[November 14, 2011] LANTHEUS MEDICAL IMAGING, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations Tweet (Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Note Regarding Forward-Looking Statements Some of the statements contained in this quarterly report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including, in particular, statements about our plans, strategies, prospects and industry estimates. These statements identify prospective information and include words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "should," "predicts," "hopes" and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) our liquidity, including our belief that our existing cash, cash equivalents and anticipated revenues are sufficient to fund our existing operating expenses, capital expenditures and liquidity requirements for at least the next twelve months; (ii) our outlook and expectations including, without limitation, in connection with continued market expansion and penetration for our commercial products, including Ablavar, DEFINITY and TechneLite; (iii) our outlook and expectations related to the BVL shutdown and supply of Neurolite, DEFINITY and Cardiolite; and (iv) expected new product launch dates and market exclusivity periods. The foregoing is not an exclusive list of all forward-looking statements we make. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this quarterly report may not in fact occur. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: º • º our dependence on a limited number of third-party suppliers and the instability of global molybdenum-99 ("Moly") supply; º • º a sustained decrease in TechneLite generator demand following the end of the global Moly shortage; º • º our dependence upon third-parties, including BVL, for the manufacture and supply of a substantial portion of our products (see "Inventory Supply" within the "Key Factors Affecting Our Results" section); º • º adverse business and financial consequences of our recent recall of lots of Cardiolite and Neurolite; º • º our dependence on key customers, primarily Cardinal Health, Inc. ("Cardinal"), United Pharmacy Partners, Inc. ("UPPI") and GE Healthcare, for our nuclear imaging products; º • º our inability to compete effectively; º • º continued generic competition to Cardiolite products; º • º our dependence upon third-party healthcare payors and the uncertainty of third-party coverage and reimbursement rates; º • º uncertainties regarding the impact of U.S. healthcare reform on our business, including related reimbursements of our products; º • º our being subject to extensive government regulation and our potential inability to comply with such regulations; 31-------------------------------------------------------------------------------- Table of Contents º • º the extensive costs, time and uncertainty associated with new product development, including further product development in cooperation with a development partner or partners; º • º liability associated with our marketing and sales practices; º • º the occurrence of side effects with our DEFINITY and Ablavar products; º • º our inability to introduce new products and adapt to changing technology and diagnostic landscape, such as the much slower than anticipated market acceptance of Ablavar; º • º our exposure to product liability claims and environmental liability, including with respect to our recent recall of lots of Cardiolite and Neurolite; º • º our inability to protect our intellectual property and the risk of claims that we have infringed on the intellectual property of others; º • º risks associated with the current economic environment, including the U.S. credit markets; º • º risks associated with our international operations; º • º our inability to adequately protect our technology infrastructure; º • º our inability to hire or retain skilled employees and the loss of any of our key personnel; º • º costs and other risks associated with the Sarbanes-Oxley Act and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; º • º risks related to our outstanding indebtedness; and º • º other statements regarding our future operations, financial condition and prospects, and business strategies. Factors that could cause or contribute to such differences include, but are not limited to, those that are discussed in other documents we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Any forward-looking statement made by us in this quarterly report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as the other factors described in "Risk Factors" under Part II-Item 1A of this report and the information provided in our Annual Report on Form 10-K. Overview We are a global leader in developing, manufacturing and distributing innovative diagnostic medical imaging agents and products that assist clinicians in the diagnosis of cardiovascular diseases such as coronary artery disease, congestive heart failure and stroke, peripheral vascular disease and other diseases. We were founded in 1956 as New England Nuclear Corporation and purchased by E. I. du Pont de Nemours and Company in 1981. We were subsequently acquired by BMS, as part of its acquisition of DuPont Pharmaceuticals in 2001. On January 8, 2008, with the financial sponsorship of Avista Capital, we purchased the medical imaging business from BMS for an aggregate purchase price of $518.7 million, which is now known as LMI. Our current marketed products are used by nuclear physicians, cardiologists, radiologists, internal medicine physicians, technologists and sonographers working in a variety of clinical settings. We sell our products to radiopharmacies, hospitals, clinics, group practices, integrated delivery networks, group 32-------------------------------------------------------------------------------- Table of Contents purchasing organizations and, in certain circumstances, wholesalers. In addition to our marketed products, we have three products in clinical and pre-clinical development including our lead Phase 3 product, flurpiridaz F 18, a myocardial perfusion imaging agent, 18F LMI1195, a cardiac neuronal imaging agent, and BMS 753951 for the identification of vascular plaque. We expect on going investment in our clinical programs and research and development to remain an important component of our business strategy. We market our products globally and have operations in the United States, Puerto Rico, Canada and Australia and distribution relationships in Europe, Asia Pacific and Latin America. Our Products Our principal products include DEFINITY, an ultrasound contrast agent, Cardiolite, a myocardial perfusion imaging agent, and TechneLite, a generator used to provide the radioisotope to radiolabel Cardiolite and other radiopharmaceuticals. We launched DEFINITY in 2001 and it is currently patent protected in the United States and numerous foreign jurisdictions with known or expected patent protection until 2019 and in the United States a likely patent term adjustment until 2021. Cardiolite was approved by the FDA in 1990 and its market exclusivity expired in July 2008. In the United States, our nuclear imaging products, including Cardiolite and TechneLite, are primarily distributed through over 350 radiopharmacies that are controlled by or associated with Cardinal, UPPI, Triad and GE Healthcare. A small portion of our sales in the United States of nuclear imaging products are made through our direct sales force to hospitals and clinics that maintain their own in-house radiopharmaceutical capabilities. Sales of our contrast agents, including DEFINITY, are made through our direct sales force of approximately 70 representatives. Outside the United States, we own five radiopharmacies in Canada and two radiopharmacies in each of Puerto Rico and Australia. We also maintain a direct sales force in each of these countries. In the rest of the world, we rely on third-party distributors to market, distribute and sell our nuclear imaging and contrast agent products, either on a country-by-country basis or on a multi-country regional basis. The following table sets forth our revenue derived from our principal products: Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2011 % 2010 % 2011 % 2010 % Cardiolite $ 15,875 18 $ 18,087 19 $ 57,696 21 $ 56,559 22 TechneLite 32,665 38 39,537 41 100,195 37 86,641 33 DEFINITY 17,166 20 15,007 15 50,632 18 44,142 17 Other 20,526 24 23,959 25 66,247 24 71,815 28 Total revenues $ 86,232 100 $ 96,590 100 $ 274,770 100 $ 259,157 100 Key Factors Affecting Our Results Our business and financial performance have been, and continue to be, affected by the following: Inventory Supply We rely on BVL for sole source manufacturing of DEFINITY, Neurolite and certain TechneLite accessories. We also rely on BVL for a majority of our Cardiolite product supply. In July 2010, BVL temporarily shutdown the facility where it manufactures products for a number of customers, including us, in order to upgrade the facility to meet certain regulatory requirements. In anticipation of the shutdown, BVL manufactured for us additional inventory of these products to meet our expected needs during the shutdown period which was anticipated to end in March 2011. As the shutdown and re-inspection periods have been longer than anticipated by BVL and ourselves, we could not meet all 33-------------------------------------------------------------------------------- Table of Contents of the demand for certain products during the third quarter of 2011, resulting in an overall revenue decline over the prior period. BVL began the process of manufacturing of Cardiolite product on September 29, 2011 and has informed us that it anticipates resuming manufacturing of Neurolite, DEFINITY and TechneLite accessories later in the fourth quarter of 2011. As previously disclosed, BVL must successfully complete the on-going FDA regulatory process before we can distribute to our customers in the U.S. products that BVL has manufactured following the shutdown. We can give no assurances as to when the FDA regulatory process will be completed or that BVL will be able to successfully manufacture and distribute product thereafter. If BVL is not able to provide us with adequate product supply for a prolonged period of time, we will have limited Cardiolite product supply. We also procure Cardiolite from a second-source manufacturer which could help mitigate the limited product supply. Based on our current projections, we believe that we have sufficient DEFINITY inventory until the end of February 2012. In addition, we believe that we will have an alternative approved supplier of Technelite accessories shortly. The inventory of Neurolite previously supplied to us by BVL has now been exhausted. We are pursuing new manufacturing relationships to establish and secure additional long-term or alternative suppliers of Cardiolite, Neurolite and DEFINITY, but we are uncertain of the timing as to when these arrangements could provide meaningful quantities of product. In addition, if BVL is not able to provide us adequate product supply for a prolonged period of time, we will need to implement certain expense reduction and other operating and strategic initiatives beginning in 2012. See Risk Factors-"Our dependence upon third parties for the manufacture and supply of a substantial portion of our products could prevent us from delivering our products to our customers in the required quantities, within the required timeframe, or at all, which could result in order cancellations and decreased revenues." Global Moly Supply Historically, our largest supplier of Moly, our highest volume raw material, has been Nordion, which has relied on the NRU reactor in Chalk River, Ontario. This reactor was off-line from May 2009 until August 2010 due to a heavy water leak in the reactor vessel. With the return to service of the NRU reactor, we have seen increased sales in both Cardiolite products and TechneLite for the nine months ended September 30, 2011. In response to the global Moly shortage and to minimize the risk of any potential future supply disruption, we took several steps to diversify and balance our global supply of Moly, including expanding our sourcing of Moly to include South Africa, Belgium and Australia. We are also pursuing additional sources of Moly from potential new producers around the world to further augment our current supply. In addition, we are exploring a number of alternative Moly projects with existing reactors and technologies as well as new technologies. For the year ended December 31, 2010, instability in the global supply of Moly and supply shortages resulted in substantial volatility in the cost of Moly in comparison to historical costs. We were able to pass some of these Moly cost increases on to our customers through our customer contracts. Additionally, the instability in the global supply of Moly has resulted in Moly producers requiring, in exchange for fixed Moly prices, supply minimums in the form of take-or-pay obligations. With less Moly, we manufactured less TechneLite and fewer generators for radiopharmacies and hospitals to make up unit doses of Cardiolite, resulting in decreased sales of TechneLite and Cardiolite in favor of other diagnostic modalities that do not use Moly. Demand for TechneLite Following the global Moly supply challenge, we have experienced decreased demand for TechneLite generators from pre-shortage levels even though volume has increased in absolute terms from shortage levels following the return of our normal Moly supply in August 2010. Although, we do 34-------------------------------------------------------------------------------- Table of Contents not know if Technetium demand will ever return to pre-shortage levels, we expect to experience some increase in sales of TechneLite generators. We believe that TechneLite unit volume has not returned to pre-shortage levels for a number of reasons, including: (i) changing staffing and utilization practices in radiopharmacies, which have resulted in an increased number of unit doses of Technetium-based radiopharmaceuticals being made from available amounts of Technetium; (ii) shifts to alternative diagnostic imaging modalities during the Moly supply shortage, which have not returned to Technetium-based procedures; and (iii) decreased amounts of Technetium being used in unit-doses of Technetium-based radiopharmaceuticals due to growing concerns about patient radiation dose exposure. We also believe that there has been an overall decline in the MPI study market because of decreased levels of patient studies during the Moly shortage period that have not returned to pre-shortage levels and industry-wide cost-containment initiatives that have resulted in a transition of location in which imaging procedures are performed from free standing imaging centers to the hospital setting. We expect these factors will continue to affect Technetium demand in the future. Additionally, our ability to meet the demand for TechneLite may be impacted by the BVL shutdown. See "-Inventory Supply." Cardiolite Competitive Pressures Cardiolite's market exclusivity expired in July 2008. In September 2008, the first of several competing generic products to Cardiolite was launched. With continued pricing pressure from generic competitors, we also sell our Cardiolite product in the form of a generic sestamibi while at the same time continuing to sell branded Cardiolite throughout the MPI segment. We believe this strategy of selling branded as well as generic sestamibi allows us to maintain total segment share by having multiple sestamibi offerings that are attractive in terms of brand, as well as price. In addition to pricing pressure due to generics, Cardiolite has also faced a moderate decline in the MPI segment due to a change in professional society appropriateness guidelines, on-going reimbursement pressures, the limited availability of Moly during the recent reactor shutdowns and the increase in use of other diagnostic modalities as a result of a shift to more available imaging agents and modalities. In the latter case, given the superior safety and efficacy profile of Technetium generator-based MPI agents, with the major global Moly producers now operating again, we believe that there will be an incremental increase in orders for Cardiolite products from our channel partners. Despite these trends, we believe our share of the MPI segment only decreased from approximately one-half to approximately one-third of the entire segment from 2008 through the end of 2010 due to continued brand awareness, loyalty to the agent within the cardiology community and our strong relationships with our distribution partners. Growth of DEFINITY We believe the market opportunity for our contrast agent, DEFINITY, remains quite significant. As we better educate the physician and healthcare provider community about the benefits and risks of this product, we believe we will experience further penetration of suboptimal echocardiograms. Sales of DEFINITY have continually increased quarter over quarter since June 2008, when we were able to modify the boxed warning on DEFINITY. Unit sales of DEFINITY had decreased substantially in late 2007 and early 2008 as a result of an FDA request in October 2007 that all manufacturers of ultrasound contrast agents add a boxed warning to their products to notify physicians and patients about potentially serious safety concerns or risks posed by the products. However, in May 2008, the boxed warning was modified by the FDA in response to the substantial advocacy efforts of prescribing physicians. In October 2011, we received FDA approval of further modifications to the DEFINITY label, including: further relaxing the boxed warning; eliminating the sentence in the Indication and Use section "The safety and efficacy of DEFINITY with exercise stress or pharmacologic stress testing have not been established" (previously added in October 2007 in connection with the imposition of the box 35-------------------------------------------------------------------------------- Table of Contents warning); and including summary data from the post-approval CaRES (Contrast echocardiography Registry for Safety Surveillance) safety registry and the post-approval pulmonary hypertension study. If BVL continues to remain shutdown, however, we will be unable to manufacture DEFINITY. See "-Inventory Supply." Product Recall Costs As a result of recent FDA inspections of BVL and of our own facilities in North Billerica, MA, we filed a field alert and initiated a recall of a total of six lots of Cardiolite and Neurolite manufactured for us by BVL prior to the shutdown described above. Although there have been no significant changes in product safety risk profiles with relatively stable adverse event rates being reported and although the rates of serious adverse medical events have not changed significantly and are rare for these products, our medical risk assessment determined that there was a theoretical risk to patients associated with the injection of product from these lots because of the identification of certain particulate matter in a limited number of vials from these lots, which was introduced during the BVL manufacturing process. In connection with the field alert, we conducted a 100% visual inspection for the presence of foreign matter for all unexpired lots of Cardiolite within our control, including retained vials, stability samples and any remaining inventory. We have completed the visual inspections and have concluded that the probability of patient exposure to foreign matter is very low and the overall patient risk associated with Cardiolite product in the field is very low. Accordingly, we have concluded that Cardiolite lots in the field are suitable for use. Additionally, all inspected material has been returned to active inventory status. In connection with the voluntary recall, our revenue in the third quarter of 2011 was negatively impacted by less than $1.0 million. We do not anticipate a significant negative financial impact to the fourth quarter of 2011 as a result of the recalled lots. We may seek reimbursement from BVL and insurance coverage from our relevant insurer. The recall activities, and any necessary future recalls, could result in decreased future demand for our products which could have a material adverse effect on our business and results of operations. In addition, depending upon the magnitude of these financial obligations, if we are unable to obtain adequate reimbursement and insurance coverage in connection with these recalled lots, our financial condition and cash flows could also be adversely affected. See Part II-Item 1A. "Risk Factors" for additional detail. Ablavar Prior to the issuance of our June 30, 2011 financial statements, we performed an analysis of our expected future sales based on an updated sales forecast using actual results through June 30, 2011 and forecasted sales of our Ablavar product and recorded an inventory write-down to cost of goods sold of $13.5 million of Ablavar inventory, which represented the cost of Ablavar finished good product and API that we did not believe we would be able to sell prior to its expiration. We also evaluated our expected sales forecast for Ablavar in consideration of our supply agreement for API. Based on the updated sales forecast, coupled with the aggregate six-year shelf life of API and finished goods, we believe that we will not be able to sell all of the committed supply. As a result, prior to the issuance of our June 30, 2011 financial statements, we also recorded a reserve of $1.9 million for the loss associated with the portion of the committed purchases of Ablavar product that we do not believe we will be able to sell prior to expiry. In addition, we determined that the write down of Ablavar inventory represented an event that warranted assessment of the Ablavar intangible asset for its recoverability and concluded that the asset was not recoverable and prior to the issuance of out June 30, 2011 financial statements we recorded in cost of goods sold in the U.S. segment an impairment charge of $23.5 million to adjust the carrying value to its fair value of zero. Both the inventory write-down and the intellectual property asset impairment are recorded as cost of goods sold in the accompanying statements of operations. The Company assessed third quarter results against its current forecast, which 36-------------------------------------------------------------------------------- Table of Contents was utilized to perform the impairment analysis in the second quarter. Sales for the third quarter were consistent with management's expectations. In the event that we do not meet our sales expectations for Ablavar or cannot sell the product we have committed to purchase prior to its expiration, we could incur additional inventory losses and/or losses on our purchase commitments. On October 14, 2011, LMI entered into Amendment No. 2 to the Supply Agreement dated as of April 6, 2009 between LMI and Mallinckrodt. The Ablavar Agreement provides for the manufacture and supply by Mallinckrodt of Ablavar active pharmaceutical ingredient and finished drug product for LMI. Among other things, Amendment No. 2 (i) extends the term of the Ablavar Agreement from September 30, 2012 until September 30, 2014, (ii) reduces the amount of active pharmaceutical ingredient Mallinckrodt is obligated to supply to LMI and LMI is obligated to purchase from Mallinckrodt over the term of the Ablavar Agreement and (iii) increases the amount of finished drug product Mallinckrodt is obligated to supply to LMI and LMI is obligated to purchase from Mallinckrodt over the term of the Ablavar Agreement. As a result of Amendment No. 2, the aggregate future purchase obligations of LMI under the Ablavar Agreement have been reduced from approximately $33.8 million to approximately $20.9 million. Increases in Research and Development Expenses To compete successfully in the marketplace, we must make substantial investments in new product development. As a result, research and development expenses are a key factor that have historically affected our results and will continue to do so in the future. We expect that research and development expenses will fluctuate depending primarily on the timing and outcomes of clinical trials, related manufacturing initiatives and the results of our decisions based on these outcomes. We expect to incur substantial additional expenses over the next several years for clinical trials related to our product development candidates, including flurpiridaz F 18, 18F LMI1195 and BMS 753951. We also expect manufacturing expenses for some programs included in research and development expenses to increase as we support our manufacturing infrastructure for later stages of clinical development. Description of Key Line Items Total Revenues The majority of our total revenues are derived from product revenues. Product revenues can be affected by changes in raw material and finished goods availability, customer demand and competitive pressures in the market. Product pricing is reduced upon entrance of generic competition to the marketplace, offset by decreases in rebates and discounts as brand name sales are replaced by generic. License and other revenues represent licensing fees associated with one of our products and contract manufacturing performed with respect to one product for one customer. The related costs are included in cost of goods sold. Cost of Goods Sold Cost of goods sold consists of manufacturing, distribution, definite lived intangible asset amortization and other costs related to our commercial products. In addition, it includes reserves established for excess or obsolete inventory. Most of our manufacturing and distribution costs are internal costs which include salaries and expenses related to managing our manufacturing, supply chain and quality assurance. Certain raw material costs and volumes are subject to product availability and variable pricing, which can have an impact on the total cost of our products in any given period. The cost of Moly was historically purchased through contractual pricing arrangements with a sole supplier. The sources of this raw material have since been diversified, which has resulted in variable pricing. With the general instability in the global supply of Moly and recent supply shortages, we have also 37-------------------------------------------------------------------------------- Table of Contents faced increases in the cost of Moly in comparison to our historical costs. We attempt to pass these Moly cost increases on to our customers through our customer contracts. General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, accounting, legal, information technology and human resource functions. Other costs included in general and administrative expenses are professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, and certain facility and insurance costs, including director and officer liability insurance. Sales and Marketing Expenses Sales and marketing expenses consist primarily of salaries and other related costs for personnel in sales, marketing and business development and our sales operations functions, as well as other costs related to our commercial products. In the third quarter of 2009, we hired and trained a contract sales force and a medical liaison staff to prepare for the launch of Ablavar. The contract sales force associated with the Ablavar product was terminated as of December 31, 2010 and the sales function is now supported by our internal sales force. Other costs included in sales and marketing expenses include sales and marketing costs related to our co-promotion and marketing agreement, cost of product samples, promotional materials, market research and sales meetings. We expect to continue to incur sales and marketing costs associated with enhancing our sales and marketing functions and maintaining our sales force to support our commercial products. Research and Development Expenses Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for monitoring and analyzing clinical trials, regulatory costs, including user fees paid to the FDA, costs related to the development of our approved products, costs of contract research and manufacturing and the cost of facilities. In addition, research and development expenses include the cost of our medical affairs and medical information functions, which educate physicians on the scientific aspects of our commercial products and the approved indications, labeling and the costs of monitoring adverse events. After FDA approval of a product candidate, we record manufacturing expenses associated with a product as cost of goods sold rather than as research and development expenses. We expense research and development costs and patent related costs as they are incurred. Because of our ability to utilize resources across several projects, many of our research and development costs are not tied to any particular project and are allocated among multiple projects. We record direct costs on a project-by-project basis. We record indirect costs in the aggregate in support of all research and development. Development costs for clinical-stage programs, such as flurpiridaz F 18, tend to be higher than earlier stage programs such as our BMS 753951 program, because of the costs associated with conducting late-stage clinical trials and supporting manufacturing infrastructure. Interest Expense Interest expense represents amounts accrued and paid on the outstanding balances, if any, under our existing indebtedness, including the Facility and the Notes plus amortization of deferred financing costs. Provision for Income Taxes We account for income taxes using an asset and liability approach, with the provision (benefit) for income taxes representing income taxes paid or payable for the current year plus the change in 38-------------------------------------------------------------------------------- Table of Contents deferred taxes during the year. Additionally, we have a tax indemnification agreement with BMS related to certain tax obligations arising prior to the acquisition, for which we have the primary legal obligation. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete events that may not occur in any given year, and are not consistent from year to year. Results of Operations The following have impacted our results in the three and nine months ended September 30, 2011: º • º limited supply of Neurolite and Cardiolite product inventory as a result of the BVL shutdown and on-going return to service; º • º costs of Neurolite and Cardiolite recall from July 2011 to September 2011; º • º the continued increase in sales of TechneLite generators to the market following the return of a normal Moly supply in September 2010; º • º DEFINITY's continued ramp up of sales as a result of the product's relaunch in June 2008; º • º continued generic competition to Cardiolite; º • º limited Ablavar revenues to offset costs related to the launch and commercialization of the product; and º • º action taken on June 30, 2011 to reduce our work force in an effort to reduce costs and increase operating efficiency. Other than product recall costs, we expect the trends noted above to continue for the remainder of 2011. We also expect our research and development expenses to increase during the remainder of 2011 as we begin our Phase III clinical trial for flurpiridaz F 18. 39-------------------------------------------------------------------------------- Table of Contents Three and Nine Months Ended September, 30, 2011 For the Three Months For the Nine Months Ended September 30, Ended September 30, Change Change Change Change (dollars in thousands) 2011 2010 $ % 2011 2010 $ % Revenues Net product revenues $ 84,091 $ 94,532 $ (10,441 ) (11 )% $ 268,325 $ 252,995 $ 15,330 6 % License and other revenues 2,141 2,058 83 4 6,445 6,162 283 5 Total revenues 86,232 96,590 (10,358 ) (11 ) 274,770 259,157 15,613 6 Cost of goods sold 48,943 53,897 (4,954 ) (9 ) 188,439 139,591 48,848 35 Loss on firm purchase commitment - - - - 1,879 - 1,879 100 Total cost of goods sold 48,943 53,897 (4,954 ) (9 ) 190,318 139,591 50,727 36 Gross profit 37,289 42,693 (5,404 ) (13 ) 84,452 119,566 (35,114 ) (29 ) Operating expenses General and administrative expenses 8,681 7,947 734 9 23,935 22,573 1,362 6 Sales and marketing expenses 9,650 10,766 (1,116 ) (10 ) 29,747 33,838 (4,091 ) (12 ) Research and development expenses 10,338 11,835 (1,497 ) (13 ) 31,185 34,957 (3,772 ) (11 ) Total operating expenses 28,669 30,548 (1,879 ) (6 ) 84,867 91,368 (6,501 ) (7 ) Operating income 8,620 12,145 (3,525 ) (29 ) (415 ) 28,198 (28,613 ) (101 ) Interest expense (10,599 ) (6,801 ) (3,798 ) (56 ) (28,117 ) (13,937 ) (14,180 ) (102 ) Loss on early extinguishment of debt - - - - - (3,057 ) 3,057 100 Interest income 82 41 41 100 230 123 107 87 Other income (expense), net 355 642 (287 ) (45 ) 1,298 532 766 144 (Loss) income before income taxes (1,542 ) 6,027 (7,569 ) (126 ) (27,004 ) 11,859 (38,863 ) (328 ) (Provision) benefit for income taxes (452 ) (1,853 ) 1,401 76 9,044 (4,265 ) 13,309 312 Net (loss) income $ (1,994 ) $ 4,174 $ (6,168 ) (148 )% $ (17,960 ) $ 7,594 $ (25,554 ) (337 )% 40 -------------------------------------------------------------------------------- Table of Contents Revenues Revenues are summarized as follows: Three Months Nine Months Ended Ended September 30, September 30, (dollars in Change Change Change Changethousands) 2011 2010 $ % 2011 2010 $ % U.S. Cardiolite $ 10,686 $ 12,162 $ (1,476 ) (12 )% $ 37,845 $ 37,326 $ 519 1 % TechneLite 28,721 35,765 (7,044 ) (20 ) 87,124 77,233 9,891 13 DEFINITY 16,934 14,685 2,249 15 49,853 43,259 6,594 15 Other currently marketed products 7,585 10,046 (2,461 ) (24 ) 27,391 30,148 (2,757 ) (9 ) Total U.S. product revenues 63,926 72,658 (8,732 ) (12 ) 202,213 187,966 14,247 8 License and other revenues 2,141 2,058 83 4 6,445 6,162 283 5 Total U.S. revenues $ 66,067 $ 74,716 $ (8,649 ) (12 )% $ 208,658 $ 194,128 $ 14,530 7 % International Cardiolite $ 5,189 $ 5,925 $ (736 ) (12 )% $ 19,851 $ 19,233 $ 618 3 % TechneLite 3,944 3,772 172 5 13,071 9,408 3,663 39 DEFINITY 232 322 (90 ) (28 ) 779 883 (104 ) (12 ) Other currently marketed products 10,800 11,855 (1,055 ) (9 ) 32,411 35,505 (3,094 ) (9 ) Total International product revenues $ 20,165 $ 21,874 $ (1,709 ) (8 ) $ 66,112 $ 65,029 $ 1,083 2 Product revenues $ 84,091 $ 94,532 $ (10,441 ) (11 )% $ 268,325 $ 252,995 $ 15,330 6 %License and other revenues 2,141 2,058 83 4 6,445 6,162 283 5 Total revenues $ 86,232 $ 96,590 $ (10,358 ) (11 )% $ 274,770 $ 259,157 $ 15,613 6 % Total revenues decreased $10.4 million, or 11%, to $86.2 million in the three months ended September 30, 2011 as compared to $96.6 million in the three months ended September 30, 2010. U.S. segment revenue decreased $8.6 million, or 12%, to $66.1 million in the same period, as compared to $74.7 million in the prior year. The decrease in revenue was primarily due to the BVL shutdown and the product recall of Cardiolite and Neurolite. See "Key Factors Affecting Our Results-Inventory Supply" and "Key Factors Affecting Our Results-Product Recall Costs." TechneLite sales decreased in the current year period as compared to the same period in the prior year. The market for TechneLite was impacted in the prior year period by a global moly shortage that affected our supply through August 2010. With the resumption of Moly availability in the third quarter of 2010 following the NRU reactor coming back on line, as well as competitive outages, we experienced higher than normal demand in that prior year period as we delivered TechneLite following the supply shortage. Thallium sales decreased primarily due to customers returning to technetium-based studies. Offsetting these decreases were increases of DEFINITY, due to an increase in the number of contrast studies performed, and Xenon as a result of price increases. The International segment revenues decreased $1.7 million, or 8%, to $20.2 million in the three months ended September 30, 2011 as compared to $21.9 million in the three months ended September 30, 2010. The International segment was also affected by the Cardiolite and Neurolite product shortage and recall, resulting in product shortages in certain international markets and lower sales in the third quarter of 2011 over the same period in 2010. Thallium sales decreased primarily due to customers returning to technetium-based studies. These decreases were partially offset by favorable foreign exchange rates. Total revenues increased $15.6 million, or 6%, to $274.8 million in the nine months ended September 30, 2011 as compared to $259.2 million in the nine months ended September 30, 2010. U.S. segment revenue increased $14.5 million, or 7%, to $208.7 million in the same period, as compared to 41-------------------------------------------------------------------------------- Table of Contents $194.1 million in the prior year. This increase over the prior year is primarily driven by TechneLite which was impacted by a global Moly shortage in the prior year as a result of the NRU reactor outage from May 2009 until August 2010. Revenues also increased in the U.S. segment for DEFINITY due to the increase in the number of contrast studies performed and for Xenon primarily due to price increases. Offsetting these increases were lower Thallium revenues primarily due to customers returning to technetium-based studies. The International segment revenues increased $1.1 million, or 2%, to $66.1 million in the nine months ended September 30, 2011 as compared to $65.0 million in the nine months ended September 30, 2010. The increase was primarily driven by favorable foreign exchange rates and higher TechneLite revenues due to an increase in global Moly availability following the NRU reactor outage. This increase was partially offset by decreased Thallium revenues as customers returned to technetium-based studies, as well as a decrease in Cardiolite and Neurolite as a result of the recent product recall and manufacturing issues, resulting in stock outs of product in certain international markets. Rebates, Discounts and Allowances Estimates for rebates, discounts and allowances represent our estimated obligations under contractual arrangements with third parties. Rebate accruals and allowances are recorded in the same period the related revenue is recognized, resulting in a reduction to product revenue and the establishment of a liability which is included in accrued expenses in the accompanying consolidated balance sheets. These rebates result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for certain products, administration fees of group purchasing organizations and certain distributor related commissions. The calculation of the accrual for these rebates and allowances is based on an estimate of the third party's buying patterns and the resulting applicable contractual rebate or commission rate(s) to be earned over a contractual period. Revenue reserves are categorized as rebates or allowances. An analysis of the amount of, and change in, reserves is summarized as follows: (in thousands) Rebates Allowances Total Balance, as of January 1, 2010 $ 427 $ 41 $ 468 Current provisions relating to revenues in current year 3,072 555 3,627 Adjustments relating to prior years estimate - - - Payments/credits relating to revenues in current year (2,171 ) (454 ) (2,625 ) Payments/credits relating to revenues in prior years (418 ) (41 ) (459 ) Balance, as of December 31, 2010 910 101 1,011 Current provisions relating to revenues in current year 2,798 371 3,169 Adjustments relating to prior years estimate (119 ) - (119 ) Payments/credits relating to revenues in current year (1,828 ) (336 ) (2,164 ) Payments/credits relating to revenues in prior years (481 ) (101 ) (582 ) Balance, as of September 30, 2011 $ 1,280 $ 35 $ 1,315 Sales rebates and other accruals were approximately $1.3 million and $910,000 at September 30, 2011 and December 31, 2010, respectively. The increase in the accrual resulted principally from the addition of contracts with rebate rights in the second half of 2010. In October 2010, we entered into a Medicaid Drug Rebate Agreement for certain of our products which did not have a material impact on our results of operations. If the demand for these products through the Medicaid program increases in the future, our rebates associated with this program could increase and could have a material impact on future results of operations. 42 -------------------------------------------------------------------------------- Table of Contents Costs of Goods Sold Cost of goods sold consists of manufacturing, distribution, definite lived intangible asset amortization and other costs related to our commercial products. In addition, it includes the write off of excess and obsolete inventory. Cost of goods sold is summarized as follows: Three Months Nine Months Ended Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % United States $ 36,381 $ 40,239 $ (3,858 ) (10 )% $ 150,358 $ 98,901 $ 51,457 52 % International 12,562 13,658 (1,096 ) (8 ) 39,960 40,690 (730 ) (2 ) Total Cost of Goods Sold $ 48,943 $ 53,897 $ (4,954 ) (9 )% $ 190,318 $ 139,591 $ 50,727 36 % Total cost of goods sold decreased $5.0 million, or 9%, to $48.9 million in the three months ended September 30, 2011, as compared to $53.9 million in the three months ended September 30, 2010. U.S. segment cost of goods sold decreased $3.9 million, or 10%, to $36.4 million in same period, as compared to $40.2 million in the prior year period. International segment cost of goods sold decreased $1.1 million, or 8%, to $12.6 million for the same period, as compared to $13.7 million in the prior year period. For the three months ended September 30, 2011 compared to the same period for 2010, the primary contributing factor to the decrease in the U.S. segment was a decrease in TechneLite volume due to an approximate six week competitor outage in the prior period and concurrent increase in our own volume. We also experienced lower intangible amortization for customer relationships. Cost of goods sold in our International segment decreased $1.1 million largely due to lower Neurolite and Cardiolite volumes resulting from the longer than anticipated BVL outage and product recall. Total cost of goods sold increased $50.7 million, or 36%, to $190.3 million in the nine months ended September 30, 2011, as compared to $139.6 million in the nine months ended September 30, 2010. U.S. segment cost of goods sold increased $51.5 million, or 52%, to $150.4 million in same period, as compared to $98.9 million in the prior year period. International segment cost of goods sold decreased $0.7 million, or 2%, to $40.0 million for the same period, as compared to $40.7 million in the prior year period. For the nine months ended September 30, 2011 compared to the same period for 2010, the primary contributing factors to the increase in the U.S. segment were charges resulting from an assessment of future Ablavar sales, on-hand inventory shelf-life, committed supply and an impairment of the Ablavar patent portfolio intangible asset. We currently believe that we will not be able to sell a portion of future committed supply purchases of Ablavar product and a portion of on-hand inventory prior to its expiration. As a result, we recorded inventory and loss contract reserves. Additionally, the assessment determined that the Ablavar patent portfolio intangible asset was not recoverable and thus an impairment was recorded to write the intangible asset down to its fair value of zero. The total impact included in cost of goods sold of the inventory reserve, the loss contract reserve and the intangible impairment was $38.9 million. The U.S. segment also incurred higher costs as we produced more TechneLite after the return to normal Moly supply following the outage of the NRU reactor in Chalk River, Ontario. Increases in Thallium and Gallium costs also occurred as a result of lower International segment volume, the effect of which burdens the U.S. segment with a greater share of manufacturing overhead expenses. We also experienced higher Neurolite manufacturing costs due to 43-------------------------------------------------------------------------------- Table of Contents unabsorbed capacity resulting from lower volume due to the longer than expected BVL shutdown and product recall. Cost of goods sold in our International segment decreased primarily due to lower Neurolite cost as a result of lower volume due to the longer than expected BVL outage and product recall. We also experienced lower Thallium cost as we produced lower volume as a result of customers switching to technetium-based studies. These decreases were partially offset by higher TechneLite costs due to an increase in volume associated with the return of normal Moly supply. Gross Profit Three Months Nine Months Ended Ended September 30, September 30, (dollars in Change Change Change Changethousands) 2011 2010 $ % 2011 2010 $ % United States $ 29,686 $ 34,476 $ (4,790 ) (14 )% $ 58,300 $ 95,234 $ (36,934 ) (39 )% International 7,603 8,217 (614 ) (7 ) 26,152 24,332 1,820 7 Total Gross Profit $ 37,289 $ 42,693 $ (5,404 ) (13 )% $ 84,452 $ 119,566 $ (35,114 ) (29 )% Total gross profit decreased $5.4 million, or 13%, to $37.3 million in the three months ended September 30, 2011, as compared to $42.7 million in the three months ended September 30, 2010. U.S. segment gross profit decreased $4.8 million, or 14%, to $29.7 million in same period, as compared to $34.5 million in the prior year period. International segment gross profit decreased $0.6 million, or 7%, to $7.6 million for the same period, as compared to $8.2 million in the prior year period. Gross profit in the U.S. segment decreased primarily due to lower profit from Neurolite and Cardiolite due to the longer than anticipated BVL outage, product recall, reinspection of product within the our control as a result of the recall, and market decline. We also experienced lower profit from Technelite and from Thallium due to customers returning to technetium-based studies. These decreases were partially offset by an increase in profit contributed by DEFINITY as demand continues to increase subsequent to the relaunch of the product, higher profit from Xenon due to an increase in price and lower intangible amortization for customer relationships. Gross profit in our International segment decreased $0.6 million largely due to lower Thallium volume as customers returned to technetium-based studies and lower Cardiolite revenues. These decreases were offset partially by, increased Third Party and Other Product profit due to higher revenues from flourodeoxyglucose (18F) ("FDG") and generic sestamibi. Total gross profit decreased $35.1 million, or 29%, to $84.5 million in the nine months ended September 30, 2011, as compared to $119.6 million in the nine months ended September 30, 2010. U.S. segment gross profit decreased $36.9 million, or 39%, to $58.3 million, as compared to $95.2 million in the prior year period. International segment gross profit increased $1.8 million, or 7%, to $26.2 million for the same period, as compared to $24.3 million in the prior year period. Gross profit in the U.S. segment decreased primarily due to the $38.9 million expense arising from the Ablavar matter previously discussed. We also experienced a decrease in Thallium profit due to customers sourcing product from competitors and a decrease in Neurolite profit relating to the longer than anticipated BVL outage and product recall coupled with higher manufacturing costs. These decreases were partially offset by an increase in DEFINITY profit as demand continues to increase subsequent to the relaunch of the product and higher profit from Xenon due to an increase in price. For the nine months ended September 30, 2011, excluding the impact of the $38.9 million Ablavar related charges included in cost of goods sold, gross profit in the U.S. segment would have been $97.2 million. 44-------------------------------------------------------------------------------- Table of Contents Gross profit in our International segment increased largely due to an increase in TechneLite profit following the return to normal Moly supply. We also experienced higher third party and other products profit due to lower material costs and higher revenues from FDG and generic sestamibi. Offsetting part of the increase was a decrease in Thallium profit due to lower volume as customers returned to technetium-based studies. Sales and Marketing Three Months Ended Nine Months Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % United States $ 8,565 $ 9,725 $ (1,160 ) (12 )% $ 26,015 $ 30,210 $ (4,195 ) (14 )% International 1,085 1,041 44 4 3,732 3,628 104 3 Total Sales and Marketing $ 9,650 $ 10,766 $ (1,116 ) (10 )% $ 29,747 $ 33,838 $ (4,091 ) (12 )% Sales and marketing expenses consist primarily of salaries and related costs for personnel in field sales, marketing, business development, and customer service functions. Other costs in sales and marketing expense include the development and printing of advertising and promotional material, professional services, market research, and sales meetings. For the three months ended September 30, 2011 compared to the three months ended September 30, 2010, sales and marketing expense decreased $1.1 million, or 10%. In the U.S. segment, the decrease related primarily to the discontinued use of a contracted sales force supporting Ablavar, as part of a sales force reorganization in the fourth quarter of 2010. Ablavar is now completely supported by our internal sales force. Additionally, Ablavar related market research and advertising and promotion expenses decreased from the prior period driven by cost control efforts. For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, sales and marketing expenses decreased $4.1 million, or 12%. In the U.S. segment, the decrease related primarily to the discontinued use of a contracted sales force supporting Ablavar, as well as lower compensation costs related to a non-recurring reduction of stock compensation expense; the result of an expired liability award. For the three and nine months ended September 30, 2011, the International segment sales and marketing expense remained relatively flat. General and Administrative Three Months Ended Nine Months Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % United States $ 8,051 $ 7,143 $ 908 13 % $ 22,016 $ 20,537 $ 1,479 7 % International 630 804 (174 ) (22 ) 1,919 2,036 (117 ) (6 ) Total General and Administrative $ 8,681 $ 7,947 $ 734 9 % $ 23,935 $ 22,573 $ 1,362 6 % General and administrative expenses consist of salaries and related costs for personnel in executive, finance, legal, information technology and human resource functions. Other costs in general and administrative include professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, and certain facility and insurance costs, including director and officer liability insurance. 45-------------------------------------------------------------------------------- Table of Contents For the three months ended September 30, 2011 compared to the three months ended September 30, 2010, general and administrative expense increased $734,000, or 9%. The increase primarily related to the U.S. segment salaries; benefits for increased health care claim activity on our self-insured medical policy; adjustments to stock compensation expense; as well as, legal expenses related to a business interruption insurance claim. These increases were partly offset with lower professional services driven by cost control efforts. For the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, general and administrative costs increased $1.5 million, or 7%. The increase primarily related to U.S. segment legal expenses for a business interruption insurance claim, as well as higher salaries and benefits. These increases were partly offset by adjustments to stock compensation expense, and lower professional services driven by cost control efforts. For the three months and nine months ended September 30, 2011, general and administrative costs in the International segment decreased $174,000, or 22%, and $117,000, or 6%, respectively. This decrease was primarily driven by lower bad debt expense. Research and Development Three Months Ended Nine Months Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % United States $ 10,195 $ 11,476 $ (1,281 ) (11 )% $ 30,649 $ 34,106 $ (3,457 ) (10 )% International 143 359 (216 ) (60 ) 536 851 (315 ) (37 ) Total Research and Development $ 10,338 $ 11,835 $ (1,497 ) (13 )% $ 31,185 $ 34,957 $ (3,772 ) (11 )% Total research and development expense decreased $1.5 million, or 13%, to $10.3 million in the three months ended September 30, 2011, as compared to $11.8 million in the three months ended September 30, 2010. In the U.S. segment, research and development expense decreased $1.3 million, or 11%, to $10.2 million, as compared to $11.5 million in the prior year period. In the International segment, research and development expenses decreased $0.2 million, or 60%, to $0.1 million, as compared to $0.3 million in the prior year period. The decrease in expense in the U.S. segment was primarily due to the timing of clinical activity related to our flurpiridaz F 18 program. During the third quarter of 2011, we were enrolling patients and activating sites for our flurpiridaz F 18 Phase 3 trial, as compared to the same period in 2010, when we had costs related to multiple clinical trials, primarily associated with the conclusion of the flurpiridaz F 18 Phase 2 clinical trial and our DEFINITY Phase 4 clinical trial. This reduction of clinical activity in the third quarter of 2011 results from changes in purchases of drug products, lab supplies, and lower clinical site monitoring costs. In addition, we had a decrease associated with our drug safety for our commercial products, a onetime new drug application ("NDA") regulatory filing fee for our DEFINITY product and in the third quarter of 2011, realized a decrease to compensation and related personnel costs associated with a reduction in workforce in June 2011. Total research and development expense decreased $3.8 million, or 11%, to $31.2 million in the nine months ended September 30, 2011, as compared to $35.0 million in the nine months ended September 30, 2010. In the U.S. segment, research and development expense decreased $3.5 million, or 10%, to $30.6 million, as compared to $34.1 million in the prior year period. In the International segment, research and development expenses decreased $0.3 million, or 37%, to $0.5 million, as compared to $0.8 million in the prior year period. The decrease in expense in the U.S. segment was primarily due to the timing of clinical activity related to our flurpiridaz F 18 program. During the first nine months of 2011, we were primarily in the planning and preparation stage for our flurpiridaz F 18 46 -------------------------------------------------------------------------------- Table of Contents Phase 3 trial. We enrolled our first patient near the end of the second quarter and continued to actively enroll patients and activate sites during the third quarter, as compared to the same period in 2010, when we had costs related to multiple clinical trials, primarily the flurpiridaz F 18 Phase 2 clinical trial in which we enrolled our last patient in the second quarter of 2010 and our DEFINITY Phase 4 clinical trial, offset in part, by the closure of our Cardiolite Pediatrics clinical trial. This reduction of clinical activity results from changes in purchases of drug products, lab supplies, lower clinical site monitoring costs and consultants. In addition, we had a decrease associated with drug safety costs for our commercial products, and our independent medical education grants caused by the timing of services, as well as onetime NDA regulatory filing fee for our DEFINITY product. These were all offset by increased compensation costs as part of a reduction in workforce in June 2011. We anticipate that our research and development expenses for the balance of 2011 will primarily relate to the support of our flurpiridaz F 18 Phase 3 trial. Other Income (Expense), Net Three Months Ended Nine Months Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % Interest expense $ (10,599 ) $ (6,801 ) $ (3,798 ) (56 )% $ (28,117 ) $ (13,937 ) $ (14,180 ) (102 )% Loss on early extinguishment of debt - - - - - (3,057 ) 3,057 100 Interest Income 82 41 41 100 230 123 107 87 Other Income, Net 355 642 (287 ) (45 ) 1,298 532 766 144 Total Other Expense, net $ (10,162 ) $ (6,118 ) $ (4,044 ) (66 )% $ (26,589 ) $ (16,339 ) $ (10,250 ) (63 )% Interest Expense For the three and nine months ended September 30, 2011 compared to the same period in 2010, interest expense increased by $3.8 million and $14.2 million, respectively, as a result of the issuance of the Notes in May 2010 and March 2011. The proceeds from the Existing Notes were utilized to repay the then existing debt in full and to pay a dividend to Holdings to allow it to repay its then outstanding demand note and to redeem a portion of its 14% Series A Preferred Stock at the accreted value. The proceeds from the New Notes were utilized to pay a dividend to Holdings to allow it to fully redeem the balance of its 14% Series A Preferred Stock and to pay a dividend to the holders of its common securities and stock options. See Note 10, "Financing Arrangements" to our unaudited consolidated financial statements. During the three months ended September 30, 2011, we borrowed $10 million from our revolving credit facility due to uncertainties in the credit markets associated with the U.S. government's debt ceiling crisis. This amount was repaid prior to September 30, 2011. Interest Income For the three and nine months ended September 30, 2011 compared to the same period in 2010, interest income increased by $41,000 and $107,000, respectively as a result of an increase in cash in interest bearing accounts. 47-------------------------------------------------------------------------------- Table of Contents Other Income, net For the three and nine months ended September 30, 2011 compared to the same period in 2010, other income, net increased as a result of the tax indemnification offset slightly by foreign currency exchange. Provision for Income Taxes Three Months Ended Nine Months Ended September 30, September 30, (dollars in Change Change Change Change thousands) 2011 2010 $ % 2011 2010 $ % Benefit (provision) for income taxes $ (452 ) $ (1,853 ) 1,401 76 % $ 9,044 $ (4,265 ) $ 13,309 312 % For the three months ended September 30, 2011, compared to the same period in 2010, income tax expense decreased due primarily to lower pre-tax losses, which were offset by uncertain tax positions. For the nine months ended September 30, 2011 compared to the same period in 2010, benefit for income taxes increased, due primarily to the impairment of Ablavar intangible assets and write-down of Ablavar inventory. Liquidity and Capital Resources Cash Flows The following table provides information regarding our cash flows: Nine Months Ended September 30, (dollars in thousands) 2011 2010 $Change Cash provided by (used in): Operating activities $ 25,057 $ 26,893 $ (1,836 ) Investing activities $ (6,359 ) $ (5,384 ) $ (975 ) Financing activities $ (6,953 ) $ (17,045 ) $ 10,092 Net Cash Provided by Operating Activities Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Cash provided by operating activities is primarily driven by our earnings and changes in working capital. The decrease in cash provided by operating activities for the nine months ended September 30, 2011 as compared to 2010 was primarily driven by decreases in liabilities and increases in inventory. Net Cash Used in Investing Activities Net cash used in investing activities in the three and nine months ended September 30, 2011 and 2010 primarily reflect the purchase of property and equipment. Net Cash Used in Financing Activities Since 2010, our primary source of cash flows from financing activities has been the proceeds from the issuance of the Notes. Going forward, we expect our primary source of cash flows from financing activities to be further issuances of securities or other financing arrangements into which we may enter. Our primary historical uses of cash in financing activities are principal payments on our term loan and line of credit as well as dividends to Holdings, our parent. On March 21, 2011, we issued an additional $150.0 million of Notes. The net proceeds of these Notes were used to pay a dividend to Holdings, 48-------------------------------------------------------------------------------- Table of Contents which utilized the dividend to redeem its 14% Series A Preferred Stock at the accreted value of $44.0 million and to pay a $106.0 million dividend to the holders of its common securities and stock options. Internal Sources of Liquidity Our internal sources of liquidity are derived from cash and cash equivalents of $44.2 million as of September 30, 2011, as well as revenues primarily from the sale of Cardiolite, Technelite and Definity. External Sources of Liquidity On May 10, 2010, LMI issued $250.0 million in aggregate principal amount of 9.750% Senior Notes due in 2017 at face value, net of issuance costs of $10.1 million, under the Indenture. The net proceeds were used to repay $77.9 million due under LMI's outstanding credit agreement and to issue a $163.8 million dividend to Holdings. Holdings utilized the dividend to repay a $75.0 million Demand Note and to repurchase $90.0 million of Holdings' Series A Preferred Stock at the accreted value. The $75.0 million Demand Note was issued in June 2009, was payable on demand and had an interest rate equal to the greater of the prime rate plus 2.25% or LIBOR plus 5.0%; the interest rate at December 31, 2009 was 5.5%. On February 2, 2011, LMI consummated an exchange offer where LMI exchanged $250.0 million aggregate principal amount of Notes for an equal principal amount of Notes that were registered under the Securities Act, with substantially identical terms in all respects. On March 21, 2011, LMI issued an additional $150.0 million in aggregate principal amount of Notes, at face value, net of issuance costs of $4.9 million, under the Indenture, as supplemented by the First Supplemental Indenture, dated as of March 14, 2011, and the Second Supplemental Indenture, dated as of March 21, 2011. The net proceeds were used to fund a $150.0 million dividend to Holdings. Holdings utilized the dividend to repurchase approximately $44 million of Holdings' Series A Preferred Stock at the accreted value and to issue an approximately $106 million dividend to our common securityholders. On May 10, 2011, LMI consummated an exchange offer where LMI exchanged $150.0 million aggregate principal amount of Notes for an equal principal amount of Notes registered under the Securities Act, with substantially identical terms in all respects. The Notes mature on May 15, 2017. Interest on the Notes accrues at a rate of 9.750% per year and is payable semiannually in arrears on May 15 and November 15 commencing on November 15, 2010 for the Notes issued on May 10, 2010 and May 15, 2011 for the Notes issued on March 21, 2011. Our annual interest expense has increased from $24.4 million to $39.0 million as a result of the March 21, 2011 issuance of the Notes. In connection with the May 10, 2010 refinancing described above, LMI entered into the Facility with the ability to request the lenders to increase the revolving credit facility by an additional amount of up to $15.0 million at the discretion of the lenders. In March 2011, LMI received the consent of the lenders under the Facility to amend the agreement to allow us to use the net proceeds of the March 2011 issuance as described above. The amendment also increased the consolidated total leverage ratio to accommodate the March 2011 issuance and decreased the consolidated interest coverage ratio to accommodate the associated increase in semiannual interest payments. Additionally, the amendment adjusted the effective interest rate of borrowings thereunder. The amendment was consummated concurrently with the consummation of the March 2011 issuance. Interest on the Facility will be at either LIBOR plus 3.75% or the Reference Rate (as defined in the agreement) plus 2.75%. The Facility expires on May 10, 2014, at which time all outstanding borrowings are due and payable. At September 30, 2011, LMI had $42.5 million of borrowing availability under the Facility. The Notes and the Facility contain affirmative and negative covenants, as well as restrictions on the ability of LMI, Lantheus Intermediate and its subsidiaries to: (i) incur additional indebtedness or issue preferred stock; (ii) repay subordinated indebtedness prior to its stated maturity; (iii) pay 49-------------------------------------------------------------------------------- Table of Contents dividends on, repurchase or make distributions in respect of its capital stock or make other restricted payments; (iv) make certain investments; (v) sell certain assets; (vi) create liens; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and (viii) enter into certain transactions with our affiliates. The Notes contain customary events of default provisions, including payment default and cross-acceleration for non-payment of any outstanding indebtedness, where such indebtedness exceeds $10.0 million. The Facility also contains customary default provisions and the Company is required to comply with financial covenants in the Facility including a total leverage ratio and interest coverage ratio, beginning with the quarter ended September 30, 2010, as well as limitations on the amount of capital expenditures. The Facility also requires us to comply with financial covenants, including a total leverage ratio and interest coverage ratio, beginning with the quarter ended March 31, 2011, as well as limitations on the amount of capital expenditures. The financial ratios are determined by Facility EBITDA. The total leverage ratio is the financial covenant that is currently the most restrictive, which requires Lantheus Intermediate and its Subsidiaries (as defined in the Facility) to maintain a leverage ratio as defined in the table below: Revolving Credit Facility Financial Covenants Period Total Leverage Ratio Interest Coverage Ratio Q1 2011 5.50 to 1.00 1.75 to 1.00 Q2 2011 5.50 to 1.00 1.75 to 1.00 Q3 2011 5.25 to 1.00 1.75 to 1.00 Q4 2011 5.00 to 1.00 2.00 to 1.00 Q1 2012 4.75 to 1.00 2.00 to 1.00 Q2 2012 4.50 to 1.00 2.15 to 1.00 Q3 2012 4.50 to 1.00 2.15 to 1.00 Q4 2012 4.25 to 1.00 2.25 to 1.00 Q1 2013 4.25 to 1.00 2.25 to 1.00 Q2 2013 4.25 to 1.00 2.25 to 1.00 Q3 2013 4.25 to 1.00 2.25 to 1.00 Thereafter 3.75 to 1.00 2.25 to 1.00 As of September 30, 2011, we were in compliance with all applicable financial covenants. As of September 30, 2011 and the date hereof, there were no amounts outstanding under the Facility. If BVL is not able to provide us adequate product supply for a prolonged period of time, we will need to implement certain expense reduction and other operating and strategic initiatives beginning in 2012. If we are not successful in those initiatives, we could, at some time in the future, be in non-compliance with one or more of the financial ratio covenants in the Facility. If this were to occur, we would seek either an amendment to our Facility or a waiver of the appropriate financial covenants to eliminate such potential default. There can be no assurance that we would be able to obtain an amendment or waiver from our lenders. We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases of any notes outstanding, prepayments of our term loans or other retirements or refinancing of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, would be decided upon at the sole discretion of our Board of Directors and will depend on market conditions, trading levels of our debt from time to time, our cash position and other considerations. 50-------------------------------------------------------------------------------- Table of Contents Funding Requirements Our future capital requirements will depend on many factors, including: º • º the effect of the BVL shutdown and other inventory supply issues; º • º the level of product sales of our currently marketed products and any additional products that we may market in the future; º • º the scope, progress, results and costs of development activities for our current product candidates and whether we obtain one or more partners to help share such development costs; º • º the costs, timing and outcome of regulatory review of our product candidates; º • º the number of, and development requirements for, additional product candidates that we pursue; º • º the costs of commercialization activities, including product marketing, sales and distribution and whether we obtain one or more partners to help share such commercialization costs; º • º the costs and timing of establishing manufacturing and supply arrangements for clinical and commercial supplies of our product candidates and products; º • º the extent to which we acquire or invest in products, businesses and technologies; º • º the extent to which we choose to establish collaboration, co-promotion, distribution or other similar arrangements for our marketed products and product candidates; º • º the legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance or other claims; º • º the cost of interest on any additional debt which we incur under our financing arrangements. If BVL is not able to provide us adequate product supply for a prolonged period of time, we will need to implement certain expense reduction and other operating and strategic initiatives beginning in 2012. To the extent that our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements, sale/leasebacks or other financing alternatives, to the extent such transactions are permissible under the covenants of the Notes and the Facility. If any of the transactions require a waiver under the covenants in the Notes and the Facility, which could result in additional expenses associated with obtaining the amendment or waiver, we will seek to obtain such a waiver to remain in compliance with the covenants of the Notes and the Facility. However, we cannot assure you that such a waiver would be granted, or that additional capital will be available on acceptable terms, if at all. Our only committed external source of funds is borrowing availability under the Facility. As of September 30, 2011, we had $42.5 million of borrowing availability under the Facility, and there were no amounts outstanding thereunder. Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on acceptable terms, if at all. As of September 30, 2011, we had $44.2 million of cash and cash equivalents. In addition, the Company had included $3.2 million in accounts payable related to its purchases of property, plant and equipment at December 31, 2010, which is reflected in the change in accounts payable on the statement of cash flows. 51-------------------------------------------------------------------------------- Table of Contents Contractual Obligations Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payment, including contingencies related to potential future development, financing, certain suppliers, contingent royalty payments and/or scientific, regulatory, or commercial milestone payments under development agreements. The following table summarizes our contractual obligations as of September 30, 2011: Payments Due by Period Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years (dollars in thousands) Debt obligations (principal) $ 400,000 $ - $ - $ - $ 400,000 Interest on debt obligations 234,000 39,000 78,000 78,000 39,000 Operating leases(1) 4,500 969 1,805 918 808 Purchase obligations(2)(4) 160,252 89,922 70,330 - - Asset retirement obligation 4,744 - - - 4,744 Other long-term liabilities(3) 35,101 - - - 35,101 Total contractual obligations $ 838,597 $ 129,891 $ 150,135 $ 78,918 $ 479,653 -------------------------------------------------------------------------------- º (1) º Operating leases include minimum payments under leases for our facilities and certain equipment. º (2) º Purchase obligations include fixed or minimum payments under manufacturing and service agreements with Covidien and other third-parties. º (3) º Due to the uncertainty related to the timing of the reversal of uncertain tax positions, the liability is not subject to fixed payment terms and the amount and timing of payments, if any, which we will make related to this liability, are not known. º (4) º On October 14, 2011, we entered into Amendment No. 2 to the Ablavar Agreement, between LMI and Mallinckrodt. See "-Key Factors Affecting Our Results-Ablavar Write-downs." After giving pro forma effect to the amendment, as of September 30, 2011, the total remaining purchase commitment under the amended agreement would be approximately $20.9 million. Critical Accounting Estimates The discussion and analysis of our financial position and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, inventory, impairments of long-lived assets including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, valuation of investments, research and development expenses, contingencies and litigation, and share-based payments. For the quarter ended September 30, 2011, our critical estimates included estimates related to what we believe to be our portion of the fee payable to the Federal Government by Pharmaceutical Manufacturers pursuant to ASU 2010-027. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. 52-------------------------------------------------------------------------------- Table of Contents Please read Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of our critical accounting estimates. There have been no material changes to our critical accounting policies in the nine months ended September 30, 2011. Off-Balance Sheet Arrangements Since inception, we have not engaged in any off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities. [ Back To TMCnet.com's Homepage ]