expenses as expressed in U.S. dollars.
From time to time, we enter into foreign currency option and
forward contracts to reduce earnings and cash flow volatility
associated with foreign exchange rate changes to allow our
management to focus its attention on our core business issues
and challenges. Accordingly, we enter into various contracts
which change in value as foreign exchange rates change to
economically offset the effect of changes in the value of
foreign currency assets and liabilities, commitments and
anticipated foreign currency denominated sales and operating
expenses. We enter into foreign currency forward and option
contracts in amounts between minimum and maximum anticipated
foreign exchange exposures, generally for periods not to exceed
one year.
We use foreign currency option contracts, which provide for the
sale or purchase of foreign currencies to offset foreign
currency exposures expected to arise in the normal course of our
business. While these instruments are subject to fluctuations in
value, such fluctuations are anticipated to offset changes in
the value of the underlying currency exposures.
All of our outstanding foreign exchange forward contracts are
entered into to protect the value of intercompany receivables
denominated in currencies other than the lenders
functional currency. The realized and unrealized gains and
losses from foreign currency forward contracts and the
revaluation of the foreign denominated intercompany receivables
are recorded through Other, net in the accompanying
consolidated statements of operations.
69
All of our outstanding foreign currency option contracts are
entered into to reduce the volatility of earnings generated in
currencies other than the U.S. dollar, primarily earnings
denominated in the Canadian dollar, Mexican peso, Australian
dollar, Brazilian real, euro, Japanese yen, Swedish krona, Swiss
franc and U.K. Pound. Current changes in the fair value of open
foreign currency option contracts are recorded through earnings
as Unrealized gain (loss) on derivative instruments,
net while any realized gains (losses) on settled contracts
are recorded through earnings as Other, net in the
accompanying consolidated statements of operations. The premium
costs of purchased foreign exchange option contracts are
recorded in Other current assets and amortized to
Other, net over the life of the options.
The following table provides information about our foreign
currency derivative financial instruments outstanding as of
December 31, 2006 and 2005. The information is provided in
U.S. dollars, as presented in our consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
Average Contract
|
|
|
|
Average Contract
|
|
|
Notional
|
|
Rate or Strike
|
|
Notional
|
|
Rate or Strike
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
Amount
|
|
|
(in millions)
|
|
|
|
(in millions)
|
|
|
|
Foreign currency forward
contracts:
(Receive U.S. dollar/pay foreign currency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
142.3
|
|
|
|
1.32
|
|
|
$
|
12.6
|
|
|
|
1.20
|
|
Canadian dollar
|
|
|
1.8
|
|
|
|
1.15
|
|
|
|
6.9
|
|
|
|
1.15
|
|
Australian dollar
|
|
|
9.1
|
|
|
|
0.78
|
|
|
|
2.6
|
|
|
|
0.75
|
|
U.K. Pound
|
|
|
|
|
|
|
|
|
|
|
16.5
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
153.2
|
|
|
|
|
|
|
$
|
38.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
(0.7
|
)
|
|
|
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sold
put options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar
|
|
$
|
35.0
|
|
|
|
1.14
|
|
|
$
|
26.0
|
|
|
|
1.15
|
|
Mexican peso
|
|
|
14.3
|
|
|
|
11.00
|
|
|
|
11.7
|
|
|
|
10.78
|
|
Australian dollar
|
|
|
20.6
|
|
|
|
0.78
|
|
|
|
12.1
|
|
|
|
0.75
|
|
Brazilian real
|
|
|
11.7
|
|
|
|
2.24
|
|
|
|
9.3
|
|
|
|
2.40
|
|
Euro
|
|
|
73.0
|
|
|
|
1.34
|
|
|
|
39.4
|
|
|
|
1.20
|
|
Japanese yen
|
|
|
9.6
|
|
|
|
113.06
|
|
|
|
|
|
|
|
|
|
Swedish krona
|
|
|
7.7
|
|
|
|
6.79
|
|
|
|
|
|
|
|
|
|
Swiss franc
|
|
|
6.1
|
|
|
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178.0
|
|
|
|
|
|
|
$
|
98.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
3.8
|
|
|
|
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
purchased call options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Pound
|
|
$
|
15.3
|
|
|
|
1.96
|
|
|
$
|
17.0
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
0.2
|
|
|
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Adopted Accounting Standards
In May 2005, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Corrections
(SFAS No. 154). SFAS No. 154 requires
retrospective application to prior-period financial statements
of changes in accounting principles, unless a new accounting
pronouncement provides specific transition provisions to the
contrary or it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 also redefines restatement
70
as the revising of previously issued financial statements to
reflect the correction of an error. We adopted the provisions of
SFAS No. 154 in our first fiscal quarter of 2006. The
adoption did not have a material effect on our consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans
(SFAS No. 158). SFAS No. 158 requires
employers to recognize on their balance sheet an asset or
liability equal to the over- or under-funded benefit obligation
of each defined benefit pension and other postretirement plan
and to recognize as a component of other comprehensive income,
net of tax, the actuarial gains or losses and prior service
costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost. Amounts
recognized in accumulated other comprehensive income, including
the actuarial gains or losses, prior service costs or credits,
and the transition asset or obligation remaining from the
initial application of (i) Statement of Financial
Accounting Standards No. 87, Employers Accounting
for Pensions and (ii) Statement of Financial Accounting
Standards No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, are adjusted as
they are subsequently recognized as components of net periodic
benefit cost pursuant to the recognition and amortization
provisions of those statements. This change in balance sheet
reporting is effective for fiscal years ending after
December 15, 2006 for public companies, which is our fiscal
year 2006. SFAS No. 158 also eliminates the ability to
use an early measurement date and requires employers to measure
defined benefit plan assets and obligations as of the date of
the employers fiscal year end statement of financial
position, commencing with fiscal years ending after
December 15, 2008, which is our fiscal year 2008. We
adopted the balance sheet recognition and reporting provisions
of SFAS No. 158 during our fourth fiscal quarter of
2006. We currently expect to adopt in our fourth fiscal quarter
of 2008 the provisions of SFAS No. 158 relating to the
change in measurement date, which is not expected to have a
material impact on our consolidated financial statements. See
Note 9, Employee Retirement and Other Benefit
Plans in the notes to our consolidated financial
statements listed under Item 15 of Part IV of this
report, Exhibits and Financial Statement Schedules,
for further discussion of the effect of adopting
SFAS No. 158 on our consolidated financial statements.
New
Accounting Standards Not Yet Adopted
In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155, Accounting for Certain
Hybrid Financial Instruments an amendment of FASB
Statements No. 133 and 140 (SFAS No. 155).
SFAS No. 155 permits an entity to measure at fair
value any financial instrument that contains an embedded
derivative that otherwise would require bifurcation. This
statement is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring after the
beginning of an entitys first fiscal year that begins
after September 15, 2006, which is our fiscal year 2007. We
do not expect the adoption of SFAS No. 155 to have a
material impact on our consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (FIN 48),
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 will be effective for fiscal years
beginning after December 15, 2006, which is our fiscal year
2007. We are still completing our evaluation of the potential
effect of adopting FIN 48 on our consolidated financial
statements. We currently do not expect the adoption of
FIN 48 to have a material impact on our consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements.
SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007, which is our fiscal year
2008. We have not yet evaluated the potential impact of adopting
SFAS No. 157 on our consolidated financial statements.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this Item is incorporated herein by
reference to the financial statements set forth in Item 15
of Part IV of this report, Exhibits and Financial
Statement Schedules.
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Principal Executive Officer and our Principal
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Our management, including our
Principal Executive Officer and our Principal Financial Officer,
does not expect that our disclosure controls or procedures will
prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within Allergan have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the control. The design of any system of controls is also based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected. Also, we have investments
in certain unconsolidated entities. As we do not control or
manage these entities, our disclosure controls and procedures
with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Principal
Executive Officer and our Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2006, the end of
the annual period covered by this report. The evaluation of our
disclosure controls and procedures included a review of the
disclosure controls and procedures objectives,
design, implementation and the effect of the controls and
procedures on the information generated for use in this report.
In the course of our evaluation, we sought to identify data
errors, control problems or acts of fraud and to confirm the
appropriate corrective actions, including process improvements,
were being undertaken. Our assessment did not include evaluating
the effectiveness of internal control over financial reporting
at our recently acquired Inamed business, which is included in
our 2006 consolidated financial statements and constituted:
$70.3 million of cash and equivalents, $75.5 million
of trade receivables, net, $52.5 million of inventories and
$64.4 million of property, plant and equipment, net as of
December 31, 2006, and $371.6 million of product net
sales for the year ended December 31, 2006. Management did
not assess the effectiveness of internal control over financial
reporting at this newly acquired business due to the complexity
associated with assessing internal controls during integration
efforts.
Based on the foregoing, our Principal Executive Officer and our
Principal Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and
procedures were effective and were operating at the reasonable
assurance level.
Further, management determined that, as of December 31,
2006, there were no changes in our internal control over
financial reporting that occurred during the fourth fiscal
quarter that have materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
Our management report on internal control over financial
reporting and the attestation report on managements
assessment of our internal control over financial reporting are
contained in Item 15 of Part IV of this report,
Exhibits and Financial Statement Schedules.
72
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
For information required by this Item regarding our executive
officers, see Item 1 of Part I of this report,
Business.
The information to be included in the sections entitled
Election of Directors and Corporate
Governance in the Proxy Statement to be filed by us with
the Securities and Exchange Commission no later than
120 days after the close of our fiscal year ended
December 31, 2006 (the Proxy Statement) is
incorporated herein by reference.
The information to be included in the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement is incorporated herein
by reference.
The information to be included in the section entitled
Code of Business Conduct and Ethics in the Proxy
Statement is incorporated herein by reference.
We have filed, as exhibits to this report, the certifications of
our Principal Executive Officer and Principal Financial Officer
required pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
On May 16, 2006, we submitted to the New York Stock
Exchange the Annual CEO Certification required pursuant to
Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual.
|
|
Item 11.
|
Executive
Compensation
|
The information to be included in the sections entitled
Executive Compensation and Non-Employee
Directors Compensation in the Proxy Statement is
incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information to be included in the section entitled
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters in the Proxy
Statement is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information to be included in the sections entitled
Certain Relationships and Related Transactions and
Compensation Committee Interlocks and Insider
Participation in the Proxy Statement is incorporated
herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information to be included in the section entitled
Independent Registered Public Accounting Firm Fees
in the Proxy Statement is incorporated herein by reference.
73
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) 1. Consolidated Financial Statements and
Supplementary Data:
The following financial statements are included herein under
Item 8 of Part II of this report, Financial
Statements and Supplementary Data:
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-58
|
|
(a) 2. Financial Statement Schedules:
All other schedules have been omitted for the reason that the
required information is presented in the financial statements or
notes thereto, the amounts involved are not significant or the
schedules are not applicable.
(a) 3. Exhibits:
INDEX OF
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of Allergan, Inc., as filed with the State of
Delaware on May 22, 1989 (incorporated by reference to
Exhibit 3.1 to Allergan, Inc.s Registration Statement
on
Form S-1
No. 33-28855,
filed on May 24, 1989)
|
|
3
|
.2
|
|
Certificate of Amendment of
Certificate of Incorporation of Allergan, Inc. (incorporated by
reference to Exhibit 3 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 30, 2000)
|
|
3
|
.3
|
|
Certificate of Amendment of
Restated Certificate of Incorporation of Allergan, Inc.
(incorporated by reference to Exhibit 3.1 to Allergan,
Inc.s Current Report on
Form 8-K
filed on September 20, 2006)
|
|
3
|
.4
|
|
Allergan, Inc. Bylaws
(incorporated by reference to Exhibit 3 to Allergan,
Inc.s Report on
Form 10-Q
for the Quarter ended June 30, 1995)
|
|
3
|
.5
|
|
First Amendment to Allergan, Inc.
Bylaws (incorporated by reference to Exhibit 3.1 to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 24, 1999)
|
|
3
|
.6
|
|
Second Amendment to Allergan, Inc.
Bylaws (incorporated by reference to Exhibit 3.5 to
Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)
|
|
3
|
.7
|
|
Third Amendment to Allergan, Inc.
Bylaws (incorporated by reference to Exhibit 3.6 to
Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2003)
|
74
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.1
|
|
Certificate of Designations of
Series A Junior Participating Preferred Stock, as filed
with the State of Delaware on February 1, 2000
(incorporated by reference to Exhibit 4.1 to Allergan,
Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 1999)
|
|
4
|
.2
|
|
Rights Agreement, dated
January 25, 2000, between Allergan, Inc. and First Chicago
Trust Company of New York (incorporated by reference to
Exhibit 4 to Allergan, Inc.s Current Report on
Form 8-K
filed on January 28, 2000)
|
|
4
|
.3
|
|
Amendment to Rights Agreement,
dated as of January 2, 2002, between First Chicago Trust
Company of New York, Allergan, Inc. and EquiServe Trust Company,
N.A., as successor Rights Agent (incorporated by reference to
Exhibit 4.3 to Allergan, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2001)
|
|
4
|
.4
|
|
Second Amendment to Rights
Agreement, dated as of January 30, 2003, between First
Chicago Trust Company of New York, Allergan, Inc. and EquiServe
Trust Company, N.A., as successor Rights Agent (incorporated by
reference to Exhibit 1 to Allergan, Inc.s amended
Form 8-A
filed on February 14, 2003)
|
|
4
|
.5
|
|
Third Amendment to Rights
Agreement, dated as of October 7, 2005, between Wells Fargo
Bank, National Association and Allergan, Inc., as successor
Right Agent (incorporated by reference to Exhibit 4.11 to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
4
|
.6
|
|
Amended and Restated Indenture,
dated as of July 28, 2004, between Allergan, Inc. and Wells
Fargo Bank, National Association (incorporated by reference to
Exhibit 4.11 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 24, 2004)
|
|
4
|
.7
|
|
Form of Zero Coupon Convertible
Senior Note Due 2022 (incorporated by reference to
Exhibit 4.2 (included in Exhibit 4.1) to Allergan,
Inc.s Registration Statement on
Form S-3
dated January 9, 2003, Registration
No. 333-102425)
|
|
4
|
.8
|
|
Registration Rights Agreement,
dated as of November 6, 2002, by and between Allergan, Inc.
and Banc of America Securities LLC, Salomon Smith Barney Inc.,
J.P. Morgan Securities Inc. and Banc One Capital Markets,
Inc. (incorporated by reference to Exhibit 4.3 to Allergan,
Inc.s Registration Statement on
Form S-3
dated January 9, 2003, Registration
No. 333-102425)
|
|
4
|
.9
|
|
Indenture, dated as of
April 12, 2006, between Allergan, Inc. and Wells Fargo,
National Association relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 4.1 to Allergan, Inc.s Current
Report on
Form 8-K
filed on April 12, 2006)
|
|
4
|
.10
|
|
Indenture, dated as of
April 12, 2006, between Allergan, Inc. and Wells Fargo,
National Association relating to the $800,000,000
5.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.2 to Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
4
|
.11
|
|
Form of 1.50% Convertible
Senior Note due 2026 (incorporated by reference (and included
in) the Indenture dated as of April 12, 2006 between
Allergan, Inc. and Wells Fargo, National Association at
Exhibit 4.1 to Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
4
|
.12
|
|
Form of 5.75% Senior Note due
2016 (incorporated by reference to (and included in) the
Indenture dated as of April 12, 2006 between Allergan, Inc.
and Wells Fargo, National Association at Exhibit 4.2 to
Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
4
|
.13
|
|
Registration Rights Agreement,
dated as of April 12, 2006, among Allergan, Inc. and Banc
of America Securities LLC and Citigroup Global Markets Inc., as
representatives of the Initial Purchasers named therein,
relating to the $750,000,000 1.50% Convertible Senior Notes
due 2026 (incorporated by reference to Exhibit 4.3 to
Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
4
|
.14
|
|
Registration Rights Agreement,
dated as of April 12, 2006, among Allergan, Inc. and Morgan
Stanley & Co., Incorporated, as representative of the
Initial Purchasers named therein, relating to the $800,000,000
5.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.4 to Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
10
|
.1
|
|
Form of Director and Executive
Officer Indemnity Agreement
|
|
10
|
.2
|
|
Form of Allergan, Inc. Change in
Control Agreement 11E Grade (applicable to certain employees
hired before December 4, 2006) *
|
|
10
|
.3
|
|
Form of Allergan, Inc. Change in
Control Agreement 11E Grade (applicable to certain employees
hired after December 4, 2006) *
|
75
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
First Amendment to Allergan, Inc.
2003 Nonemployee Director Equity Incentive Plan (incorporated by
reference to Appendix A to Allergan, Inc.s Proxy
Statement filed on March 21, 2006)*
|
|
10
|
.5
|
|
Amended Form of Restricted Stock
Award Agreement under Allergan, Inc.s 2003 Nonemployee
Director Equity Incentive Plan, as amended (incorporated by
reference to Exhibit 10.60 to Allergan, Inc.s Report
on
Form 10-Q
for the Quarter ended March 31, 2006)
|
|
10
|
.6
|
|
Amended Form of Non-Qualified
Stock Option Award Agreement under Allergan, Inc.s 2003
Nonemployee Director Equity Incentive Plan, as amended
(incorporated by reference to Exhibit 10.61 to Allergan,
Inc.s Report on
Form 10-Q
for the Quarter ended March 31, 2006)
|
|
10
|
.7
|
|
Allergan, Inc. Deferred
Directors Fee Program, amended and restated as of
November 15, 1999 (incorporated by reference to
Exhibit 4 to Allergan, Inc.s Registration Statement
on
Form S-8
dated January 6, 2000, Registration
No. 333-94155)*
|
|
10
|
.8
|
|
Allergan, Inc. 1989 Incentive
Compensation Plan, as amended and restated November 2000 and as
adjusted for 1999 split (incorporated by reference to
Exhibit 10.5 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2000)
|
|
10
|
.9
|
|
First Amendment to Allergan, Inc.
1989 Incentive Compensation Plan (as amended and restated
November 2000) (incorporated by reference to Exhibit 10.51
to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 26, 2003)
|
|
10
|
.10
|
|
Second Amendment to Allergan, Inc.
1989 Incentive Compensation Plan (as amended and restated
November 2000) (incorporated by reference to Exhibit 10.7
to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.11
|
|
Form of Certificate of Restricted
Stock Award Terms and Conditions under Allergan, Inc. 1989
Incentive Compensation Plan (as amended and restated November
2000) (incorporated by reference to Exhibit 10.8 to
Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.12
|
|
Form of Restricted Stock Units
Terms and Conditions under Allergan, Inc. 1989 Incentive
Compensation Plan (as amended and restated November 2000)
(incorporated by reference to Exhibit 10.9 to Allergan,
Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.13
|
|
Allergan, Inc. Employee Stock
Ownership Plan (Restated 2003) (incorporated by reference to
Exhibit 10.6 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)
|
|
10
|
.14
|
|
First Amendment to Allergan, Inc.
Employee Stock Ownership Plan (as Restated 2003) (incorporated
by reference to Exhibit 10.52 to Allergan, Inc.s
Report on
Form 10-Q
for the Quarter ended September 26, 2003)
|
|
10
|
.15
|
|
Second Amendment to Allergan, Inc.
Employee Stock Ownership Plan (as Restated 2003) (incorporated
by reference to Exhibit 10.9 to Allergan, Inc.s
Report on
Form 10-K
for the Fiscal Year ended December 31, 2003)
|
|
10
|
.16
|
|
Third Amendment to Allergan, Inc.
Employee Stock Ownership Plan (as Restated 2003) (incorporated
by reference to Exhibit 10.13 to Allergan, Inc.s
Report on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.17
|
|
Allergan, Inc. Employee Savings
and Investment Plan (Restated 2003) (incorporated by reference
to Exhibit 10.7 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)
|
|
10
|
.18
|
|
First Amendment to Allergan, Inc.
Savings and Investment Plan (Restated 2003) (incorporated by
reference to Exhibit 10.53 to Allergan, Inc.s Report
on
Form 10-Q
for the Quarter ended September 26, 2003)
|
|
10
|
.19
|
|
Second Amendment to Allergan, Inc.
Savings and Investment Plan (Restated 2003) (incorporated by
reference to Exhibit 10.12 to Allergan, Inc.s Report
on
Form 10-K
for the Fiscal Year ended December 31, 2003)
|
|
10
|
.20
|
|
Third Amendment to Allergan, Inc.
Savings and Investment Plan (Restated 2003) (incorporated by
reference to Exhibit 10.17 to Allergan, Inc.s Report
on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.21
|
|
Allergan, Inc. Pension Plan
(Restated 2003) (incorporated by reference to Exhibit 10.8
to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)
|
|
10
|
.22
|
|
First Amendment to Allergan, Inc.
Pension Plan (Restated 2003) (incorporated by reference to
Exhibit 10.50 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 26, 2003)
|
76
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.23
|
|
Second Amendment to Allergan, Inc.
Pension Plan (Restated 2003) (incorporated by reference to
Exhibit 10.20 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2004)
|
|
10
|
.24
|
|
Restated Allergan, Inc.
Supplemental Retirement Income Plan (incorporated by reference
to Exhibit 10.5 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended March 31, 1996)*
|
|
10
|
.25
|
|
First Amendment to Allergan, Inc.
Supplemental Retirement Income Plan (incorporated by reference
to Exhibit 10.4 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 24, 1999)*
|
|
10
|
.26
|
|
Second Amendment to Allergan, Inc.
Supplemental Retirement Income Plan (incorporated by reference
to Exhibit 10.12 to Allergan, Inc.s Current Report on
Form 8-K
filed on January 28, 2000)*
|
|
10
|
.27
|
|
Third Amendment to Allergan, Inc.
Supplemental Retirement Income Plan (incorporated by reference
to Exhibit 10.46 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 28, 2002)*
|
|
10
|
.28
|
|
Fourth Amendment to Allergan, Inc.
Supplemental Retirement Income Plan (incorporated by reference
to Exhibit 10.13 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)*
|
|
10
|
.29
|
|
Restated Allergan, Inc.
Supplemental Executive Benefit Plan (incorporated by reference
to Exhibit 10.6 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended March 31, 1996)*
|
|
10
|
.30
|
|
First Amendment to Allergan, Inc.
Supplemental Executive Benefit Plan (incorporated by reference
to Exhibit 10.3 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 24, 1999)*
|
|
10
|
.31
|
|
Second Amendment to Allergan, Inc.
Supplemental Executive Benefit Plan (incorporated by reference
to Exhibit 10.11 to Allergan, Inc.s Current Report on
Form 8-K
filed on January 28, 2000)*
|
|
10
|
.32
|
|
Third Amendment to Allergan, Inc.
Supplemental Executive Benefit Plan (incorporated by reference
to Exhibit 10.45 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 28, 2002)*
|
|
10
|
.33
|
|
Fourth Amendment to Allergan, Inc.
Supplemental Executive Benefit Plan (incorporated by reference
to Exhibit 10.18 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)*
|
|
10
|
.34
|
|
Allergan, Inc. 2006 Executive
Bonus Plan (incorporated by reference to Appendix B to
Allergan, Inc.s Proxy Statement filed on March 21,
2006)*
|
|
10
|
.35
|
|
Allergan, Inc. 2007 Executive
Bonus Plan Performance Objectives
|
|
10
|
.36
|
|
Allergan, Inc. 2007 Management
Bonus Plan*
|
|
10
|
.37
|
|
Allergan, Inc. Executive Deferred
Compensation Plan (amended and restated effective
January 1, 2003) (incorporated by reference to
Exhibit 10.22 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2002)*
|
|
10
|
.38
|
|
First Amendment to Allergan, Inc.
Executive Deferred Compensation Plan (amended and restated
effective January 1, 2003) (incorporated by reference to
Exhibit 10.29 to Allergan, Inc.s Report on
Form 10-K
for the Fiscal Year ended December 31, 2003)*
|
|
10
|
.39
|
|
Allergan, Inc. Premium Priced
Stock Option Plan (incorporated by reference to Exhibit B
to Allergan, Inc.s Proxy Statement filed on March 23,
2001)*
|
|
10
|
.40
|
|
Acceleration of Vesting of Premium
Priced Stock Options (incorporated by reference to
Exhibit 10.57 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended March 25, 2005)
|
|
10
|
.41
|
|
Distribution Agreement, dated
March 4, 1994, between Allergan, Inc. and Merrill
Lynch & Co. and J.P. Morgan Securities Inc.
(incorporated by reference to Exhibit 10.14 to Allergan,
Inc.s Report on
Form 10-K
for the fiscal year ended December 31, 1993)
|
|
10
|
.42
|
|
Credit Agreement, dated as of
October 11, 2002, among Allergan, Inc., as Borrower and
Guarantor, the Eligible Subsidiaries Referred to Therein, the
Banks Listed Therein, JPMorgan Chase Bank, as Administrative
Agent, Citicorp USA Inc., as Syndication Agent and Bank of
America, N.A., as Documentation Agent (incorporated by reference
to Exhibit 10.47 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 27, 2002)
|
|
10
|
.43
|
|
First Amendment to Credit
Agreement, dated as of October 30, 2002, among Allergan,
Inc., as Borrower and Guarantor, the Eligible Subsidiaries
Referred to Therein, the Banks Listed Therein, JPMorgan Chase
Bank, as Administrative Agent, Citicorp USA Inc., as Syndication
Agent and Bank of America, N.A., as Documentation Agent
(incorporated by reference to Exhibit 10.48 to Allergan,
Inc.s Report on
Form 10-Q
for the Quarter ended September 27, 2002)
|
77
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.44
|
|
Second Amendment to Credit
Agreement, dated as of May 16, 2003, among Allergan, Inc.,
as Borrower and Guarantor, the Banks listed Therein, JPMorgan
Chase Bank, as Administrative Agent, Citicorp USA Inc., as
Syndication Agent and Bank of America, N.A., as Documentation
Agent (incorporated by reference to Exhibit 10.49 to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 27, 2003)
|
|
10
|
.45
|
|
Third Amendment to Credit
Agreement, dated as of October 15, 2003, among Allergan,
Inc., as Borrower and Guarantor, the Banks Listed Therein,
JPMorgan Chase Bank, as Administrative Agent, Citicorp USA Inc.,
as Syndication Agent and Bank of America, N.A., as Documentation
Agent (incorporated by reference to Exhibit 10.54 to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 26, 2003)
|
|
10
|
.46
|
|
Fourth Amendment to Credit
Agreement, dated as of May 26, 2004, among Allergan, Inc.,
as Borrower and Guarantor, the Banks Listed Therein, JPMorgan
Chase Bank, as Administrative Agent, Citicorp USA Inc., as
Syndication Agent and Bank of America, N.A., as Document Agent
(incorporated by reference to Exhibit 10.56 to Allergan,
Inc.s Report on
Form 10-Q
for the Quarter ended June 25, 2004)
|
|
10
|
.47
|
|
Amended and Restated Credit
Agreement, dated as of March 31, 2006, among Allergan, Inc.
as Borrower and Guarantor, the Banks listed therein, JPMorgan
Chase Bank, as Administrative Agent, Citicorp USA Inc., as
Syndication Agent and Bank of America, N.A., as Document Agent
(incorporated by reference to Exhibit 10.1 to Allergan,
Inc.s Current Report on
Form 8-K
filed on April 4, 2006)
|
|
10
|
.48
|
|
Purchase Agreement, dated as of
April 6, 2006, among Allergan, Inc. and Banc of America
Securities LLC, Citigroup Global Markets Inc. and Morgan
Stanley & Co. Incorporated, as representatives of the
initial purchasers named therein, relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 10.1 to Allergan, Inc.s Current
Report on
Form 8-K
filed on April 12, 2006)
|
|
10
|
.49
|
|
Purchase Agreement, dated as of
April 6, 2006, among Allergan, Inc. and Banc of America
Securities LLC, Citigroup Global Markets Inc., Goldman,
Sachs & Co. and Morgan Stanley & Co.
Incorporated, relating to the $800,000,000 5.75% Senior
Notes due 2016 (incorporated by reference to Exhibit 10.2
to Allergan, Inc.s Current Report on
Form 8-K
filed on April 12, 2006)
|
|
10
|
.50
|
|
Stock Sale and Purchase Agreement,
dated as of October 31, 2006, by and among Allergan, Inc.,
Allergan Holdings France, SAS, Waldemar Kita, the European
Pre-Floatation Fund II and the other minority stockholders
of Groupe Cornéal Laboratories and its subsidiaries
(incorporated by reference to Exhibit 10.1 to Allergan,
Inc.s Current Report on
Form 8-K
filed on November 2, 2006)
|
|
10
|
.51
|
|
Contribution and Distribution
Agreement, dated as of June 24, 2002, by and among
Allergan, Inc. and Advanced Medical Optics, Inc. (incorporated
by reference to Exhibit 10.35 to Allergan, Inc.s
Report on
Form 10-Q
for the Quarter ended June 28, 2002)
|
|
10
|
.52
|
|
Transitional Services Agreement,
dated as of June 24, 2002, between Allergan, Inc. and
Advanced Medical Optics, Inc. (incorporated by reference to
Exhibit 10.36 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 28, 2002)
|
|
10
|
.53
|
|
Employee Matters Agreement, dated
as of June 24, 2002, between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.37 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 28, 2002)
|
|
10
|
.54
|
|
Tax Sharing Agreement, dated as of
June 24, 2002, between Allergan, Inc. and Advanced Medical
Optics, Inc. (incorporated by reference to Exhibit 10.38 to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended June 28, 2002)
|
|
10
|
.55
|
|
Manufacturing and Supply
Agreement, dated as of June 30, 2002, between Allergan,
Inc. and Advanced Medical Optics, Inc. (incorporated by
reference to Exhibit 10.39 to Allergan, Inc.s Report
on
Form 10-Q
for the Quarter ended June 28, 2002)
|
|
10
|
.56
|
|
Agreement and Plan of Merger,
dated as of December 20, 2005, by and among Allergan, Inc.,
Banner Acquisition, Inc., a wholly-owned subsidiary of Allergan,
and Inamed Corporation (incorporated by reference to
Exhibit 99.2 to Allergan, Inc.s Current Report on
Form 8-K
filed on December 13, 2005)
|
|
10
|
.57
|
|
Transition and General Release
Agreement, effective as of August 6, 2004, by and between
Allergan, Inc. and Lester J. Kaplan (incorporated by reference
to Exhibit 10.55 to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended March 26, 2004)
|
78
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.58
|
|
Transfer Agent Services Agreement,
dated as of October 7, 2005, by and among Allergan, Inc.
and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 10.57 to Allergan, Inc.s Report
on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.59
|
|
Botox®
China License Agreement, dated as of September 30, 2005, by
and among Allergan, Inc. Allergan Sales, LLC and Glaxo Group
Limited (incorporated by reference to Exhibit 10.51** to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.60
|
|
Botox®
Japan License Agreement, dated as of September 30, 2005, by
and among Allergan, Inc. Allergan Sales, LLC and Glaxo Group
Limited (incorporated by reference to Exhibit 10.52** to
Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.61
|
|
Co-Promotion Agreement, dated as
of September 30, 2005, by and among Allergan, Inc.,
Allergan Sales, LLC and SmithKline Beecham Corporation d/b/a
GlaxoSmithKline (incorporated by reference to
Exhibit 10.53** to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.62
|
|
Botox®
Global Strategic Support Agreement, dated as of
September 30, 2005, by and among Allergan, Inc., Allergan
Sales, LLC and Glaxo Group Limited (incorporated by reference to
Exhibit 10.54** to Allergan, Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.63
|
|
China
Botox®
Supply Agreement, dated as of September 30, 2005, by and
among Allergan Sales, LLC and Glaxo Group Limited (incorporated
by reference to Exhibit 10.55** to Allergan, Inc.s
Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.64
|
|
Japan
Botox®
Supply Agreement, dated as of September 30, 2005, by and
between Allergan Pharmaceuticals Ireland and Glaxo Group Limited
(incorporated by reference to Exhibit 10.56** to Allergan,
Inc.s Report on
Form 10-Q
for the Quarter ended September 30, 2005)
|
|
10
|
.65
|
|
Severance and General Release
Agreement between Allergan, Inc. and Roy J. Wilson, dated as of
October 6, 2006 (incorporated by reference to
Exhibit 10.1 to Allergan, Inc.s Current Report on
Form 8-K
filed on October 10, 2006)
|
|
21
|
|
|
List of Subsidiaries of Allergan,
Inc.
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP, independent registered public accounting firm
|
|
23
|
.2
|
|
Report and consent of KPMG LLP,
independent registered public accounting firm
|
|
31
|
.1
|
|
Certification of Principal
Executive Officer Required Under
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
31
|
.2
|
|
Certification of Principal
Financial Officer Required Under
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
32
|
|
|
Certification of Principal
Executive Officer and Principal Financial Officer Required Under
Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350
|
|
|
*
|
Management contract or compensatory plan or arrangement.
|
|
**
|
Confidential treatment was requested with respect to the omitted
portions of this Exhibit, which portions have been filed
separately with the Securities and Exchange Commission and which
portions were granted confidential treatment on
December 13, 2005.
|
|
|
All current directors and executive officers of Allergan, Inc.
have entered into the Indemnity Agreement with Allergan, Inc.
|
|
|
All vice president level employees, including executive
officers, of Allergan, Inc., grade level 11E and above,
hired before December 4, 2006, are eligible to be party to
the Allergan, Inc. Change in Control Agreement.
|
|
|
All employees of Allergan, Inc., grade level 11E and below,
hired after December 4, 2006, are eligible to be party to
the Allergan, Inc. Change in Control Agreement.
|
(b) Item 601 Exhibits
Reference is hereby made to the Index of Exhibits under
Item 15 of Part IV of this report, Exhibits and
Financial Statement Schedules.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Allergan,
Inc.
David E.I. Pyott
Chairman of the Board and
Chief Executive Officer
Date: March 1, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
Date: March 1, 2007
|
|
By /s/ David
E.I. Pyott
David
E.I. Pyott
Chairman of the Board and
Chief Executive Officer
|
|
|
|
Date: March 1, 2007
|
|
By
/s/ Jeffrey
L. Edwards
Jeffrey
L. Edwards
Executive Vice President, Finance and
Business Development, Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Date: March 1, 2007
|
|
By
/s/ James
F. Barlow
James
F. Barlow
Senior Vice President, Corporate Controller (Principal
Accounting Officer)
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Date: March 1, 2007
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By
/s/ Herbert
W. Boyer
Herbert
W. Boyer, Ph.D.,
Vice Chairman of the Board
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Date: March 1, 2007
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By
/s/ Deborah
L. Dunsire
Deborah
L. Dunsire, M.D., Director
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Date: March 1, 2007
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By
/s/ Handel
E. Evans
Handel
E. Evans, Director
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Date: March 1, 2007
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By
/s/ Michael
R.
Gallagher
Michael
R. Gallagher, Director
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Date: March 1, 2007
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By
/s/ Gavin
S. Herbert
Gavin
S. Herbert,
Director and Chairman Emeritus
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Date: March 1, 2007
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By
/s/ Robert
A. Ingram
Robert
A. Ingram, Director
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Date: March 1, 2007
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By
/s/ Trevor
M. Jones
Trevor
M. Jones, Director
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80
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Date: March 1, 2007
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By
/s/ Louis
J. Lavigne,
Jr.
Louis
J. Lavigne, Jr., Director
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Date: March 1, 2007
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By
/s/ Russell
T. Ray
Russell
T. Ray, Director
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Date: March 1, 2007
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By
/s/ Stephen
J. Ryan
Stephen
J. Ryan, M.D., Director
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Date: March 1, 2007
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By
/s/ Leonard
D.
Schaeffer
Leonard
D. Schaeffer, Director
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81
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal control over financial reporting, as such term is
defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended, refers to
the process designed by, or under the supervision of, our
Principal Executive Officer and Principal Financial Officer, and
effected by our Board of Directors, management and other
personnel, 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, and includes those
policies and procedures that:
(1) Pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of Allergan;
(2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Allergan are
being made only in accordance with authorizations of management
and directors of Allergan; and
(3) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of Allergans assets that could have a material effect on
the financial statements.
Managements assessment of the effectiveness of
Allergans internal control over financial reporting has
been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report on
managements assessment and on the effectiveness of
Allergans internal control over financial reporting as of
December 31, 2006. Internal control over financial
reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate,
this risk. Management is responsible for establishing and
maintaining adequate internal control over financial reporting
for Allergan.
Our assessment did not include evaluating the effectiveness of
internal control over financial reporting at our recently
acquired Inamed business, which is included in our 2006
consolidated financial statements and constituted:
$70.3 million of cash and equivalents, $75.5 million
of trade receivables, net, $52.5 million of inventories and
$64.4 million of property, plant and equipment, net as of
December 31, 2006, and $371.6 million of product net
sales for the year ended December 31, 2006. Management did
not assess the effectiveness of internal control over financial
reporting at this newly acquired business due to the complexity
associated with assessing internal controls during integration
efforts.
Management has used the framework set forth in the report
entitled Internal Control Integrated
Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the
effectiveness of Allergans internal control over financial
reporting. Management has concluded that Allergans
internal control over financial reporting was effective as of
the end of the most recent fiscal year, based on those criteria.
David E.I. Pyott
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Jeffrey L. Edwards
Executive Vice President, Finance and
Business Development, Chief Financial Officer
(Principal Financial Officer)
February 26, 2007
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Allergan, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Allergan, Inc. (the
Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). The Company
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Report on
Internal Control over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal