MBRK Middlebrook Pharmaceuticals (MM)

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number: 000-50414

MIDDLEBROOK PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its Charter)

 

 

(817) 837-1200

(Registrant’s telephone number, including area code)

 

(Former name, former address and former

fiscal year — if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

 

Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined by Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange 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 the registrant’s 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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, 2008, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $130,999,231.

 

As of March 10, 2009, 86,440,194 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of MiddleBrook Pharmaceuticals, Inc.’s Notice of Annual Stockholders’ Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report.

 

 

MIDDLEBROOK PHARMACEUTICALS, INC.
INDEX

 

FORM 10-K

 

 

KEFLEX, MiddleBrook, MiddleBrook Pharmaceuticals (stylized), MiddleBrook Pharmaceuticals, Inc., M1 (stylized), MOX-10, MOXAKIT, MOXATAG1 (stylized), MOXATAG, MOXATEN, MOX-PAK and PULSYS are our trademarks and have been registered in the U.S. Patent and trademark office or are the subject of pending U.S. trademarks applications. Each of the other trademarks, tradenames, or service marks appearing in this document belongs to the respective holder, as used herein, except as otherwise indicated by the context, references to “we,” ‘‘us,” “our,” ‘‘MiddleBrook,” or the “Company,” refer to MiddleBrook Pharmaceuticals, Inc., and its subsidiaries.

FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, that reflect our plans, beliefs and current views with respect to, among other things, future events and financial performance. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “potential,” “estimate ,” “will,” “may,” “predict,” “should,” “could,” “would” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are based on our historical performance and on our current plans, estimates and expectations. You should not regard the inclusion of this forward-looking information as a representation by us or any other person that we will achieve the future plans, estimates or expectations contained in this Annual Report. Such forward-looking statements are subject to various risks and uncertainties. In addition, there are or will be important factors that could cause our actual results to differ materially from those in the forward-looking statements. We believe these factors include, but are not limited to, those described in Part 1, Item 1A. Risk Factors.

 

These cautionary statements should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report. Moreover, we operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict these new risks or uncertainties, nor can it assess the impact, if any, that any such risks or uncertainties may have on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those projected in any forward-looking statement. Accordingly, the risks and uncertainties to which we are subject can be expected to change over time, and we undertake no obligation to update publicly or review the risks or uncertainties described in this Annual Report. We also undertake no obligation to update publicly or review any of the forward-looking statements made in this Annual Report, whether as a result of new information, future developments or otherwise.

 

If one or more of the risks or uncertainties referred to in this Annual Report materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we have projected. Any forward-looking statements contained in this Annual Report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, financial condition, growth strategy and liquidity. You should specifically consider the factors identified in this Annual Report that could cause actual results to differ. We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

We urge you to review and consider the various disclosures made by us in this Annual Report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.

 

The data included in this Annual Report regarding market share, historical sales, market size, and ranking, including our position within these markets, is based on data generated by the independent market research firm IMS Health Incorporated, or IMS Health.

 

IMS Health reports data from various sources, including drug manufacturers, wholesalers, retailers, pharmacies, mail services, long-term care facilities, and hospitals. We rely on IMS Health-National Sales Perspectives ^tm for retail and non-retail sales data related to our business; IMS Health, National Prescription Audit ^tm for historical retail and mail-order prescription data related to our product classes; and IMS Health, National Disease and Therapeutic Index ^tm for tracking physician treatment patterns.

 

 

Corporate Overview

 

We are a pharmaceutical company focused on developing and commercializing anti-infective drug products that fulfill unmet medical needs. We have developed a proprietary delivery technology called PULSYS, which enables the pulsatile delivery, or delivery in rapid bursts, of certain drugs. Our PULSYS technology can potentially offer the prolonged release and absorption of a drug. We believe that the pulsatile delivery of certain medicines can provide therapeutic advantages over current dosing regimens and therapies.

 

Our near-term corporate strategy is to improve dosing regimens and frequency of dosing which we believe will result in improved patient dosing convenience and compliance for antibiotics that have been used and trusted for decades. Initially we are focused on developing PULSYS product candidates utilizing approved and marketed drugs such as amoxicillin and cephalexin. We currently have 26 U.S. issued patents and four foreign patents covering our PULSYS technology that extend through 2020.

 

Our lead PULSYS product, based on the antibiotic amoxicillin, received U.S. Food and Drug Administration, or FDA, approval for marketing on January 23, 2008, under the trade name MOXATAG (amoxicillin extended-release) Tablets, 775 mg. MOXATAG is the first and only FDA-approved once-daily amoxicillin. It is approved for the treatment of pharyngitis/tonsillitis secondary to Streptococcus pyogenes , commonly known as strep throat, for adults and pediatric patients age 12 and older. On March 16, 2009, our 271-member field sales force and 30 district sales managers will begin detailing MOXATAG to approximately 40,000 primary care physicians and 16,500 pharmacies to help educate them on the benefits of our MOXATAG product. We believe these primary care physicians have traditionally written most of the prescriptions for antibiotic treatment of strep throat.

 

We have two additional PULSYS product candidates in clinical development. We are currently in the early stages of preparing for a Phase III clinical trial for our KEFLEX (Cephalexin) PULSYS product candidate for the treatment of skin and skin structure infections. We believe the added convenience of improving cephalexin from its typical two-to-four times per day dosing regimen to a once-daily product represents an attractive commercial opportunity. Assuming the availability of funds, we also plan to conduct a Phase II trial to evaluate various dosing regimens of our amoxicillin pediatric PULSYS sprinkle product candidate, which is a sprinkle formulation utilizing the antibiotic amoxicillin for use in pediatric patients greater than two years old with pharyngitis/tonsillitis secondary to Streptococcus pyogenes .

 

We believe the antibiotic prescription market is significant and stable, and new products are sought due to several factors, including, but not limited to the increasing problem of resistance, the aging U.S. population and multiple deficiencies in currently available regimens (i.e., ineffectiveness against resistant bacteria, multiple daily dosing requirements, lengthy treatment periods, and the potential for severe side effects). According to IMS Health, National Sales Perspectives ^tm 2008 and 2007, overall antibiotic sales in the United States totaled approximately $10.2 billion for 2008, as compared to $10.3 billion for 2007.

 

Amoxicillin, an aminopenicillin antibiotic, remains one of the most prescribed antibiotics in the United States with approximately 51.0 million prescriptions filled annually, according to IMS Health, National Prescription Audit ^tm 2008. Pharyngitis is the number one condition for which amoxicillin is prescribed, and the most commonly prescribed dosing regimen for immediate-release amoxicillin is 500 mg three times per day, according to IMS Health, National Disease and Therapeutic Index ^tm 2008. Cephalexin, a first generation cephalosporin, is currently the fourth most prescribed oral antibiotic with approximately 22.0 million prescriptions filled annually according to IMS Health, National Prescription Audit ^tm 2008. The number one condition for which cephalexin is prescribed is skin and skin structure infections, and the most commonly prescribed dosing regimen for immediate-release cephalexin is 500 mg three or four times per day, according to IMS Health, National Disease and Therapeutic Index ^tm 2008.

 

We operate in one business segment: prescription pharmaceuticals. All of our revenues result from sales of our products in the United States. Our net revenues were $8.8 million, $10.5 million and $4.8 million for the fiscal years ended December 31, 2008, 2007 and 2006, respectively. Our net loss was $41.6 million, $42.2 million and

$42.0 million for the fiscal years ended December 31, 2008, 2007 and 2006, respectively. Our total assets were $95.2 million, $23.7 million and $42.0 million at December 31, 2008, 2007 and 2006, respectively. At December 31, 2008 and 2007, our long-lived assets were $4.2 million and $10.9 million, respectively, which primarily consisted of leasehold improvements and computer equipment located in the United States.

 

We currently market certain drug products which do not utilize our PULSYS technology and which are not protected by any other patents. We acquired the U.S. rights to KEFLEX (Cephalexin, USP) capsules, the immediate-release brand of cephalexin, from Eli Lilly in 2004. The asset purchase included the exclusive rights to manufacture, sell and market KEFLEX in the United States, including Puerto Rico, and the acquisition of the KEFLEX trademarks, technology and new drug applications supporting the approval of KEFLEX capsules and oral suspension. We currently sell our line of immediate-release KEFLEX products to wholesalers in capsule formulations, and received FDA marketing approval in May 2006 for two additional immediate-release KEFLEX strengths, 333 mg capsules and 750 mg capsules; however, we only market the 750 mg capsules. Previously, the Innovex division of Quintiles Transnational Corporation, or Innovex, provided us with a contract sales force for the promotion of KEFLEX 750 mg capsules. However, in November 2008, we terminated our agreement with Innovex and began to hire an internal dedicated 271-person field sales force to prepare for the nationwide launch of MOXATAG in March 2009.

 

We were incorporated in Delaware in December 1999 and commenced operations in January 2000. Our principal executive offices are located at 7 Village Circle, Suite 100, Westlake, Texas 76262. Our telephone number is (817) 837-1200. Our corporate website is www.middlebrookpharma.com. Information contained on our website is not part of, and is not incorporated into, this annual report on Form 10-K.

 

Anti-Infectives Market

 

Infectious diseases are caused by pathogens such as bacteria, viruses and fungi that can enter the body through the skin or mucous membranes of the lungs, nasal passages and gastrointestinal tract and overwhelm the body’s immune system. These pathogens establish themselves in various tissues and organs throughout the body and cause a number of serious and, in some cases, lethal infections.

 

We believe that this market represents a highly attractive opportunity for the following reasons:

 

Substantial market.   Antibiotics, along with antiviral medications and antifungal medications, constitute the primary categories of the anti-infectives market. According to sales data compiled by IMS Health, National Sales Perspectives ^tm 2008, U.S. anti-infective sales were approximately $22.5 billion in 2008. Antibiotics accounted for approximately $10.2 billion of such 2008 U.S. sales.

 

Increased resistance to existing therapies.   Certain medical, veterinary and agricultural practices and sociological factors have led to increased bacterial resistance to many currently available antibiotics. Bacterial resistance has been fostered through the erroneous prescription of anti-infective drugs for non-bacterial infections, unconfirmed infections and the administration of broad spectrum antibiotics before the identification of the specific disease-causing pathogen. In addition, low patient compliance with prescribed courses of therapies has contributed to bacterial resistance to currently marketed compounds. For example, it is estimated that one-third of all Streptococcus pneumoniae , a type of bacteria that can cause pneumonia, meningitis and ear infections, are resistant to penicillin. Recently, mechanisms of macrolide resistance for Streptococcus p yogenes have been well documented and resistant strains have been reported. The increased prevalence of resistant bacteria has resulted in prolonged hospitalizations, increased healthcare costs and higher mortality rates.

 

Growing need for improved new treatments.   Social and demographic factors are contributing to the growth of the antibiotic market and the need for new, more effective therapies. The aging population of the United States is more likely to have suppressed immune systems and will require drugs that are effective against increasingly resistant strains of bacteria. Patients diagnosed with diseases that target the immune system, such as AIDS, increasingly require therapies that are more effective to combat infection. In addition, the pharmaceutical industry continues to develop therapeutics, such as cancer chemotherapy, that compromise

the immune system as a side effect of the primary therapy. As a result, we believe there is a strong demand for effective and efficient new treatments with favorable side-effect profiles.

 

Difficulties in developing new classes of anti-infective compounds.   We believe that the growing problem of resistance and other limitations of currently available antibiotics are not being adequately addressed. Moreover, many of the large pharmaceutical companies have reduced research and development efforts in this sector and others have stopped producing anti-infective products.

 

Limitations of standard treatment regimens.   In addition to the increased incidence of antibiotic resistant bacteria, we believe that standard antibiotic treatment regimens have several other limitations, including multiple daily dosage requirements, lengthy treatment periods, limited effectiveness and severe side effects, all of which decrease patient compliance and ultimately, therapeutic efficacy.

 

Our Proprietary PULSYS Technology

 

We have developed a proprietary delivery technology called PULSYS, which enables the pulsatile delivery, or delivery in rapid bursts, of drugs. Our PULSYS technology can potentially offer the prolonged release and absorption of a drug. We believe that the pulsatile delivery of certain drugs can provide therapeutic advantages over current dosing regimens and therapies.

 

In the antibiotic therapeutic area, our PULSYS technology may result in the following therapeutic advantages:

 

 

Products that incorporate one or more of these attributes have the potential to provide increased convenience and possibly increased patient compliance.

 

Our PULSYS technology has the capability of being utilized in a solid oral dosage form which may contain multiple units (e.g., pellets or mini-tablets) with varying release profiles. These units are combined in a proportion to produce targeted systemic drug levels. We believe our PULSYS technology may also be utilized in other dosage forms including, but not limited to, topicals, transdermals and insertables. While our initial focus has been on developing pulsatile antibiotics, we believe that pulsatile dosing may also offer therapeutic advantages in the areas of antivirals, antifungals and oncology. We have implemented a multi-layer patent strategy to protect our pulsatile antibiotic products as well as the pulsatile delivery of drugs in these other therapeutic areas.

 

Our Strategy

 

We expect to use our novel proprietary PULSYS platform technology to develop and commercialize effective, more efficient, and more convenient pharmaceutical products. We plan to focus initially on antibiotics. To achieve this objective, we have adopted the following product development and commercialization strategies:

 

Commercialize products with multiple advantages over existing therapies/regimens.   We plan to develop PULSYS products that have multiple therapeutic advantages over currently available antibiotics, which may include once-daily dosing, lower doses, shorter treatment periods, fewer dose-related side effects, reduced incidence of resistance and improved efficacy.

 

Focus initially on antibiotics that have been used and trusted for decades.   We will attempt to reduce development risk and expense, and decrease time to market for our drug candidates by focusing on improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. The additional benefits of developing improved formulations of existing and approved antibiotics include reasonable and predictable production costs and higher probability of market acceptance. In addition, because these existing products have already been proven to be safe and effective, we anticipate being able to rely in

part on existing approvals and existing safety and efficacy data, which may allow us to reduce the amount of new data that we will need to generate in order to support FDA approval of our products.

 

Focus on first-line, broad-spectrum antibiotics for community infections.   We are pursuing a product development strategy focused primarily on first-line, broad spectrum antibiotics for community infections. Our pulsatile antibiotic products are expected to target upper respiratory tract infections, and skin and skin structure infections in particular. The target indications for our current product candidates cover some of the top antibiotics-related diagnoses, and we anticipate that our future products will compete against the most-prescribed antibiotics. We believe products utilizing our front-loaded, pulsed dosing approach will support once-daily dosing where two-to-four times daily dosing is typical, with the potential for a concomitant reduction in dose and treatment duration compared to current traditional therapies.

 

Multi-level patent strategy for PULSYS.   We have implemented a multi-level patent strategy in order to protect our approved and potential future pulsatile drug products. The first level is composed of “umbrella” patents and patent applications directed to the application of the PULSYS technology to general classes of anti-infective drugs, such as antibiotics, antivirals, antifungals, and anti-cancer agents. The second level is composed of “sub-umbrella” patents and patent applications, directed to the application of the PULSYS technology to subclasses of drugs, such as beta-lactam antibiotics with enzyme inhibitors. The third level includes patents and applications directed to the application of the PULSYS technology to specific antibiotics. We intend to continue to use and enhance this strategy in an effort to protect our intellectual property. We currently own 26 issued U.S. patents, 21 U.S. patent applications, four issued foreign patents, and 67 foreign-filed patent applications, which correspond to our U.S. patents and applications.

 

In-license or acquire antibiotic products.   We continue to explore pulsatile formulations for a wide range of other antibiotics and antibiotic combinations and, assuming we have sufficient financial resources, we may in-license or acquire antibiotic products that we believe can be improved with our novel PULSYS delivery technology.

 

Our Approved and Marketed Products

 

 

MOXATAG (amoxicillin extended-release) Tablets, 775 mg

 

On January 23, 2008, we received FDA approval of our New Drug Application, or NDA, for our amoxicillin PULSYS product, under the trade name MOXATAG (amoxicillin extended-release) Tablets, 775 mg. MOXATAG is a once-daily treatment for pharyngitis and/or tonsillitis secondary to Streptococcus pyogenes, more commonly known as strep throat, in adults and pediatric patients 12 years and older. MOXATAG is the first and only FDA-approved once-daily amoxicillin. According to prescription data from IMS Health, National Prescription Audit ^tm 2008 and National Disease and Therapeutic Index ^tm 2008, approximately 16.4 million adult and pediatric (age 12 and over) amoxicillin oral-solid prescriptions were written for pharyngitis/tonsillitis in the United States during 2008.

 

MOXATAG’s once daily extended-release tablet consists of three components: one immediate-release and two delayed-release components. The three components are combined in a specific ratio to prolong the release of amoxicillin from MOXATAG compared to immediate-release amoxicillin.

 

MOXATAG is intended to provide a lower treatment dose, once-daily alternative to currently approved penicillin and amoxicillin regimens for the treatment of adults and pediatric patients 12 years and older with tonsillitis and/or pharyngitis. Streptococcus pyogenes remains uniformly sensitive to penicillin and amoxicillin with no resistant strains reported. However, mechanisms of macrolide (e.g., Zithromax ^® ) resistance for Streptococcus pyogenes are well-documented and resistant strains have been reported. Amoxicillin remains an appropriate

first-line treatment for streptococcal pharyngitis and MOXATAG is approved as first-line therapy for this indication. We utilized our proprietary once-daily PULSYS delivery technology to develop MOXATAG. We currently have a total of 26 issued U.S. patents and four issued foreign patents covering our PULSYS delivery technology. Three of these patents specifically relate to MOXATAG and run to October 2020.

 

Clinical development history of MOXATAG.   Our MOXATAG product successfully concluded a Phase III clinical trial for the treatment of pharyngitis/tonsillitis for adults and pediatric patients 12 years and older using a 10-day treatment period in August 2006. We conducted our first Phase III clinical trial for adult and adolescent pharyngitis in 2005, using a shorter 7-day duration of therapy, which did not achieve its desired microbiological and clinical end points.

 

Our re-designed non-inferiority Phase III trial conducted in 2005/2006 enrolled 618 adult and adolescent patients in 50 centers in the U.S. and Canada. We compared our MOXATAG tablet for the treatment of pharyngitis/tonsillitis due to Streptococcus pyogenes (Group A streptococcus ) delivered in a once-daily, 775 mg tablet for a period of 10 days to 250 mg of penicillin dosed four times daily, for a total of one gram per day, for 10 days. MOXATAG demonstrated statistical non-inferiority to the comparator therapy in the trial’s primary endpoints, which were eradication of all bacteria as determined during the post-therapy “test-of-cure” visit. MOXATAG also demonstrated non-inferiority in the trial’s secondary endpoints, including clinical cure at the test-of-cure visit and bacterial eradication at the late post-therapy visit.

 

Based on the results of our successful Phase III trial, we submitted an NDA for MOXATAG on December 14, 2006. On February 12, 2007, we received a “refusal to file” letter from the FDA, indicating that additional data was required regarding our proposed commercial manufacturing process in order for the FDA to accept our application for filing. In its letter, the FDA indicated that our application was not sufficiently complete in that it did not include a proposed commercial batch record or a detailed commercial process description with process parameters and in-process controls. We conducted a meeting with the FDA regarding our MOXATAG NDA on February 26, 2007. In that meeting, we reached agreement with the FDA on the additional information required for our NDA filing to be accepted by the FDA. Based on the outcome of the FDA meeting, we resubmitted the revised NDA to the FDA for our MOXATAG product on March 23, 2007. The NDA was accepted for filing, and we received a January 2008 FDA target action date. On January 23, 2008, we received an approval letter from the FDA for MOXATAG.

 

MOXATAG U.S. Market Opportunity.   Amoxicillin is one of the most widely prescribed antibiotic drugs in the United States. We believe the market opportunity for a once-daily amoxicillin product is substantial, with approximately 16.4 million pharyngitis/tonsillitis prescriptions written for traditional multiple-times per day amoxicillin formulations in 2008, according to IMS Health, National Prescription Audit ^tm 2008.

 

Amoxicillin, which is currently marketed by other companies as a generic product, is an aminopenicillin antibiotic used by healthcare professionals for the treatment of a variety of conditions, including ear, nose and throat infections; urinary tract infections; skin infections and lower respiratory infections. Pharyngitis is the number one condition for which amoxicillin is prescribed and the most commonly prescribed dosing regimen for immediate release amoxicillin is 500 mg three times per day, according to IMS Health, National Disease and Therapeutic Index ^tm 2008.

 

We believe MOXATAG will compete effectively in the tonsillitis/pharyngitis segment of the antibiotic market due to its once-daily dosing and favorable side effect profile. We also expect MOXATAG to compete most directly against generic amoxicillin therapies and against other common tonsillitis/pharyngitis therapies such as cephalosporins (e.g., Omnicef ^® and Ceftin ^® ), extended spectrum macrolides (e.g., Zithromax ^® ), penicillin, quinolones (e.g., Levaquin ^® and Avelox ^® ) and amoxicillin/clavulanate (e.g., Augmentin ^® ). According to IMS Health, National Disease and Therapeutic Index ^tm 2008 and National Prescription Audit ^tm 2008 more than 24.1 million adult and pediatric solid and liquid prescriptions were written for strep throat in the United States in 2008.

 

According to IMS Health, National Prescription Audit ^tm 2008, the most frequently prescribed pharyngitis treatment is 500 mg of amoxicillin three times daily for ten days, or 15 grams total over the course of therapy, and amoxicillin is the most commonly mentioned antibiotic associated with the pharyngitis/tonsillitis diagnosis today. Our MOXATAG product for adults and pediatric patients 12 years and older is dosed 775 mg once-daily for ten days, for a total of 7.75 grams per course of therapy. Physicians prescribing MOXATAG are now able to provide the

convenience of once-daily dosing, compared to the typical immediate-release amoxicillin therapy at a lower overall dose of approximately one-half the amount of amoxicillin.

 

MOXATAG International Market Opportunity.   We own the worldwide rights to MOXATAG; however, we have not sought approval of MOXATAG in any country other than the United States to date. In addition to sales in the United States, we believe there may be the opportunity for us to earn additional revenue from sales of MOXATAG in other countries should we decide to seek and subsequently obtain regulatory approval outside the United States. Our international commercialization strategy is currently being evaluated, and may include the outsourcing of the sales and marketing functions to others, in exchange for royalties or other financial consideration.

 

KEFLEX (Cephalexin, USP) Capsules 250 mg, 500 mg, and 750 mg

 

KEFLEX is our immediate-release first-generation cephalosporin product approved for treatment of several types of bacterial infections. KEFLEX is most commonly used in the treatment of skin and skin structure infections and, to a lesser extent, upper respiratory tract infections. KEFLEX is among the most prescribed antibiotics in the United States; however, generic competition is intense, and a high percentage of all KEFLEX prescriptions are substituted with generic versions of cephalexin, the active ingredient in KEFLEX.

 

On June 30, 2004, we acquired the U.S. rights to 250 mg and 500 mg KEFLEX capsules, the immediate-release brand of cephalexin, from Eli Lilly for a purchase price of $11.2 million, including transaction costs. The asset purchase included the exclusive rights to manufacture, sell and market KEFLEX in the United States, including Puerto Rico. We also acquired KEFLEX trademarks, technology and NDAs supporting the approval of KEFLEX capsules and oral suspension. On December 9, 2004, we announced that we entered into a commercial supply agreement with Ceph International Corporation, a wholly owned subsidiary of Patheon’s MOVA Pharmaceutical Corporation, or Patheon, to secure a long-term supply for KEFLEX products. Patheon has informed us that it will be closing its Puerto Rico site that manufactures our KEFLEX products, and that it would manufacture enough KEFLEX to meet our commercial needs for approximately 18 months. We received our final order of KEFLEX from Patheon in February 2008. We are actively pursuing a new third-party manufacturer for our KEFLEX products, but we cannot guarantee we will have a manufacturing site qualified by the FDA prior to selling all of our currently available KEFLEX inventory.

 

On May 12, 2006, the FDA approved two new strengths of immediate-release KEFLEX capsules for marketing, 333 mg and 750 mg. We decided to focus our commercialization efforts solely on KEFLEX 750 mg capsules. We believe the KEFLEX 750 mg capsules allow physicians the flexibility to deliver higher doses of KEFLEX to achieve the desired daily dose with fewer capsules per day. In July 2006, we began promoting KEFLEX 750 mg capsules across the United States to targeted high-prescribing physicians through a dedicated national contract sales force (through Innovex) and MiddleBrook district sales managers. In 2007, the sales force was reduced from 75 sales representatives to 30 sales representatives. In November 2008, we terminated our agreement with Innovex, and we began hiring our own dedicated field sales force of 271 sales representatives and 30 district sales managers. The cost of cancelling this agreement had a minimal impact on our financial statements. Our field sales force will begin detailing KEFLEX and MOXATAG on March 16, 2009. We market KEFLEX in the United States to healthcare practitioners, pharmacists, pharmaceutical wholesalers and retail pharmacy chains.

 

In addition to our ongoing sales and marketing activities for our immediate-release KEFLEX products, we have initiated a research program with the goal of developing a once-a-day cephalexin product utilizing our proprietary PULSYS dosing technology. We are currently in the early stages of preparing for a Phase III clinical trial for this product candidate for the treatment of skin and skin structure infections. We will continue to evaluate the extent of work performed on this product based upon our financial resources and assuming the successful commercialization of MOXATAG. In the event we are able to develop and commercialize a PULSYS-based KEFLEX product, other cephalexin products relying on the acquired NDAs, or other pharmaceutical products using the acquired trademarks, Eli Lilly will be entitled to royalties on these new products. A 10% royalty on net sales, as defined in the agreement, is payable on a new product by new product basis for five years following the first commercial sale for each new product, up to a maximum aggregate royalty per calendar year of $10.0 million. All

royalty obligations with respect to the Eli Lilly agreement cease after the fifteenth anniversary of the first commercial sale of the first new product.

 

KEFLEX Agreements- Deerfield Transaction.   On November 7, 2007, we sold certain immediate-release PULSYS KEFLEX assets and licensed certain immediate-release KEFLEX intellectual property to Deerfield Management. In September 2008, we repurchased these assets from Deerfield Management and terminated our agreements with them. See Item 1. Business “KEFLEX Agreements — Deerfield Transaction.”

 

Our Product Pipeline

 

We have two PULSYS product candidates in clinical development which are summarized in the table below. Our current focus is the commercialization of our approved product, MOXATAG. However, we also intend to do a limited amount of work in connection with preparing for a Phase III clinical trial for our KEFLEX (Cephalexin) PULSYS product candidate in 2009. Our Phase II trial, to evaluate various dosing regimens of our amoxicillin pediatric PULSYS sprinkle product candidate, is on hold pending the availability of adequate financial resources.

 

 

 

 

In the event that we do not successfully commercialize MOXATAG and are unable to raise additional capital from other sources, we may not have sufficient resources to complete our development programs. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a detailed discussion of our research and development expenses.

 

PULSYS Product Candidates

 

We intend to develop the PULSYS technology-based drugs listed above and any that we may develop in the future, with the intention of incorporating one or more of the following therapeutic advantages:

 

 

Products that incorporate one or more of these attributes have the potential to provide increased convenience and possibly increased patient compliance.

 

Our drug product candidates primarily represent improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. Because these existing drugs have already been approved for marketing by the FDA, we anticipate being able to rely, in part, on the FDA’s prior findings regarding the safety and/or efficacy of these existing drugs when seeking FDA approval of our PULSYS product candidates. For example, based on meetings with the FDA regarding the study program for MOXATAG, we filed our NDA via the 505(b)(2) regulatory pathway, which relied in part on the FDA’s prior findings regarding the safety and efficacy of

amoxicillin. For a more detailed explanation of a 505(b)(2) application see Item 1. Business- “ Government Regulation- 505(b)(2) Applications. ”

 

KEFLEX (Cephalexin) PULSYS.   We are developing a once-daily PULSYS version of KEFLEX, our first-generation oral cephalosporin antibiotic product. We are in the early stages of preparing for a Phase III clinical trial for our KEFLEX PULSYS product candidate, and we continue to evaluate the extent of work to be performed on this product based upon our financial resources and the successful commercialization of MOXATAG. Our intent is to develop a once-daily KEFLEX PULSYS product for skin and skin structure infections to increase patient convenience and compliance for cephalexin therapy. Cephalexin is the antibiotic most frequently prescribed by physicians for the treatment of skin and skin structure infections, and the most common dosing regimen is 500 mg three times per day for a period of ten days, according to IMS Health, National Disease and Therapeutic Index ^tm 2008. There is currently no FDA-approved once-daily cephalexin product and we believe a once-daily version of KEFLEX PULSYS may represent a substantial market opportunity. In 2008, cephalexin, the active ingredient in KEFLEX, was the fourth most prescribed antibiotic in the United States, with approximately 22.0 million prescriptions according to IMS Health, National Prescription Audit ^tm 2008.

 

We have completed a total of six KEFLEX PULSYS Phase I clinical studies, evaluating various formulations and components of a proposed PULSYS formulation dosed in more than 150 healthy volunteer subjects. Based on the results from our Phase I studies, we finalized the formulation development Phase I program for our KEFLEX PULSYS product candidate.

 

We are in the early stages of preparing for a Phase III clinical trial for our KEFLEX PULSYS product candidate for the treatment of skin and skin structure infections in adults and adolescents due to susceptible Staphylococcus aureus and/or Streptococcus pyogenes . We expect to begin enrolling patients in our Phase III clinical trial in early 2010. The design of the clinical trial is on-going and we plan to gain agreement with the FDA, on the trial’s design, prior to enrollment. Our work on this Phase III clinical trial is dependent on the availability of funds and the successful launch of MOXATAG. While we cannot predict the exact start or completion dates of this Phase III clinical trial, we would anticipate that the clinical trial and regulatory approval process, assuming a positive outcome and FDA approval of the clinical trial, should take approximately three years from the start of patient enrollment in the clinical trial. We refer to this product candidate as KEFLEX PULSYS, but there is no guarantee the FDA will accept or approve this name for use with the marketed product, if approved.

 

Amoxicillin Pediatric PULSYS Sprinkle Program.   In addition to our amoxicillin PULSYS formulation to treat pharyngitis in adults and pediatric patients age 12 and older (our FDA-approved MOXATAG), we have a product development candidate (a sprinkle formulation), intended for pediatric patients age two and older. Our pediatric PULSYS sprinkle product’s formulation is similar to MOXATAG; however, it is dosed in multiparticulate granules which can be sprinkled over food. Survey results from patients and caregivers utilizing our pediatric sprinkle product suggest that its convenience and transportability may be beneficial features of our sprinkle formulation. We believe the market opportunity for a pediatric strep throat product is substantial, as almost one-third of the strep throat market is believed to be represented by pediatric patients, according to IMS Health, National Prescription Audit ^tm 2008 and National Disease and Therapeutic Index ^tm 2008. In 2008, approximately 18.6 million prescriptions were written for pediatric amoxicillin, according to IMS Health, National Prescription Audit ^tm 2008. The further development of this pediatric PULSYS sprinkle product candidate is dependent upon commercialization of MOXATAG and our having adequate financial resources available.

 

In 2005, we concluded a Phase III clinical trial evaluating our once-daily amoxicillin pediatric PULSYS sprinkle product for seven days in pediatric patients with pharyngitis/tonsillitis, or strep throat which did not achieve its desired clinical endpoints. However, we believe there is potential for us to pursue a PULSYS version of amoxicillin for the treatment of pediatric patients with strep throat through a redesigned clinical trial program. Based on the results from our Phase I studies and previously conducted Phase III clinical trials in pediatrics and adults, we intend to evaluate the safety and efficacy of various daily doses and durations of treatment for our pediatric PULSYS sprinkle product candidate in a Phase II study, should we have sufficient capital and other resources to do so.

 

As part of our FDA approval of MOXATAG on January 23, 2008, in adults and pediatric patients 12 years and older and in accordance with the requirements of the Pediatric Research Equity Act, we received from the FDA a

deferral to further evaluate our product candidate for pediatric patients with pharyngitis and/or tonsillitis as part of a post-marketing commitment. Should the results of the Phase II study support proceeding into Phase III, we plan to conduct a Phase III trial in this population. We agreed to submit a completed study report and data set for our pediatric amoxicillin product candidate in pediatric patients between the ages of two and 11 by March 2013. If the results of the Phase II study do not support proceeding into Phase III, we may file a request for a waiver for the further assessment of the safety and effectiveness of the product in this population.

 

Other Possible Pulsatile Product Candidates.   Our current focus is on antibiotic product candidates that include amoxicillin and cephalexin. We have also identified additional product candidates that we believe could be developed with our pulsatile delivery technology. Furthermore, when we reinitiate our research and development efforts, additional or alternative compounds may be selected to replace or supplement the compounds described above. The timing of further development work on these candidates depends on the successful launch of MOXATAG, our financial and other resources, as well as our evaluation of these products’ commercial potential.

 

We have previously conducted preclinical studies evaluating the bacterial killing efficiency of several antibiotics and antibiotic combinations dosed in a pulsatile manner. Based on these studies, along with the consultation of our scientific advisors, we believe we may be able to utilize our PULSYS technology to target some of the most common uses of antibiotics. These include:

 

 

We may also explore the use of our pulsatile dosing approach beyond antibiotics to other therapeutic categories, such as antivirals and antifungals, in the event that we have sufficient financial and other resources to do so. Although we have not tested the effectiveness of pulsatile dosing for these applications, we believe that our approach may yield benefits similar to those we have found for the treatment of bacterial infections.

 

We have currently placed all of these development programs on hold, and any plans for additional studies regarding these, or any other possible product candidates, will be dependent on the successful commercialization of MOXATAG and our having adequate financial resources.

 

Patent and Intellectual Property Protection

 

Our success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing upon the proprietary rights of others and to prevent others from infringing on our proprietary rights. We seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Furthermore, all of our employees have executed agreements assigning to us all rights to any inventions and processes they develop while they are employed by us. In addition, we may use license agreements to access external products and technologies, as well as to convey our own intellectual property to others. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Protection of our intellectual property rights is subject to a number of risks.

 

Number of patents.   We currently own 26 issued U.S. patents, 21 pending U.S. patent applications and four foreign issued patents. Our issued patents cover certain compositions and methods using pulsatile dosing. We also own 67 foreign-filed patent applications, which correspond to our U.S. patents and applications. We also own one International (PCT) patent application, which we anticipate converting into several individually foreign-filed patent applications to further correspond to our U.S. patents and applications.

 

Multi-level patent strategy for PULSYS.   We have implemented a multi-level patent strategy in order to protect our approved and potential future pulsatile drug products. The first level is composed of “umbrella” patents

and patent applications directed to application of the PULSYS technology to general classes of anti-infective drugs, such as antibiotics, antivirals, antifungals and anti-cancer agents. The second level is composed of “sub-umbrella” patents and patent applications, directed to the application of the PULSYS technology to subclasses of drugs, such as beta-lactam antibiotics with enzyme inhibitors. The third level includes patents and applications directed to the application of the PULSYS technology to specific antibiotics.

 

Expiration dates for key patents.   Our general PULSYS antibiotic patents were issued in 2003 and 2004, and will continue to run for a number of years. The earliest patent expiration is in October 2020.

 

No royalties on PULSYS patents.   We have developed our PULSYS technology in-house, and we have retained full ownership of our patents. Thus, we owe no royalties to any third party for utilizing the PULSYS technology in our products. However, we do owe certain royalties to Eli Lilly for use of the KEFLEX trademarks we acquired from them in June 2004. For more information on the KEFLEX trademark royalties, see Item 1. Business- “ Our Approved and Marketed Products- KEFLEX (Cephalexin, USP) Capsules .”

 

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and by maintaining the physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

 

KEFLEX, MiddleBrook, MiddleBrook Pharmaceuticals (stylized), MiddleBrook Pharmaceuticals, Inc., M1 (stylized), MOX-10, MOXAKIT, MOXATAG1 (stylized), MOXATAG, MOXATEN, MOX-PAK and PULSYS are our trademarks and have been registered in the U.S. Patent and trademark office or are the subject of pending U.S. trademarks applications.

 

Sales and Marketing

 

Following the receipt of FDA approval for MOXATAG in January 2008, and the investment by EGI-MBRK, L.L.C. in our equity in September 2008, we are focusing our organization’s efforts on the commercialization of MOXATAG. To that end, we have expanded our marketing and sales departments in preparation for the launch of MOXATAG in March 2009. Our new sales and marketing campaign is designed to educate physicians, pharmacists and other healthcare professional on the benefits of our products and to encourage them to recommend our products to their patients. Our physician marketing efforts for MOXATAG and KEFLEX will focus on primary care physicians and pharmacists. Historically, we used an Innovex contract sales force for the promotion of KEFLEX 750 mg capsules. In November 2008, we terminated our agreement with Innovex, and we began to hire an internal, dedicated field sales force to prepare for the launch of MOXATAG. Our approximately 271-person field sales force and 30 district sales managers will detail MOXATAG and KEFLEX 750 mg to approximately 40,000 primary care physicians and 16,500 pharmacies. We believe these healthcare professionals have traditionally written most of the prescriptions for products similar to ours.

 

If we successfully market MOXATAG, and develop and receive regulatory approval to market additional product candidates, we believe we will have to substantially expand our sales and marketing capabilities and/or enter into partnerships with other pharmaceutical companies to successfully commercialize our product candidates. Our future profitability will depend in part on our ability to successfully recruit additional sales and marketing personnel and expand our sales and marketing infrastructure to successfully commercialize any additional products or product candidates that we develop, acquire or license.

 

Trade Sales and Distribution.   KEFLEX is primarily sold directly to wholesalers. However, we believe that MOXATAG will be sold directly to food and drug chains in addition to drug wholesalers. A limited number of major wholesalers account for a majority of our sales. Product sales of KEFLEX to Cardinal Health Inc., McKesson

Corporation, and AmerisourceBergen Corporation represented approximately 94% and 95% of our net revenue from KEFLEX in fiscal years 2007 and 2008, respectively.

 

Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period prior and subsequent to the expiration date of the product label. Occasionally, we also provide extended payment terms and greater discounts to our customers to ensure adequate distribution of our products.

 

Our trade sales department calls on national and regional drug, food and mass merchandiser retail accounts. The primary focus of our trade sales effort is to ensure availability of our products on pharmacy shelves to support the efforts of our professional field sales representatives.

 

In 2004, we entered into a distribution and logistics agreement with Integrated Commercialization Solutions, a division of AmerisourceBergen Corporation, or ICS. Under this agreement, ICS is responsible for warehouse inventory operations, logistics, shipping, billing and customer collections on a fee-for-services basis. ICS also serves as the exclusive distribution agent for commercial sales of KEFLEX and MOXATAG.

 

Seasonality.   Aminopenicillin antibiotics experience seasonality with prescriptions peaking between October and March, according to IMS Health, National Prescription Audit ^tm . We do not believe that the cephalexin antibiotic market experiences any seasonality.

 

Competition

 

The pharmaceutical industry is highly competitive and characterized by a number of established, large pharmaceutical companies, as well as smaller emerging companies. Our main competitors are:

 

 

There are many approved antibiotics available to treat bacterial conditions in the United States. Our marketed KEFLEX and MOXATAG products, and our developmental products, will compete with other available products based primarily on:

 

 

 

Our KEFLEX brand of cephalexin faces significant competition from generic distributors of cephalexin capsules and suspensions. Currently, a significant portion of the prescriptions written for our KEFLEX 250 mg and 500 mg capsules are substituted at the pharmacy with generic versions of KEFLEX, supplied through leading generic drug manufacturers including Teva, Stada, Ranbaxy, and others. In addition, our KEFLEX 750 mg capsules are not patent protected and thus would be subject to similar competition from generic versions of KEFLEX 750 mg capsules if and when generic drug manufacturers decide to pursue the manufacture and marketing approvals required for a generic 750 mg strength cephalexin product.

 

In some instances, MOXATAG and our development products that utilize our PULSYS technology may compete against non-PULSYS drug products that share the same active ingredient, but are less convenient or require more cumbersome administration schedules. A number of these non-PULSYS drug products are available in generic form, which are usually substantially less expensive than the branded version. For example, a number of retailers offer generic amoxicillin, the active pharmaceutical ingredient in MOXATAG, for free or at significantly lower prices than MOXATAG. Companies such as Teva, Ranbaxy, Sandoz, Stada, and others are major manufacturers and distributors of generic versions of antibiotics that may compete with our existing and future products.

 

New developments, including the development of methods for preventing the incidence of disease, such as vaccines, occur rapidly in the pharmaceutical industry. These developments may render our product candidates or technologies obsolete or noncompetitive.

 

Many of our competitors possess greater financial, managerial and technical resources and have established reputations for successfully developing and marketing drugs, all of which put us at a competitive disadvantage. Our competitors may be able to apply their resources and capabilities to develop and commercialize products that have distinct, enhanced, or perceived advantages versus our products. The competitors may be in a position to devote greater resources in the sales, marketing, and distribution of these products and therefore considerably impact our ability to successfully commercialize our own products.

 

Manufacturing

 

Manufacture and Packaging.   We currently rely on third-party contract manufacturers to produce sufficient quantities of our product candidates for use in our preclinical studies and clinical trials, and to produce sufficient quantities of commercial supplies of our marketed products and product samples. We believe that our initial focus on the production of improved formulations of approved and marketed drugs will reduce the risk and time involved in the development of manufacturing capabilities because production of these drugs involves well-established and well-accepted manufacturing techniques and processes. We intend to continue to rely upon third-party contract manufacturers for the production of our clinical and commercial supplies for products and product candidates. The use of third-parties for these activities allows us to minimize our initial capital investment and reduce the risks associated with the establishment of our own commercial manufacturing and distribution operations. We maintain internal quality control, regulatory affairs and product planning resources to oversee the activities of these third-party manufacturers.

 

In December 2004, we entered into a commercial supply agreement with Patheon to manufacture our KEFLEX brand of products. Patheon informed us that it would be closing its Puerto Rico site which manufactured our KEFLEX immediate-release products and that it would manufacture enough KEFLEX to meet our commercial needs for approximately 18 months. We received our final order of KEFLEX from Patheon in February 2008. We are actively pursuing a third-party manufacturer for our KEFLEX products, but we cannot guarantee we will have a manufacturer site qualified by the FDA prior to selling all of our currently available KEFLEX inventory.

 

In April 2005, we entered into agreements under which Stada Production Ireland Limited, or SPI, previously known as the manufacturing division of Clonmel Healthcare Limited, a subsidiary of Stada Arzneimittel AG, provides us with commercial supply of our MOXATAG product. SPI has capacity in place to cover current projected needs, with additional capacity for growth. In addition, we have entered into various ancillary agreements whereby SPI provided technology transfer, clinical/stability batch manufacturing, commercial scale-up and validation

services. As part of our agreement with SPI, we funded the facility build-out and equipment additions to support our commercial manufacturing program at SPI’s facilities. In December 2008, we entered into a three year packaging agreement with ALMAC Pharma Services Limited to handle the packaging of our MOXATAG samples. To date, we have received all trade and physician sample materials of MOXATAG ordered to support the commercial launch of MOXATAG.

 

In connection with our third-party manufacturing and clinical activities, we generate hazardous waste. We are subject to various regulations regarding the disposal of hazardous and potentially hazardous waste. We may incur costs to comply with such regulations now or in the future.

 

Raw Material Sourcing Agreements.   We depend upon DSM Anti-Infectives B.V., or DSM, for all amoxicillin used in MOXATAG and for all cephalexin used in our KEFLEX products. We believe that DSM will provide us with sufficient quantities of amoxicillin and cephalexin to meet our current manufacturing needs for the next twelve months. We are actively pursuing additional suppliers of both amoxicillin and cephalexin for use in our products and product candidates.

 

Product Candidates.   We obtain active pharmaceutical ingredients and finished products from certain specialized manufacturers for use in clinical studies. Although the antibiotics and finished products we use in our clinical studies may generally be obtained from several suppliers, the loss of a supplier could result in delays in conducting or completing our clinical trials and could delay our ability to commercialize products.

 

Collaboration Agreements

 

We currently have no active collaboration agreements. We have previously been a party to collaborations with GlaxoSmithKline, or GSK, and Par Pharmaceuticals, or Par.

 

Termination of Our Collaboration with Par Pharmaceutical for Amoxicillin PULSYS.   In May 2004, we entered into an agreement with Par to collaborate on the further development and commercialization of a PULSYS-based amoxicillin product. Under the terms of the agreement, we conducted the development program, including manufacturing clinical supplies and conducting clinical trials, and were responsible for obtaining regulatory approval for the product. We were to own the product trademark and to manufacture or arrange for supply of the product for commercial sales. Par was to be the sole distributor of the product. Both parties were to share commercialization expenses, including pre-marketing costs and promotion costs, on an equal basis. Operating profits from sales of the product were also to be shared on an equal basis. Under the agreement, we received an upfront fee of $5.0 million and a commitment from Par to fund all further development expenses. Development expenses incurred by us were to be partially funded by quarterly payments from Par aggregating $28.0 million over the period of July 2004 through October 2005, of which up to $14.0 million was contingently refundable.

 

On August 3, 2005, we were notified by Par of its decision to terminate the amoxicillin PULSYS collaboration agreement. Under certain circumstances, the termination clauses of the agreement may entitle Par to receive a share of net profits up to one-half of their $23.25 million funding of the development of certain amoxicillin PULSYS products, should the products covered by the agreement be successfully commercialized.

 

Termination of the Collaboration with GSK.   In July 2003, we entered into a license agreement with GSK pursuant to which we licensed patents and PULSYS technology to GSK for use with its Augmentin ^® (amoxicillin/clavulanate combination) products and with limited other amoxicillin products. Under the agreement, GSK was responsible, at its cost and expense, to use commercially reasonable efforts for the clinical development, manufacture and sale of the licensed products. We received an initial non-refundable payment of $5.0 million from GSK upon signing of the agreement, and a $3.0 million payment upon achievement of the first milestone. Our receipt of further milestone payments, royalty payments and sales milestone payments under the agreement depended on the ability of GSK to develop and commercialize the products covered by the agreement and was subject to certain conditions and limitations. The agreement could be terminated at any time by GSK, which it elected to do with an effective date of December 15, 2004. As a result of the termination, we accelerated the recognition of the remaining deferred revenue of approximately $3.2 million related to the collaboration during the fourth quarter of 2004. The termination had no other effects on our financial position.

Collaboration with Par Pharmaceutical for Generic Clarithromycin.   In September 2003, we entered into an agreement pursuant to which we licensed to Par the distribution and marketing rights to our generic formulation of Abbott’s Biaxin XL (extended release clarithromycin). During the third quarter of 2004, we conducted bioequivalence studies on two revised formulations of the generic product, with both formulations failing to achieve bioequivalence. We concluded that due to the non-core nature of the product, the expense involved in the development of additional formulations, and the reduced market potential given the emergence of competing products, we would discontinue further development work on the product.

 

KEFLEX Agreements — Deerfield Transaction

 

On November 7, 2007, we entered into a series of agreements with Deerfield Management, and certain of its affiliates, which provided for a potential capital raise of up to $10.0 million in cash. The agreement included provisions for two potential closings, with the first closing occurring upon the execution of the agreements (for $7.5 million in gross proceeds, less $0.5 million in transaction expenses) and the second closing (for an additional $2.5 million in gross proceeds) occurring at our option, contingent upon FDA approval of MOXATAG.

 

First Closing.   At the transaction’s first closing, we sold certain assets, including KEFLEX product inventories, and assigned certain intellectual property rights, relating only to our existing, immediate-release cephalexin business, to two Deerfield affiliates, Kef Pharmaceuticals, Inc., or Kef, and Lex Pharmaceuticals, Inc., or Lex. Under the terms of the agreement, we received $7.5 million on November 8, 2007, and reimbursed Deerfield $0.5 million for transaction-related expenses. Approximately $4.6 million of those proceeds were used to fully repay the outstanding Merrill Lynch Capital loan balance, with the remainder available for general corporate purposes. Pursuant to a consignment of those assets and the license of those intellectual property rights back to us, we continued to operate our existing cephalexin business, subject to consignment and royalty payments to Deerfield of 20% of net sales, subject to a minimum quarterly payment of $0.4 million. In addition, we granted to Deerfield a six-year warrant to purchase 3.0 million shares of our common stock at $1.38 per share, the closing market price on November 7, 2007.

 

Second Closing.   The agreements provided for a second closing, at our option until June 30, 2008. We did not exercise the option for a second closing, and permitted the option to expire on June 30, 2008.

 

Repurchase Right.   Deerfield also granted us the right to repurchase all of the assets and rights sold and licensed by us to Deerfield by purchasing all of the outstanding capital stock of both Kef and Lex on or before June 30, 2008. In accordance with the terms of the agreement, upon payment of a $1.35 million extension fee, the right to repurchase the assets was extended to December 31, 2008. On September 4, 2008, pursuant to an agreement with Deerfield dated July 1, 2008, we exercised this repurchase right and purchased all of the outstanding capital stock of Kef and Lex for $11.0 million (the $1.35 million extension fee was applied against this purchase price), plus the value of the assets of the entities including cash and inventory, and we redeemed Deerfield’s warrant to purchase 3.0 million shares of our common stock. These repurchases were funded with a portion of the proceeds received from the EGI Transactions. For a description of the EGI transaction, see “ Management Overview of the Key Developments in 2008” in Part II, Item 7.

 

Government Regulation

 

We 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 drugs promulgated under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act and by comparable agencies in foreign countries. FDA approval is required before any new drug can be legally marketed in the United States.

 

New Drug Application Process.   The process required by the FDA before a new drug may be marketed in the United States generally involves:

 

 

 

PRECLINICAL:   Preclinical studies generally include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies, to assess the safety and efficacy of the product. Preclinical trials also provide a basis for design of human clinical studies.

 

Human clinical trials are typically conducted in three sequential phases which may overlap:

 

PHASE I:   During typical Phase I studies, the drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

 

PHASE II:   During Phase II studies, the drug is introduced to patients that have the medical condition that the drug is intended to treat. Phase II studies generally are intended to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Phase II studies are sometimes combined with Phase I studies (referred to as Phase I/II studies) in certain instances when safety issues and questions of absorption, metabolism, distribution and excretion are well-established.

 

PHASE III:   When Phase II evaluations suggest that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population, often at geographically dispersed clinical study sites.

 

The drug sponsor, the FDA or the institutional review board at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a concern that the subjects are being exposed to an unacceptable health risk.

 

The results of product development, preclinical studies and human studies are submitted to the FDA as part of the NDA. The NDA also must contain extensive manufacturing information. The FDA may approve the NDA or issue a complete response letter if applicable FDA regulatory criteria are not satisfied or if additional data, including clinical data, are required to demonstrate the safety or effectiveness of the drug.

 

Abbreviated New Drug Applications, or ANDA.   An ANDA is an application for approval of a generic drug. The application is based on a showing of bioequivalence to an already approved drug product. ANDAs do not contain full reports of safety and effectiveness as required in NDAs but rather demonstrate that their proposed products are “the same as” reference products with regard to their conditions of use, active ingredients, route of administration, dosage form, strength, and labeling. ANDA applicants must demonstrate the bioequivalence of their products to the reference product. Bioequivalence generally means that no significant difference exists in the rate and extent to which the active ingredients enter the blood-stream and become available at the site of drug action. Bioequivalence, however, does not mean that the products must be identical in all respects. Furthermore, the FDA has broad discretion to determine whether a product meets the ANDA approval standards. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists filling prescriptions written for the original listed drug.

 

505(b)(2) Applications.   As an alternate path to FDA approval for new or improved formulations of previously approved products, a company may submit a Section 505(b)(2) NDA. Section 505(b)(2) of the Federal Food, Drug, & Cosmetic Act permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. In other words, the applicant can rely upon FDA’s previous findings of safety and efficacy for an approved product and/or published literature for related products, whether or not approved, and only perform those additional studies or measurements that are needed to support the change from the referenced product. In our NDA submissions, we intend to rely, in part, on prior FDA approvals of the antibiotic ingredients used in our products and on data generated by other parties which help to demonstrate the safety and effectiveness of those ingredients. In the case of products that we may develop in conjunction with sponsors of previously approved products, we expect that we will have a specific right of reference to the data contained in the prior applications and submit a traditional NDA. In any case in which we do not have a specific right of reference from the sponsor of the previously approved

product, we anticipate that we will submit Section 505(b)(2) NDAs. All data necessary to demonstrate the safety and effectiveness of our own versions of these products will have to be generated by or for us and submitted to the FDA in support of our applications. These data are expected to include data establishing the safety and efficacy of the pulsatile dosage form and any other differences between the dosage form and the conditions for use of our products and the dosage form and conditions for use of the previously approved products.

 

Paragraph IV Certifications.   To the extent that an ANDA applicant or Section 505(b)(2) applicant is relying on previous FDA findings for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book, as defined below. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid is called a paragraph IV certification. Absent a paragraph IV certification, the ANDA or Section 505(b)(2) NDA will not be approved until all the listed patents claiming the referenced product have expired, including any applicable period of non-patent market exclusivity.

 

If the ANDA applicant or Section 505(b)(2) applicant has provided a paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to the NDA and patent holders once the ANDA or Section 505(b)(2) application has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of notice of a paragraph IV certification automatically prevents the FDA from approving the ANDA or Section 505(b)(2) application until the earlier of 30 months after notice of a paragraph IV certification is received by the NDA or patent holders, expiration of the patent and any applicable period of patent exclusivity, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant or 505(b)(2) applicant. The ANDA or Section 505(b)(2) application also will not be approved until any applicable non-patent market exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired or is otherwise waived by the reference product holder.

 

The Orange Book is the means by which the FDA identifies products it has approved on the basis of safety and efficacy under Section 505 of the Federal Food, Drug and Cosmetic Act, and attached in an addendum to the Orange Book are any applicable periods of patent and non-patent market exclusivity for those FDA approved drugs.

 

A new law, enacted late in 2008, extended certain of these patent and exclusivity benefits to older antibiotics that were historically excluded from these provisions of the Federal Food, Drug, and Cosmetic Act. Amoxicillin and cephalexin are older antibiotics covered by this new law. As such, we may be eligible for three-year exclusivity for these drugs if applicable legal and regulatory requirements are met. In addition, transition provisions included in the new law permitted us to list certain patents associated with MOXATAG in the Orange Book, thereby requiring that any applicant seeking approval of an ANDA, or Section 505(b)(2) version of MOXATAG would have to certify to these patents. In late 2008, after the enactment of the new law, we submitted and the FDA listed in the Orange Book three patents covering MOXATAG. Moreover, if we submit future 505(b)(2) NDAs that rely on previous approvals of old antibiotics for which there are Orange Book-listed patents, then we would have to certify to any patents listed in the Orange Book for those products.

 

To date, we have not received notice from a generic applicant that an ANDA or a 505(b)(2) application containing a paragraph IV certification with respect to an Orange Book-listed patent for MOXATAG has been submitted to FDA. If an ANDA or a 505(b)(2) applicant later submits an application to FDA containing a paragraph IV certification to such an Orange Book-listed patent, and if we timely sue for patent infringement within the statutory 45-day period, then we believe we will be entitled to a 30-month stay. Our KEFLEX 750 mg product currently does not have any period of patent or non-patent protection listed in the FDA’s Orange Book. Because there are no Orange Book-listed patents, we do not know whether an ANDA or a 505(b)(2) application has been submitted to the FDA for a generic or modified version of our KEFLEX 750 mg product. If we subsequently submit an NDA for a new use for KEFLEX, MOXATAG, or our pediatric PULSYS sprinkle product candidate those could qualify for three-year exclusivity, or if there is an applicable patent covering the drug product, then we will take the

necessary steps to ensure that the FDA’s Orange Book reflects this. Should we obtain the FDA’s approval for our line extension of KEFLEX, currently termed KEFLEX PULSYS, then we will take the necessary steps to ensure that the FDA’s Orange Book reflects any applicable period of patent or non-patent market exclusivity.

 

In the case of antibiotic ingredients not previously approved in the combinations that we propose, it will also be necessary for us to satisfy the FDA’s fixed-dose combination drug regulations with data establishing that each active component contributes to the effectiveness of the combination and that the dosage of each component is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy. This policy typically requires very large clinical trials that test each antibiotic alone and in combination. No assurance can be given that NDAs submitted for our products will receive FDA approval on a timely basis, or at all.

 

Under the Prescription Drug User Fee Act, or PDUFA, generally, the submission of an NDA is subject to substantial application user fees, currently $1,247,000 for an application requiring clinical data, and one-half of an application fee ($623,600) for an application not requiring clinical data and a supplement requiring clinical data, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently $71,520 per product and $425,600 per establishment. These fees are typically increased annually. In addition, the PDUFA statute has been subject to significant amendments in connection with its regular reauthorization. We are not in a position to predict whether and how the user fee requirements will be interpreted and applied to us and our products in the future.

 

Other Regulatory Constraints.   In addition to the results of product development, preclinical animal studies and clinical human studies, an NDA also must contain extensive information on the chemistry, manufacturing and controls that relate to the planned routine production and testing of the drug. An NDA must also contain proposed prescribing information for the product, supported by available clinical and other testing data, describing how the product may properly be used. The FDA may approve, deny approval or grant conditional approval depending on whether it finds that information provided sufficiently addresses all issues regarding the manufacture and proposed use of the product candidate. Both prior to and subsequent to approval of a product, the Federal Food, Drug, and Cosmetic Act and FDA regulations require that the manufacture and testing of any drug for investigational use or for commercial use in humans be manufactured in accordance with current Good Manufacturing Practice, or cGMP. Regulatory authorities, including the FDA, periodically inspect manufacturing facilities to assess compliance with cGMP. Our failure or that of our contract manufacturer, to follow cGMP requirements, as well as other regulatory requirements, can subject a sponsor and its products to various sanctions, including, but not limited to delay in approving or refusal to approve a product; product recall or seizure; suspension or withdrawal of an approved product from the market; interruption of production; operating restrictions; warning letters; injunctions; fines and other monetary penalties; criminal prosecutions; and unanticipated expenditures. We have used, and intend to continue to use, third-party firms that we believe are knowledgeable and qualified in compliance with cGMP requirements to manufacture and test our product candidates and, to the extent that we engage in these activities on our own behalf, intend to utilize cGMP-compliant procedures and controls. There can be no assurance, however, that we or our contractors will be and remain at all times in full compliance with all cGMP requirements.

 

Furthermore, the testing, manufacturing, labeling, safety, advertising, promotion, storage, sales, distribution, export and marketing, among other things, of our products, after approval, is subject to extensive regulation by governmental authorities.

 

The marketing practices of all U.S. pharmaceutical manufacturers are subject to federal and state healthcare laws that are used to protect the integrity of government-funded healthcare programs. A number of laws and related regulations, loosely referred to as fraud and abuse laws, are used to prosecute healthcare providers, suppliers, physicians and others that fraudulently or wrongfully obtain reimbursement for healthcare products or services. These laws apply broadly and may constrain our business and the financial arrangements through which we market, sell and distribute our products.

 

The anti-kickback provisions of the Federal Social Security Act prohibit the exchange of anything of value with the intent to induce referrals of patients or purchases, leases, orders, arrangements, or recommendations of any items or services reimbursable by a federal healthcare program such as Medicare or Medicaid. The statute imputes liability to both sides of an impermissible transaction and will cover any arrangement where one purpose of the arrangement is to obtain money for the referral of covered services or items. There are safe harbors provisions under

the anti-kickback statute that shield from prosecution certain common business arrangements that might otherwise technically violate the statute. Safe harbor protection is afforded, however, only to those arrangements that precisely meet all of the conditions set forth in the safe harbor. Many legitimate arrangements may not fully meet the requirements of the safe harbor provisions.

 

Additionally, the federal False Claims Act prohibits the submission of “false” or “fraudulent” claims or any other documents in support of a “false” or “fraudulent” claim for payment by government programs, commercial insurers, and other healthcare plans. Under the False Claims Act, it is illegal to make or induce someone else to make a false claim for reimbursement from the federal government for pharmaceutical products. Various states have enacted laws and regulations comparable to the federal fraud and abuse laws and regulations. If our operations are found to be in violation of any of the laws and regulations described above or any other law or regulation to which we or our customers are or will be subject, we may be subject to civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

 

In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution. Under the PDMA and its implementing regulations, states are permitted to require registration of manufacturers and distributors and adopt regulations limiting the distribution of product samples to licensed practitioners. The PDMA also imposes extensive licensing, personnel recordkeeping, packaging, quantity, labeling, product handling, and facility storage and security requirements to ensure accountability in distribution.

 

Foreign Regulatory Approval.   Although we do not currently market any of our products outside the United States and have no current plans to engage in product commercialization outside the United States, we may decide to do so in the future. In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.

 

To date, we have not initiated any discussions with the European Medicines Agency, or any other foreign regulatory authorities with respect to seeking regulatory approval for any of our products in Europe or in any other country outside the United States. Obtaining foreign regulatory approvals would require additional financial resources and in the event we choose to seek those approvals, we would need to raise additional capital. We cannot assure you that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.

 

Pharmaceutical Pricing and Reimbursement.   Our ability to commercialize our products successfully depends in significant part on the availability of adequate financial coverage and reimbursement from third party payors, including, governmental payors such as the Medicare and Medicaid programs, managed care organizations, or MCOs, pharmacy benefits managers, or PBMs, and private health insurers. Third party payors are increasingly challenging the prices charged for medicines and examining their cost effectiveness, in addition to their safety, efficacy and ease of use. Due to the share of the patient population covered by MCOs, marketing prescription drugs to them and the PBMs that serve them is important to our business. A significant objective of MCOs is to contain and, where possible, reduce health care expenditures. To achieve these objectives, MCOs and PBMs typically rely upon formularies, volume

purchases and long-term contracts to negotiate discounts from pharmaceutical companies. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their generally-lower cost, MCOs and PBMs often favor generic drugs.

 

To successfully compete for business with MCOs, PBMs and other third party payors, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate that our products offer not only medical benefits but also cost advantages as compared to other forms of care, in addition to the costs required to obtain FDA approvals. Even with these studies, our products may be considered less safe, less effective or less cost-effective than existing products, and third party payors may decide not to provide coverage and reimbursement for our product candidates, in whole or in part. If third party payors approve coverage and reimbursement, the resulting payment rates may not be sufficient for us to sell our products at a profit.

 

Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our business. We anticipate that the U.S. Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures could include, for example:

 

 

Under the Medicare Part D Prescription Drug Benefit, which took effect in January 2006, Medicare beneficiaries can obtain prescription drug coverage from private plans that are permitted to limit the number of prescription drugs that are covered on their formularies in each therapeutic category and class. Under this program, our products may be excluded from formularies and may be subject to significant price competition that depresses the prices we are able to charge. We believe that it is likely that non-Medicare plans will follow Medicare coverage and reimbursement policies.

 

Outpatient pharmaceuticals sold to state administered Medicaid programs are subject to a mandatory national drug rebate program. In order for a prescription drug to qualify for reimbursement, the Medicaid Drug Rebate Program requires the drug manufacturer to enter into a national Rebate Agreement with the Secretary of the Department of Health and Human Services. Under the Medicaid Drug Rebate Program, a drug provider must pay as a rebate to state Medicaid agencies for Medicaid recipients’ purchases of the company’s covered drugs the greater of: a specific percentage of the Average Manufacturer Price for the drug; or the difference between the average manufacturer price and the best price for the drug.

 

Pharmaceutical companies must also enter into pricing agreements with the U.S. Department of Veterans Affairs as a condition for participating in the Medicaid program, and some states may impose supplemental rebate agreements. We are a party to these types of pricing agreements with respect to our currently marketed products.

 

Pharmaceutical manufacturers participating in the Medicaid program must also enter into a second agreement, called a “pharmaceutical pricing agreement,” as a condition of reimbursement. Under the Section 340B Pricing Program, manufacturers must make covered outpatient drugs available to certain Public Health Service entities at discounted prices that are approximately equal to the price for such drugs under state Medicaid programs (after taking into consideration the Medicaid rebate).

 

We may also face competition for our products from lower priced products from foreign countries that have placed price controls on pharmaceutical products. Proposed federal legislative changes may expand consumers’ ability to purchase imported, lower priced versions of our and competing products from Canada and other countries. Further, several states 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 that compete with our own products could negatively impact our business and prospects.

 

We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect legislations, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted could impair our ability to set prices that cover our costs, constrain our ability to generate revenue from government funded or private third-party payors, limit the revenue and profitability of our potential customers, suppliers and collaborators, and impede our access to capital needed to operate and grow our company. Any of these circumstances could significantly limit our ability to operate profitably.

 

Employees

 

As of March 1, 2009, we had 352 employees, 21 who work in our Westlake, Texas facility, and 21 who work in our Germantown, Maryland facility. Our sales and marketing department consisted of 317 employees (308 of these employees are field based and work outside of the office) as of March 1, 2009. We currently have no part-time employees. None of our employees are subject to collective bargaining agreements. We consider our relationships with our employees to be good.

 

Access to Our Filings with the Securities and Exchange Commission

 

Our website address is www.middlebrookpharma.com. The information on our website is not a part of, or incorporated into, this Annual Report on Form 10-K. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, which are filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, available without charge on our website as soon as reasonably practicable after they are filed electronically with, or otherwise furnished to, the Securities and Exchange Commission, or the SEC.

 

The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov, from which you can electronically access information regarding issuers that file electronically.

 

 

There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. Those factors include, without limitation, those listed below and elsewhere herein.

 

Risks Related to Our Business

 

Our performance depends substantially on the ability of our new management team to fully implement a new business strategy and on the performance of our executive officers and other key personnel.

 

In September 2008, we issued and sold 30,303,030 shares of our common stock and a warrant to purchase an aggregate of 12,121,212 shares of our common stock to EGI-MBRK, L.L.C., or EGI, in a private placement offering, for proceeds of approximately $100 million. In connection with the offering, and as contemplated by the securities purchase agreement dated July 1, 2008 between us and EGI, our board of directors appointed John Thievon to replace Edward M. Rudnic, Ph.D., as our president and chief executive officer. Dr. Rudnic also resigned from our board, and our board appointed Mr. Thievon to fill this vacancy. In addition, David Becker was appointed our Executive Vice President and Chief Financial Officer, replacing Robert C. Low as our principal financial officer. We also expanded the size of our board of directors from seven to 10 members, adding new directors Lord James Blyth, William C. Pate and Mark Sotir. We have hired or promoted a number of other members of our senior management team. The new management team is in the process of setting new business objectives and

implementing a new business strategy for our company and products. Our management team is untested, has not worked together as a group for an extended period of time, and may lack familiarity with our company and products. They may not work together effectively to successfully implement a new business strategy, manage our operations, or accomplish business objectives. In addition, the new initiatives being implemented may not be successful and could adversely affect our business. Poor execution in the transition of our management team and in implementing new initiatives could have a material adverse effect on our business, financial condition and results of operation.

 

We are highly dependent on the principal members of our scientific and management teams. In order to pursue our product development, marketing and commercialization plans, we may need to hire additional personnel with experience in clinical testing, government regulation, manufacturing, marketing and business development. We may not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. We are not aware of any present intention of any of our key personnel to leave our company or to retire. Although we have employment agreements with certain of our executive officers, these employees may terminate their services at any time by delivery of appropriate notice. The loss of any of our key personnel, or the inability to attract and retain qualified personnel, may significantly delay or prevent the achievement of our research, development or business objectives and could materially adversely affect our business, financial condition and results of operations.

 

We have a history of losses, we expect to incur losses for the foreseeable future, and we may never become profitable.

 

From the date we began operations in January 2000 through December 31, 2008, we have incurred losses of approximately $236.9 million, including a loss of approximately $41.6 million and $42.2 million for the fiscal years ended December 31, 2008 and December 31, 2007, respectively. Our losses-to-date have resulted principally from research and development costs related to the development of our product candidates, the purchase of equipment and establishment of our facilities and selling, general and administrative costs related to our operations.

 

We expect to incur substantial losses in 2009 and depending on the successful commercialization of MOXATAG, we may incur substantial losses for the foreseeable future thereafter. Among other things, in 2009 we expect to incur significant expenses in anticipation of commercialization of our MOXATAG product which was approved for marketing by the FDA in January 2008. We have limited the further development of our KEFLEX PULSYS product candidate and postponed development of our pediatric PULSYS sprinkle product candidate in order to reduce our expenses. We may also incur losses in connection with the continued sales and marketing of our KEFLEX 750 mg product which was approved for marketing by the FDA in May 2006. In addition, we expect to incur additional expenses as a result of other research and development costs, and regulatory compliance activities.

 

Our chances for achieving profitability depend on numerous factors, including success in:

 

 

We may never become profitable.

 

Although our MOXATAG product has been approved for commercial sale, we will not be successful if the product is not accepted by the market.

 

Even though we have obtained regulatory approval to market MOXATAG, it, or any of our other potential PULSYS products, may not gain market acceptance among physicians, patients, pharmacists, healthcare payors and the medical community. The degree of market acceptance of any pharmaceutical product that we develop will depend on a number of factors, including:

 

 

 

Our products will compete with a number of products manufactured and marketed by major pharmaceutical companies, biotechnology companies and manufacturers of generic drugs. Our products may also compete with new products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept and use any product candidates that we or our collaborative partners develop. To the extent current antibiotics already successfully treat certain infections, physicians may not be inclined to prescribe our pulsatile drugs for the same indications. If our products do not achieve significant market acceptance, we will not be able to generate significant revenues or become profitable.

 

Current unfavorable market conditions may adversely affect our product sales and business.

 

Current economic and market conditions are unfavorable. Adverse economic conditions impacting our customers, including among others, high unemployment, low customer confidence in the economy, high customer debt levels, low availability of customer credit and hardships relating to declines in the stock markets, could impact the ability or willingness of consumers to purchase our products, which could adversely affect our revenues and operating results. We expect that our products will be more expensive for consumers than competing products, and in the current economy consumers may be reluctant to accept higher costs. If market conditions remain unfavorable or deteriorate further, we may experience material impacts on our business, operating results and financial condition.

 

Our PULSYS technology is based on a finding that could ultimately prove to be incorrect, or could have limited applicability.

 

Our PULSYS product candidates are based on our in vitro finding that bacteria exposed to antibiotics in front-loaded, rapid sequential bursts are eliminated more efficiently and effectively than those exposed to presently available treatment regimens. Ultimately, our finding may be incorrect, in which case our pulsatile dosage form would not differ substantially from competing dosage forms and may be inferior to them. If these products are substantially identical or inferior to products already available, the market for our pulsatile drugs will be reduced or eliminated.

 

Even if pulsatile dosing is more efficient than traditional dosing, we may be unable to apply this finding in vivo successfully to a substantial number of products in the anti-infective market. Our preliminary studies indicate that pulsatile dosing may not provide superior performance for all types of antibiotics. Additionally, we have not conducted any studies with anti-viral or anti-fungal medications. If we cannot apply our technology to a wide variety of antibiotics or other anti-infectives, our potential market will be substantially reduced.

 

Our PULSYS delivery technology may not be effective for our product candidates, which would prevent us from commercializing products that are more effective than those of our competitors.

 

Even if we are correct that pulsatile dosing is more effective than traditional dosing of antibiotics, our PULSYS delivery technology must be effective in humans such that the pulsatile administration of drugs are at levels that prove effective in curing infections. We may not be successful in developing other antibiotics using our PULSYS technology. Furthermore, we may not be successful when applying for indications other than our current indications for MOXATAG. Should this occur, our pulsatile product candidates may not be more effective than the products of our competitors, which may decrease or eliminate market acceptance of our products.

 

If our PULSYS delivery technology is not effective in delivering rapid bursts of antibiotics, or is unable to do so at appropriate concentrations, and we are not able to create an alternative delivery method for pulsatile dosing

that proves to be effective, we will be unable to capitalize on any advantage of our discovery, which could have a material adverse effect on our business and results of operations.

 

If a competitor produces and commercializes an antibiotic that is superior to our PULSYS antibiotics, the market for our potential products would be reduced or eliminated.

 

We have devoted a substantial amount of our research efforts and capital to the development of pulsatile antibiotics. Competitors are developing or have developed new drugs that may compete with our pulsatile antibiotics. A number of pharmaceutical companies are also developing new classes of compounds, such as oxazolidinones, that may also compete against our pulsatile antibiotics. In addition, other companies are developing technologies to enhance the efficacy of antibiotics by adding new chemical entities that inhibit bacterial metabolic function. If a competitor produces and commercializes an antibiotic or method of delivery of antibiotics that provides superior safety, effectiveness or other significant advantages over our pulsatile antibiotics, the value of our pulsatile drugs would be substantially reduced. As a result, we would need to conduct substantial new research and development activities to establish new product targets, which would be costly and time consuming. In the event we are unable to establish new product targets, we will be unable to generate additional sources of revenue.

 

We have not conducted an extensive third-party patent infringement, invalidity and enforceability investigation on pulsatile dosing and our PULSYS technology, and we are aware of at least one issued patent covering pulsatile delivery.

 

Our patents, prior art and infringement investigations were primarily conducted by our senior management and other employees. Although our patent counsel has consulted with management in connection with management’s intellectual property investigations, our patent counsel has not undertaken an extensive independent analysis to determine whether our PULSYS technology infringes upon any issued patents or whether our issued patents or patent applications covering pulsatile dosing could be invalidated or rendered unenforceable for any reason. We are aware of one issued patent owned by a third party that covers certain aspects of delivering drugs by the use of two delayed-release pulses. However, we believe that we will be able to manufacture and market formulations of our pulsatile products without infringing any valid claims under this patent. Any reformulation of our products, if required, could be costly and time-consuming and may not be possible. We cannot assure you that a claim will not be asserted by such patent holder or any other holder of an issued patent, that any of our products infringe their patent, or that our patents are invalid or unenforceable. We may be exposed to future litigation by third parties based on claims that our products or activities infringe the intellectual property rights of others. We cannot assure you that, in the event of litigation, any claims would be resolved in our favor. Any litigation or claims against us, whether or not valid, may result in substantial costs, could place a significant strain on our financial resources, divert the attention of management and harm our reputation. In addition, intellectual property litigation or claims could result in substantial damages and force us to do one or more of the following:

 

 

We have not sought patent protection for certain aspects of the technology used in our PULSYS product candidates.

 

We have not filed for patent protection with respect to all of our specific formulations, materials (including inactive ingredients) or manufacturing process approaches that are incorporated in our PULSYS product candidates, and we may not seek such patent coverage in the future. In producing our PULSYS products, we expect to use general formulation techniques used in the industry that would be modified by us and which would, therefore, include know-how and trade secrets that we have developed. We cannot be certain that a patent would issue to cover such intellectual property, and currently, we would prefer to keep such techniques and know-how as our trade secrets. In the event a competitor is able to develop and patent technology substantially similar to ours, we may be

blocked from using certain of our formulations or manufacturing process approaches, which could limit our ability to develop and commercialize products.

 

If we are unable to develop and successfully commercialize our PULSYS product candidates, we may never achieve profitability.

 

We have just begun the commercialization of our first PULSYS product, MOXATAG; however, as of December 31, 2008, we have not recognized any revenue from PULSYS product sales. With the exception of our KEFLEX PULSYS product candidate, which is in the early stages of preparing for a Phase III clinical trial, all of our pulsatile drugs candidates are in early stages of development. We must obtain regulatory approval for our products before we are able to commercialize these products and generate revenue from their sales. We expect that we must conduct significant additional research and development activities on our other PULSYS product candidates and successfully complete preclinical, Phase I, Phase I/II or Phase II, and Phase III clinical trials before we will be able to receive final regulatory approval to commercialize these pulsatile products. Even if we succeed in developing and commercializing one or more of our PULSYS products, we may never generate sufficient or sustainable revenue to enable us to be profitable.

 

If clinical trials for our products are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines.

 

We must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans before we can obtain regulatory approvals for their commercial sale. In addition, we will also need to demonstrate through clinical trials any claims we may wish to make that our product candidates are comparable or superior to existing products. For drug products which are expected to contain active ingredients in fixed combinations that have not been previously approved by the FDA, we may also need to conduct clinical studies in order to establish the contribution of each active component to the effectiveness of the combination in an appropriately identified patient population.

 

Conducting clinical trials is a lengthy, time-consuming and expensive process. With the exception of both our KEFLEX PULSYS product candidate and pediatric PULSYS sprinkle product candidate, which have completed Phase I clinical trials, we have not completed preclinical studies and initial clinical trials (Phase I, Phase I/II or Phase II) to extrapolate proper dosage for our other potential product candidates for Phase III clinical efficacy trials in humans. In the event we incorrectly identify a dosage as appropriate for human clinical trials, any results we receive from such trials may not properly reflect the optimal efficacy or safety of our products and may not support approval in the absence of additional clinical trials using a different dosage.

 

The commencement and rate of completion of clinical trials for our products may be delayed by many factors, including:

 

 

The results from preclinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. Although a new product may show promising results in preclinical and initial clinical trials, it may subsequently prove unfeasible or impossible to generate sufficient safety and efficacy data to obtain necessary regulatory approval. Data obtained from preclinical and clinical studies are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as a result of many factors, including results that do not support our claims, perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development. Our business, financial condition and results of operations may be materially adversely affected by any delays in, or termination of, our clinical trials or a determination by the FDA that the results of our trials are inadequate to justify regulatory approval.

We have a post marketing commitment to proceed with a Phase II clinical trial for our pediatric PULSYS sprinkle product candidate, which we may never be able to conduct.

 

As part of the MOXATAG approval, we are committed to submitting a final clinical trial report for a Phase III clinical study by March 2013 for our pediatric PULSYS sprinkle product candidate. Prior to the initiation of such a Phase III clinical trial, we plan to conduct a Phase II clinical trial in order to evaluate various dosing regimens. If we lack adequate financial resources to proceed with a Phase II clinical trial for our pediatric PULSYS sprinkle product candidate we will be unable to meet our commitment and will have to request that the FDA extend our current deferral until such resources are available. If the results of the Phase II clinical study do not support proceeding into a Phase III clinical trial, we will have to request a waiver for the further assessment of the safety and effectiveness of our pediatric PULSYS sprinkle product candidate. There can be no assurance that the FDA will grant our deferral or waiver requests. If we fail to obtain a deferral or waiver from the FDA regarding this post marketing commitment it could have a material adverse affect on our business.

 

Our ability to commercialize our products is dependent upon successfully developing our own sales and marketing capabilities and infrastructure.

 

Our new sales and marketing personnel have limited experience working together. In order to commercialize our MOXATAG product, we expanded our commercial capabilities, with the addition of several sales and marketing personnel, using a significant portion of the proceeds raised in our September 2008 private placement offering. The expansion of our sales infrastructure will also require substantial resources, which may divert the attention of our management and key personnel and defer our product development efforts. We filled all 30 district sales manager positions and 271 territory manager positions, and we have been actively creating a distribution channel for our drugs both in the commercial market and managed care market. Our sales force has had no experience selling our products and they may not be successful. In the event any of our other products or product candidates are approved by the FDA, we may have to expand our sales and marketing personnel, which could divert the attention of management and have a material adverse affect on other areas of our business, These efforts may not be successful and cause a delay in product sales and increased costs.

 

Our KEFLEX 750 mg product may not be successful.

 

We launched our KEFLEX 750 mg product in July 2006. While we have invested considerable resources in the launch of this product, to date, sales have not met our expectations. We had previously anticipated that this product would generate revenues in excess of related expenses and would contribute additional cash flow to help fund our other operations. During 2007 and 2008, we reduced the number of contract sales representatives and marketing costs associated with KEFLEX 750 mg in order to more closely match the monthly sales level. The extent to which this product is accepted by physicians is dependent upon a number of factors, including the recognition of the potential advantages over alternative generic dosage strengths of cephalexin, despite higher cost, and the effectiveness of our marketing and distribution capabilities. In addition, this product faces significant competition from other dosage strengths of cephalexin manufactured by generic pharmaceutical companies, as well as from other dosage strengths of immediate-release KEFLEX marketed by us. Although there is no current 750 mg dosage strength of generic cephalexin, the product is not protected by patents and we expect to have a limited window of opportunity to market this product, should generic pharmaceutical manufacturers choose to compete with us. Even if sales of this product increase in the short-term, we expect that the amount of revenues from this product could decline significantly within a few years due to competition from generic formulations of the product.

 

We rely upon a limited number of pharmaceutical wholesalers and distributors, which could impact our ability to sell our products.

 

We rely largely upon specialty pharmaceutical distributors and wholesalers to deliver our products to end users, including physicians, hospitals, and pharmacies. Product sales to three major pharmaceutical wholesalers, Cardinal Health Inc., McKesson Corporation and AmerisourceBergen Corporation, accounted for approximately 94% and 95% of our net revenue from KEFLEX in fiscal years ended December 31, 2007 and December 31, 2008, respectively. There can be no assurance that our distributors and wholesalers will adequately meet the market demand for our products. Given the high concentration of sales to certain pharmaceutical distributors and

wholesalers, we could experience a significant loss if one of our top customers were to cease buying our product(s), declare bankruptcy or otherwise become unable to pay its obligations to us.

 

The potential success of our products and product candidates, will be dependent upon successfully pricing the products in the marketplace.

 

While we believe that physicians make antibiotic prescribing decisions based primarily on efficacy, safety, and compliance, we also believe that, when deciding whether to prescribe a modified-release drug or its immediate release generic analog, physicians also weigh patient co-pay and patient preferences. As a result, we believe that price will be an important driver of the adoption of our products and product candidates. In addition, we believe it will be important to carefully manage resistance from payor organizations by pricing our products in such a way as to minimize the incremental payor cost burden relative to generic analogs. If our product pricing does not achieve significant market acceptance, the sales of our products will be significantly impacted and it could materially adversely affect our business, financial condition and results of operations.

 

Generic pricing plans, such as that implemented by Wal-Mart and other retailers, may affect the market for our products.

 

In September 2006, Wal-Mart began offering certain generic drugs at $4 per prescription and various other retailers currently offer generic drugs at similar prices or for free. Amoxicillin and cephalexin are on the list of drugs that retailers provide at $4 per prescription or less. Wal-Mart and many of these other retailers have significant market presence. As a result, there can be no assurance that Wal-Mart’s generic pricing plan, and/or similar plans adopted by others, will not have a material adverse effect on the market for our products.

 

Our immediate-release KEFLEX products are subject to therapeutic equivalent substitution, and our products are subject to Medicaid reimbursement and price reporting.

 

The cost of pharmaceutical products continues to be a subject of investigation and action by governmental agencies, legislative bodies and private organizations in the United States and other countries. In the United States, most states have enacted legislation requiring or permitting a dispensing pharmacist to substitute a generic equivalent to the prescribed drug. Federal legislation requires pharmaceutical manufacturers to pay to state Medicaid agencies prescribed rebates on drugs to enable them to be eligible for reimbursement under Medicaid programs. Federal and state governments continue to pursue efforts to reduce spending in Medicaid programs, including imposing restrictions on amounts agencies will reimburse for certain products. We also must give discounts or rebates on purchases or reimbursements of our products by certain other federal and state agencies and programs. Our ability to earn sufficient returns on our products will depend, in part, on the availability of reimbursements from third party payors, such as health insurers, governmental health administration authorities and other organizations and the amount of rebates payable under Medicaid programs.

 

We are dependent on our contract manufacturers and suppliers to provide us with active pharmaceutical ingredients and finished products.

 

We do not maintain commercial scale manufacturing facilities. Our KEFLEX products were manufactured for us by Patheon. We were informed that Patheon would be closing its Puerto Rico site that manufactures our KEFLEX product and that they would be willing to manufacture enough KEFLEX to meet our commercial needs for approximately 18 months. We received our final order of KEFLEX from Patheon in February 2008 and cannot guarantee that the amount of product received will meet our near term demand for KEFLEX. We are actively pursuing a third-party manufacturer to produce our current immediate-release KEFLEX products and to perform development work on our KEFLEX pulsatile development product. However, we cannot guarantee that we will be able to select a site and obtain approval from the FDA for a third-party manufacturing and development site. If we are unable to obtain approval, or if such approval is delayed, for a third-party manufacturing and development site for our current KEFLEX products and our KEFLEX PULSYS development product this could result in a significant disruption to our business, have a material adverse affect on our business, financial condition and results of operations.

MOXATAG is manufactured for us by Stada Production Ireland Limited, or SPI, previously known as the manufacturing division of Clonmel Healthcare Limited, a subsidiary of STADA Arzneimittel AG, pursuant to a contract manufacturing arrangement. Samples of our MOXATAG product are packaged by Almac Pharma Services Limited, or ALMAC, pursuant to a three-year packaging agreement. Although we believe that our finished MOXATAG product and samples could be potentially obtained from several suppliers, our applications for regulatory approval currently only identify SPI and ALMAC as our authorized sources for MOXATAG product and samples, respectively. In the event that SPI or ALMAC are unable to supply MOXATAG product and samples to us in sufficient quantities on a timely basis or at a commercially reasonable price, or in the event either of them breaches their agreement with us, or if SPI or ALMAC loses its regulatory status as an acceptable source, we would need to locate another source. A change to a supplier not previously approved or an alteration in the procedures or product provided to us by an approved supplier may require formal approval by the FDA before the product could be sold and could result in significant disruption to our business. These factors could limit our ability to sell MOXATAG and could materially adversely affect our business, financial condition and results of operations.

 

If the demand for our products increases and we are unable to increase manufacturing capacity or unable to obtain additional capacity on reasonable economic terms to meet that demand, our revenues and operating results may be negatively impacted. The addition of capacity on unfavorable terms could also affect our revenue and profitability. In addition, any damage to, or disruption at, our manufacturers’ facilities could halt production of our products and materially harm our business.

 

Reliance on third-party manufacturers entails risks, including but not limited to:

 

 

In the event of a supply disruption or a deterioration in our product quality from a third-party manufacturer, we would have to rely on alternative manufacturing sources or identify and qualify new manufacturers. We may not be able to identify or qualify new manufacturers in a timely manner or obtain a sufficient allocation of their capacity to meet our requirements. In addition, alternative vendors must comply with product validation and stability testing, which may involve additional manufacturing expense, delay in production or required regulatory approvals. Any resulting delays in meeting demand could negatively impact our inventory levels, sales, profitability, and reputation.

 

A limited number of manufacturers operating under cGMP regulations are capable of manufacturing amoxicillin and cephalexin to our specifications. We may be unable to utilize alternative manufacturing sources for these active pharmaceutical ingredients, or APIs, or to obtain such manufacturing on commercially reasonable terms or on a timely basis. Any transfer of our sources of supply to other manufacturers will require the satisfaction of various regulatory requirements, which could cause us to experience significant delays in receiving adequate supplies of API for use in our products. Any delays in the manufacturing process may adversely impact our ability to meet commercial demand on a timely basis, which would negatively impact our revenues, reputation and business strategy.

 

In addition, we obtain APIs and finished products from certain specialized manufacturers for use in clinical studies. Although the antibiotics and finished products we use in our clinical studies may generally be obtained from several suppliers, the loss of a supplier could result in delays in conducting or completing our clinical trials and could delay our ability to commercialize products.

 

All of our manufacturing operations are located outside of the U.S., which exposes us to additional business risks that may cause our profitability to decline.

 

SPI and ALMAC will manufacture and package MOXATAG product and samples in their respective facilities in Ireland. Our costs associated with SPI are denominated in euros, or EUR, and those of ALMAC are in British pound sterling, or GBP. We are therefore exposed to fluctuations in the exchange rates between the U.S. dollar, or

USD, and the EUR and GBP, which could have an adverse effect on our financial results. In addition, we may be subject to the laws and regulations of local authorities. These laws and regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.

 

We are currently in the process of selecting a third party manufacturer for our KEFLEX products. We believe this manufacturer will be located overseas, and the costs for the manufacturer will be denominated in a foreign currency, which exposes us to currency risk. In addition, we may be subject to separate laws and regulations of local authorities. These laws and regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.

 

Fluctuations in exchange rates and changes in applicable foreign laws and regulations could have an adverse effect on our business, financial condition, or results of operations.

 

Our ability to conduct clinical trials will be impaired if we fail to qualify our clinical supply manufacturing facility and we are unable to maintain relationships with current clinical supply manufacturers or enter into relationships with new manufacturers.

 

We currently rely on several contractors to manufacture product for our clinical studies. We believe that there are a variety of manufacturers that we may retain to produce these products. However, once we retain a manufacturing source, if we are unable to maintain our relationship with such manufacturer, qualifying a new manufacturing source will be time consuming and expensive and may cause delays in the development of our products.

 

Clinical trials for our product candidates may be delayed due to our dependence on third parties for the conduct of such trials.

 

We have limited experience in conducting and managing clinical trials. We rely, and will continue to rely, on third parties, including contract research organizations and outside consultants, to assist us in managing and monitoring clinical trials. Our reliance on these third parties may result in delays in the completion of, or the failure to complete, these trials if they fail to perform their obligations under our agreements with them.

 

Our success may depend on our ability to successfully attract and retain collaborative partners.

 

For certain product candidates, we may enter into collaborative arrangements with third parties. Collaborations may be necessary in order for us to:

 

 

We cannot assure you that we will be able to enter into collaborative agreements with partners on terms favorable to us, or at all, and any future agreement may expose us to risks that our partner might fail to fulfill its obligations and delay commercialization of our products. We also could become involved in disputes with partners, which could lead to delays in or terminations of our development and commercialization programs and time-consuming and expensive litigation or arbitration. Our inability to enter into additional collaborative arrangements with other partners, or our failure to maintain such arrangements, may limit the number of product candidates we can develop and ultimately, decrease our sources of any future revenues.

 

If we cannot enter into new licensing arrangements or otherwise gain access to products, our ability to develop a diverse product portfolio could be limited.

 

A component of our business strategy may involve in-licensing or acquiring drug compounds developed by other pharmaceutical and biotechnology companies or academic research laboratories that may be marketed and developed or improved upon using our novel technologies. Competition for promising compounds can be intense, and currently we have not entered into any arrangement to license or acquire any drugs from other companies, other

than Eli Lilly. If we are not able to identify licensing or acquisition opportunities or enter into arrangements on acceptable terms, we may be unable to develop a diverse portfolio of products. Any product candidate that we acquire may require significant additional research and development efforts prior to seeking regulatory approval and commercial sale, including extensive preclinical and/or clinical testing. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be safe, non-toxic and effective or approved by regulatory authorities. In addition, we cannot assure you that any approved products that we develop or acquire will be: manufactured or produced economically; successfully commercialized; widely accepted in the marketplace or that we will be able to recover our significant expenditures in connection with the development or acquisition of such products. In addition, proposing, negotiating and implementing an economically viable acquisition is a lengthy and complex process. Other companies, including those with substantially greater financial, sales and marketing resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all. In addition, if we acquire product candidates from third parties, we may be dependent on third parties to supply such products to us for sale. We could be materially adversely affected by the failure or inability of such suppliers to meet performance, reliability and quality standards.

 

We could be forced to pay substantial damage awards if product liability claims that may be brought against us are successful.

 

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims and financial losses resulting from the use or sale of our products. We have obtained limited product liability insurance coverage for our clinical trials, which we believe is adequate to cover our present activities. However, such insurance may not be adequate to cover any claims made against us. In addition, we may not be able to obtain or maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.

 

Risks Related to Our Industry

 

Any inability to protect our intellectual property could harm our competitive position.

 

Our success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate our competitive advantage. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these foreign countries.

 

The patent positions of pharmaceutical and biotechnology companies, including our patent positions, involve complex legal and factual questions and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that we cover our proprietary technologies with valid and enforceable patents or we effectively maintain such proprietary technologies as trade secrets. We will apply for patents covering both our technologies and product candidates as we deem appropriate. We may fail to apply for patents on important technologies or products in a timely fashion, or at all, and in any event, the applications we do file may be challenged and may not result in issued patents. Any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, if challenged, our patents may be declared invalid. Even if valid, our patents may fail to provide us with any competitive advantages.

 

We rely upon trade secrets protection for our confidential and proprietary information. We have taken measures to protect our proprietary information; however, these measures may not provide adequate protection. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may

independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.

 

If we are unable to protect the intellectual property rights related to our brands, our ability to compete effectively in the markets for our products and our business could be negatively impacted.

 

A significant part of our business strategy is to position MOXATAG and our KEFLEX line of products as preferred brands for relief of tonsillitis and/or pharyngitis secondary to Streptococcus pyogenes , and skin and skin structure infections, respectively. We believe that familiarity with our brands is an important competitive advantage and that the growth and sustainability of our market share for our product lines will depend to a significant extent upon the goodwill associated with our related trademarks, trade names and copyrights. We intend to use the trademarks and trade names on our products to convey that the products we sell are “brand name” products, and we believe consumers and physicians will ascribe value to our brands. We own the material trademark and trade name rights used in connection with the packaging, marketing and sale of our products. This ownership prevents our competitors or new entrants to the market from using our brand names. Therefore, we view trademark and trade name protection as critical to our business. Although most of our trademarks are registered in the United States, we may not be successful in asserting trademark or trade name protection. If we were to lose the exclusive right to use the MOXATAG or KEFLEX brand name or other brand names we establish or acquire in the future, our sales and operating results could be materially and adversely affected. We could also incur substantial costs to prosecute legal actions relating to the use of our trademarks and trade names, which could have a material adverse effect on our business, results of operations or financial condition.

 

Additionally, other parties may infringe on our property rights in our trademarks and trade names, which may dilute the value of our brands in the marketplace. Our competitors may also introduce brands that cause confusion with our brands in the marketplace, which could adversely affect the value that our customers associate with our brands and thereby negatively impact our sales. Any such infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect those rights through litigation or otherwise. In addition, third parties may assert claims against our trademark and trade name rights, and we may not be able to successfully resolve these claims. In such event, we may lose our ability to use the brand names that are the subject of these claims, which could have a material adverse impact on our sales and operating results. We could also incur substantial costs to defend even those claims that are not ultimately successful, which could materially adversely affect our business, results of operations or financial condition.

 

Legal proceedings or third party claims of intellectual property infringement may require us to spend time and money and could prevent us from developing or commercializing products.

 

Our technologies, products or potential products in development may infringe rights under patents or patent applications of third parties. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing, or sales of the product or product candidate that is the subject of the suit.

 

As a result of patent infringement claims, or to avoid potential claims, we may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly.

 

The pharmaceutical industry has experienced substantial litigation and other proceedings regarding patent and other intellectual property rights. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights

with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

 

If we do not compete successfully in the development and commercialization of products and keep pace with rapid technological change, we will be unable to capture and sustain a meaningful market position.

 

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. While we are not aware of any company using rapid bursts of antibiotics as a treatment method, there are numerous companies actively engaged in the research and development of anti-infectives.

 

Our main competitors are:

 

 

Many of these competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborative partners, have significantly greater experience than we do in:

 

 

Developments by others may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses of products or technology. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours.

 

If we experience delays in obtaining regulatory approvals, or are unable to obtain or maintain regulatory approvals, we may be unable to commercialize any products.

 

Our product candidates are subject to extensive and rigorous domestic government regulation as described more fully under Item 1. Business- “ Government Regulation ” in this Annual Report on Form 10-K. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. If we or our manufacturers fail to comply with those regulations, we could become subject to significant penalties or claims, which could materially and adversely affect our operating results or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may adversely affect our revenue and the marketing of our products. If our products are marketed abroad, they will

also be subject to extensive regulation by foreign governments. None of our PULSYS product candidates have been approved for sale in any foreign market. The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. The actual time required for satisfaction of FDA pre-market approval requirements may vary substantially based upon the type, complexity and novelty of the product or the medical condition it is intended to treat. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon a manufacturer’s activities. Delays in obtaining regulatory approvals may:

 

 

Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Of the large number of drugs in development, only a small percentage result in the submission of a NDA to the FDA, and the FDA approves even fewer for commercialization.

 

Any required approvals, once obtained, may be withdrawn. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, we may encounter difficulties including:

 

 

We may need to successfully address a number of challenges in order to complete the development of our future products. For example, to obtain marketing approval for a new product candidate, we and our third-party manufacturers will be required to demonstrate that we can consistently produce the product in commercial quantities and of specified quality on a repeated basis. This requirement is referred to as process validation. If we are unable to satisfy this process validation requirement for a future product candidate, through our third party manufacturers or otherwise, we will not receive approval to market such product.

 

In addition, the FDA and other regulatory agencies may apply new standards for safety, manufacturing, packaging, and distribution of future product candidates. Complying with such standards may be time consuming or expensive and could result in delays in our obtaining marketing approval for future product candidates, or possibly preclude us from obtaining such approval. Such a delay could also increase our commercialization costs, possibly materially.

 

Furthermore, our future products may not be effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use. Even if we do obtain regulatory approval, such regulatory approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such product.

 

We may rely on future collaborative partners to file investigational new drug applications and generally direct the regulatory approval process for some of our products. These collaborative partners may not diligently conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, we or our collaborative partners will experience delays in, or be precluded from, marketing products developed through our research.

 

We and our contract manufacturers are also required to comply with applicable FDA cGMP regulations. cGMP regulations include requirements relating to quality control and quality assurance as well as the

corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our products. We or our contract manufacturers may not be able to comply with the applicable cGMP requirements and other FDA regulatory requirements. If we or our contract manufacturers fail to comply, we could be subject to fines or other sanctions, or be precluded from marketing our products. Furthermore, if the FDA implements additional regulations with which we and our third party manufacturers have to comply, our expenses would increase.

 

Furthermore, our failure to comply with the FDA, U.S. Federal Trade Commission or state regulations relating to our product claims and advertising may result in enforcement actions and imposition of penalties or otherwise materially and adversely affect our marketing strategy and product sales.

 

The manufacture and storage of pharmaceutical and chemical products is subject to environmental regulation and risk.

 

Because of the chemical ingredients of pharmaceutical products and the nature of their manufacturing process, the pharmaceutical industry is subject to extensive environmental regulation and the risk of incurring liability for damages or the costs of remedying environmental problems. We use a number of chemicals and drug substances that can be toxic. These chemicals include acids, solvents and other reagents used in the normal course of our chemical and pharmaceutical analysis, and other materials, such as polymers, inactive ingredients and drug substances, used in the research, development and manufacture of drug products. If we fail to comply with environmental regulations to use, discharge or dispose of hazardous materials appropriately or otherwise to comply with the conditions attached to our operating licenses, the licenses could be revoked and we could be subject to criminal sanctions and/or substantial liability or could be required to suspend or modify our operations.

 

Environmental laws and regulations can require us to undertake or pay for investigation, clean-up and monitoring of environmental contamination identified at properties that we currently own or operate or that we formerly owned or operated. Further, these laws and regulations can require us to undertake or pay for such actions at offsite locations where we may have sent hazardous substances for disposal. These obligations are often imposed without regard to fault. In the event we are found to have violated environmental laws or regulations, our reputation will be harmed and we may incur substantial monetary liabilities. We currently have insurance coverage that we believe is adequate to cover our present activities. However, this insurance may not be available or adequate to cover any losses arising from contamination or injury resulting from our use of hazardous substances.

 

Our current and future products may be associated with certain transient side effects. If we or others identify additional, more severe side effects associated with our current or future products, we may be required to withdraw our products from the market, perform lengthy additional clinical trials or change the labeling of our products, any of which would hinder or preclude our ability to generate revenues.

 

Our current cephalexin-based products may be associated with mild and transient side effects including diarrhea, dyspepsia, gastritis, and abdominal pain. Our amoxicillin-based product may be associated with vulvovaginal myotic infection, diarrhea, nausea, vomiting, abdominal pain and headaches.

 

If we or others identify side effects after any of our products are on the market:

 

 

Any of these events could harm or prevent sales of the affected products or could substantially increase the costs and expenses of commercializing or marketing these products, which would adversely affect our results of operations and financial position.

 

Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payors.

 

The commercial success of our products and product candidates will depend in part on the availability of reimbursement from third-party payors, including government health administrators, managed care providers and private health insurers. We cannot assure you that third-party payors will consider our products cost-effective or provide reimbursement in whole or in part for their use.

 

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Third-party payors may conclude that our products are less safe, effective or cost-effective than existing products. Therefore, third-party payors may not approve our products for reimbursement.

 

If third-party payors do not approve our products for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, reimbursement levels may not be sufficient for us to realize an appropriate return on our investment in product development.

 

Moreover, the trend toward managed healthcare in the U.S., the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products. In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals, they could materially adversely affect our business, financial condition and results of operations.

 

Potential regulatory changes, and the billing and reimbursement process applicable to underlying conditions may cause price erosion and reduce sales revenue for our products, and our products may not be accepted by healthcare providers.

 

Government and private healthcare programs currently are under financial stress due to overall medical cost increases. Federal and state governments are taking steps to ease the burden on healthcare programs in ways that could affect the pricing of pharmaceuticals. Any such federal and state laws and regulations can have a negative impact on the pricing of prescription drugs, including Medicare, Medicaid, pharmaceutical importation laws and other laws and regulations that directly or indirectly impose controls on pricing.

 

Market acceptance of our products may depend on the availability of reimbursement by government and private third-party payors. In recent years, there have been numerous proposals to change the healthcare system in the United States. The growth of managed care organizations, or MCOs (e.g., medical insurance companies, medical plan administrators, hospital alliances and pharmaceutical benefit managers) has placed increased pressure on drug prices and on overall healthcare expenditures. MCOs and government and other private third-party payors increasingly are attempting to contain health care costs by limiting both the coverage and the level of reimbursement for drug products. Consequently, the reimbursement status of our products is highly uncertain, and we cannot assure that third-party coverage will be available or that available third-party coverage or payment will be adequate.

 

Other Risks

 

Future sales of our common stock, or the perception that these sales may occur, could depress our stock price.

 

Sales of substantial amounts of our common stock in the public market, or the perception in the public markets that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Selling of a large number of shares by any of our existing shareholders or management shareholders could cause the price of our common stock to decline.

In September 2008, we issued and sold 30,303,030 shares of common stock and a warrant to acquire up to 12,121,212 additional shares of common stock at an exercise price of $3.90 per share to EGI-MBRK, L.L.C. In January 2008, we completed a private placement of 8,750,001 shares of common stock and warrants to acquire up to 3,500,001 shares of common stock at a price of $3.00 per unit. In April 2007, we completed a private placement of 10,155,000 shares of common stock and warrants to purchase 7,616,250 shares of common stock, at a price of $2.36375 per unit. In December 2006, we completed a private placement of 6,000,000 shares of common stock. In April 2005, we completed a private placement of 6,846,735 shares of our common stock and warrants to purchase a total of 2,396,357 shares of common stock at an exercise price of $4.78 per share.

 

We have registered approximately 15,817,679 and 4,500,000 shares of common stock that are authorized for issuance under our Stock Incentive Plan and New Hire Stock Incentive Plan, respectively. As of March 1, 2009, options to purchase 16,608,379 shares were outstanding, 3,883,293 of which are vested and exercisable. Because they are registered, the shares authorized for issuance under our stock plans can be freely sold in the public market upon issuance, subject to the restrictions imposed on our affiliates under Rule 144.

 

We could be forced to pay liquidated damages if we do not maintain the effectiveness of our S-3 registration statements.

 

Pursuant to the terms of the registration rights agreements for each of the private placement transactions described directly above, we filed with the SEC shelf registration statements on Form S-3 covering resales of common stock. The registration rights agreement in each transaction provides that if we do not maintain the effectiveness of the registration statement, then in addition to any other rights the investor may have, we will be required to pay the investor liquidated damages in cash.

 

A small number of stockholders have significant influence over our business, and the interests of those stockholders may not be consistent with the interests of our other stockholders.

 

EGI currently beneficially owns an aggregate of 43.05% of our outstanding common stock (assuming the exercise of its outstanding warrant to acquire 12,121,212 shares of our common stock). William C. Pate, a member of our board, is the Chief Investment Officer and a Managing Director of Equity Group Investments, L.L.C., an affiliate of EGI, and Mark Sotir, a member of our board, is also a Managing Director of Equity Group Investments, L.L.C. Neither Mr. Pate nor Mr. Sotir share beneficial ownership with EGI of any shares of our common stock. Affiliates of Healthcare Ventures currently beneficially own an aggregate of 14.95% of our outstanding common stock. James H. Cavanaugh and Harold R. Werner, members of our board of directors, are general partners of HealthCare Ventures. Affiliates of Rho Ventures currently beneficially own an aggregate of 7.80% of our outstanding common stock. Martin A. Vogelbaum, a member of our board, is a member of the general partner of Rho Ventures. Accordingly, these stockholders are able to exert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, as well as over the day-to-day management of our business. These stockholders may direct our affairs in a manner that is not consistent with the interests of our other stockholders. In addition, this concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination or a sale of all or substantially all of our assets.

 

Our certificate of incorporation and provisions of Delaware law could discourage a takeover you may consider favorable or could cause current management to become entrenched and difficult to replace.

 

Provisions in our certificate of incorporation and Delaware law may have the effect of delaying or preventing a merger or acquisition, or making a merger or acquisition less desirable to a potential acquirer, even when the stockholders may consider the acquisition or merger favorable. Under the terms of our certificate of incorporation, we are authorized to issue 25.0 million shares of “blank check” preferred stock, and to determine the price, privileges, and other terms of these shares. The issuance of any preferred stock with superior rights to our common stock could reduce the value of our common stock. In particular, specific rights we may grant to future holders of preferred stock could be used to restrict an ability to merge with or sell our assets to a third party, preserving control by present owners and management and preventing you from realizing a premium on your shares.

In addition, we are subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. These provisions could affect our stock price adversely.

 

The price of our common stock has been and will likely continue to be volatile.

 

Prior to our October 2003 initial public offering, there was no public market for our common stock. The initial public offering price of our common stock was $10.00 per share. Since our initial public offering, the price of our common stock has been as high as $10.30 and as low as $0.86 per share. Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

 

We may undertake strategic acquisitions of technologies and products. Integration of such technologies and products will involve a variety of costs, and we may never realize the anticipated benefits of such acquisitions.

 

We intend to pursue opportunities to acquire technologies, brands and products that would allow us to leverage our professional field sales force or our marketing and development expertise or enhance our product portfolio or brand recognition in the prescription market. We have limited experience in identifying and completing such acquisitions. Further, acquisitions typically entail many risks, including risks related to the integration of the technologies and products. In attempting to integrate such technologies and products, we may experience unexpected integration costs and delays, which may divert management and employee attention and disrupt our ability to develop and introduce new products. If we are not able to successfully integrate our acquisitions, we may not be able to realize the intended benefits of the acquisition.

 

As a result of acquiring products or entering into other significant transactions, we will likely experience, significant charges to earnings for acquisitions and related expenses, including transaction costs, closure costs or acquired in-process product development charges. These costs may include substantial fees for investment bankers, attorneys, accountants, and financial printing costs. Charges that we may incur in connection with acquisitions could adversely affect our results of operations for particular quarterly or annual periods. In addition, we may lack the required funds or resources to carry out such acquisitions.

 

We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our marketing and development programs and other operations.

 

We will require substantial funds to commercialize our products, launch new products, promote our brands, and conduct development, including preclinical testing and clinical trials, of our potential products. We believe that our existing cash, coupled with cash flow from product sales, will be sufficient to fund our anticipated levels of operations through at least the next 12 months. However, our future capital requirements will depend on many factors, including:

 

 

Additional financing may not be available to us when we need it or on favorable terms, especially during the unfavorable economic conditions that currently exist and that may exist in the future. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail one or more of our marketing, development, licensing, or acquisition programs. We could be required to seek funds through arrangements with others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience dilution and the terms of any new equity securities may have preferences over our common stock.

 

 

None.

 

 

We currently lease the following space:

 

 

We currently occupy approximately 15,000 square feet of office space in our Germantown, Maryland facilities and are actively marketing the excess space. We believe that our facilities are suitable and adequate to meet our current needs.

 

 

We are not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to our business, except as discussed below.

 

In August 2007, Eli Lilly and Company provided notice of a legal matter relating to KEFLEX to us. A product liability claim was filed by Jamie Kaye Moore against Eli Lilly, Teva Pharmaceuticals, Inc. and Teva Pharmaceuticals Industries Ltd. on March 28, 2007. The claim alleges injury from ingestion of some form of KEFLEX. Lilly has determined through discovery that Ms. Moore did not take branded KEFLEX but rather took generic cephalexin manufactured by codefendant Teva. Lilly filed a Motion for Summary Judgment on the grounds that plaintiff did not take a Lilly product. That motion was denied without prejudice to its refiling. Lilly refiled its Motion for Summary Judgment after the close of discovery. As the matter remains unresolved, Lilly is not currently requesting indemnification from MiddleBrook.

 

In September 2008, Eli Lilly and Company provided notice of a legal matter relating to KEFLEX to us. A product liability claim was filed by the Estate of Jackie D. Cooper against Eli Lilly, Mylan Inc., f/k/a Mylan Laboratories, Inc., Mylan Bertek Pharmaceuticals, Inc. and Mylan Pharmaceuticals, Inc. on August 7, 2008. The claim alleges injury from ingestion of some form of “Phenytoin” and/or “KEFLEX.” Lilly has filed preliminary objections to the complaint, and has also requested prescription and other records, in order to determine whether the plaintiff ingested brand or generic cephalexin and which manufacturer might be involved. Since the identity of the manufacturer is not known, Lilly is not currently requesting indemnification from us.

 

 

No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2008.

 

 

 

Market Information

 

Our common stock has been traded on The NASDAQ Global Market, or NASDAQ under the symbol MBRK (previously, AVNC until June 29, 2007) since July 3, 2006. Prior to the creation of the NASDAQ Global Market, our common stock traded on the NASDAQ National Market. Our common stock began trading on the NASDAQ National Market on October 17, 2003 upon our initial public offering. The following table sets forth the quarterly high and low sales prices per share of our common stock as reported by NASDAQ for each quarter during the last two fiscal years, commencing on January 1, 2007:

 

 

Holders

 

As of March 10, 2009, there were 117 holders of record of our common stock. This figure does not represent the actual number of beneficial owners of our common stock because shares are generally held in “street name” by securities dealers and others for the benefit of individual owners who may vote the shares.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock. We intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant.

 

Recent Sales of Unregistered Securities

 

On January 24, 2008, we entered into a securities purchase agreement for the private placement of 8,750,001 shares of common stock and warrants to acquire up to 3,500,001 additional shares of our common stock. We filed a registration statement on Form S-3 covering the resale of our common stock and the common stock to be acquired upon exercise of the warrants. The registration statement was declared effective by the SEC on February 11, 2008.

 

On September 4, 2008, pursuant to a securities purchase agreement entered into on July 1, 2008, we issued and sold in a private transaction 30,303,030 shares of common stock and a warrant to acquire up to 12,121,212 additional shares of our common stock. We filed a registration statement on Form S-3 covering the resale of our common stock and the common stock to be acquired upon exercise of the warrants. The registration statement was declared effective by the SEC on November 24, 2008.

Corporate Performance Graph

 

The following Performance Graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it be reference into such filing.

 

The following graph shows the cumulative total return resulting from a hypothetical $100 investment in our common stock on December 31, 2003, through December 31, 2008. MiddleBrook stock price performance over this period is compared to the same amount invested in the Nasdaq Stock Market (U.S.) Index and the Nasdaq Pharmaceutical Index over the same period (in each case, assuming reinvestment of dividends). This graph is presented as required by SEC rules. Past performance might not be indicative of future results. While total stockholder return can be an important indicator of corporate performance, we believe it is not necessarily indicative of our corporation’s degree of success in executing our business plan, particularly over short periods.

 

 

Equity Compensation Plan Information

 

The following table provides information with respect to the equity securities that are authorized for issuance under our equity compensation plans as of December 31, 2008.

 

 

 

 

 

The following selected financial information has been derived from the audited financial statements. The information below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K and the financial statements and related notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below.

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the related notes included elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements, the accuracy of which involves risks and uncertainties. As a result of many factors, such as those set forth under the “Forward-Looking Statements” and “Risks Related to our Business” sections in Part 1, Item 1 and elsewhere in this annual report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Our Business

 

MiddleBrook Pharmaceuticals, Inc. was incorporated in Delaware in December 1999 and commenced operations on January 1, 2000. We are a pharmaceutical company focused on developing and commercializing anti-infective drug products that fulfill unmet medical needs. We have developed a proprietary delivery technology called PULSYS, which enables the pulsatile delivery, or delivery in rapid bursts, of certain drugs. Our PULSYS technology can potentially offer the prolonged release and absorption of a drug. We believe that the pulsatile delivery of certain medicines can provide therapeutic advantages over current dosing regimens and therapies. We currently have 26 issued U.S. patents and four issued foreign patents covering our PULSYS technology which extend through 2020.

 

Our near-term corporate strategy is to improve dosing regimens and frequency of dosing which we believe will result in improved patient dosing convenience and compliance for antibiotics that have been used and trusted for decades. Initially we are focused on developing PULSYS product candidates utilizing approved and marketed drugs such as amoxicillin and cephalexin.

 

Our lead PULSYS product, based on the antibiotic amoxicillin, received U.S. Food and Drug Administration, or FDA, approval for marketing on January 23, 2008, under the trade name MOXATAG (amoxicillin extended-release) Tablets, 775 mg. MOXATAG is the first and only FDA-approved once-daily amoxicillin. It is approved for the treatment of pharyngitis/tonsillitis secondary to Streptococcus pyogenes , commonly known as strep throat, for adults and pediatric patients age 12 and older. On March 16, 2009, our 271-member field sales force and 30 district sales managers will begin detailing MOXATAG to approximately 40,000 primary care physicians and 16,500 pharmacies to help educate them on the benefits of MOXATAG. We believe these primary care physicians have traditionally written most of the prescriptions for antibiotic treatment of strep throats.

 

We have two additional PULSYS product candidates in clinical development. We are currently in the early stages of preparing for a Phase III clinical trial for our KEFLEX (cephalexin) PULSYS product candidate for the treatment of skin and skin structure infections. We believe the added convenience of improving cephalexin from its typical two-to-four times per day dosing regimen to a once-daily product represents an attractive commercial opportunity. Assuming the availability of funds, we also plan to conduct a Phase II trial to evaluate various dosing regimens of our amoxicillin pediatric PULSYS sprinkle product candidate, which is a sprinkle formulation utilizing the antibiotic amoxicillin for use in pediatric patients greater than two years old with pharyngitis/tonsillitis secondary to Streptococcus pyogenes .

 

We currently market certain drug products which do not utilize our PULSYS technology and which are not protected by any other patents. We acquired the U.S. rights to KEFLEX (cephalexin, USP), the immediate-release brand of cephalexin, from Eli Lilly in 2004. We currently sell our line of immediate-release KEFLEX products to wholesalers in capsule formulations, and received FDA marketing approval in May 2006 for two additional immediate-release KEFLEX capsule strengths, 333 mg and 750 mg; however, we only market the 750 mg capsules. Previously, the Innovex division of Quintiles Transnational Corporation, or Innovex, provided us with a contract sales force for the promotion of KEFLEX 750 mg capsules. However, in November 2008, we terminated our agreement with Innovex, and began to hire an internal dedicated 271-person sales force to prepare for the nationwide launch of MOXATAG in March 2009.

General

 

Our future operating results will depend largely on our ability to successfully commercialize our lead PULSYS product, MOXATAG; our KEFLEX 750 mg product; and our ability to develop our product candidates in clinical development, which is subject to our having adequate financial resources available. The results of our operations will vary significantly from year to year and quarter to quarter and depend on a number of factors, including risks related to our business, risks related to our industry, and other risks which are detailed in this Annual Report on Form 10-K.

 

Management Overview of the Key Developments in 2008

 

The following is a summary of key events that occurred during 2008.

 

Review of Strategic Alternatives Concluded in $100 Million Equity Investment

 

 

MOXATAG Approval

 

 

Orange Book Listing

 

 

Marketed Products — KEFLEX (Cephalexin, USP) 250 mg, 500 mg and 750 mg Capsules

 

 

Focus for 2009

 

Our primary focus for 2009 will be the commercial launch of our MOXATAG product for adults and pediatric patients 12 years and older, beginning March 16, 2009, along with the continued commercialization of our KEFLEX 750 mg capsules. We also need to continue to preserve cash prior to achieving commercial profitability and sustainable operating cash.

 

We also intend to work toward validating additional active pharmaceutical ingredient providers for our products and a new third-party manufacturer for our KEFLEX products.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

We recognize revenue for the sale of pharmaceutical products and for payments received, if any, under collaboration agreements for licensing, milestones, and reimbursement of development costs as follows:

 

Product Sales.   Revenue from product sales, net of estimated provisions, is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably probable. Our customers consist primarily of large pharmaceutical wholesalers who sell directly into the retail channel. Provisions for sales discounts, and estimates for chargebacks, service fees, rebates, and product returns are established as a reduction of product sales revenue at the time revenues are recognized, based on historical experience adjusted to reflect known changes in the factors that impact these reserves.

 

Product Returns.   In the pharmaceutical industry, customers are normally granted the right to return product for a refund if the product has not been used prior to its expiration date, which for our KEFLEX product is typically three years from the date of manufacture. Our return policy typically allows product returns for products within an eighteen-month window from six months prior to the expiration date and up to twelve months after the expiration date.

 

As of December 31, 2008 and 2007, the liability for product returns was $1.3 million and $1.4 million, respectively, and was recorded within Accrued expenses and other current liabilities on our consolidated balance sheet. The decreased liability balance is the result of fewer sales during 2008 compared to 2007, which we believe is due to the fewer sales representative detailing physicians about the benefits of KEFLEX 750 mg, due to the reduction of contract sales representatives from 75 in 2007 to 30 for most of 2008. We estimate the level of sales which will ultimately be returned pursuant to our return policy, and record a related reserve at the time of sale. These amounts are deducted from our gross sales to determine our net revenues.

 

Our estimates take into consideration historical returns of our products, estimated product in the trade channel, remaining time until expiration and our future expectations. We periodically review the reserves established for returns and adjust the reserves and estimates based on actual experience. The amount of actual product returns could be either higher or lower than the amounts accrued by us. Changes in our estimates would be recorded in the income statement in the period of the change. If we over or under estimate the quantity of product which will ultimately be returned, there may be a material impact to our financial statements. Based on historical experience, we have estimated and accrued approximately 6% of gross product sales for KEFLEX 750 mg and 7% for all other KEFLEX strengths to cover future product returns. Changing that accrual rate by one percentage point would result in an approximately $192,000 impact to our financial results by increasing or decreasing net sales. We have not had reason to make any material changes to the assumptions utilized in our returns estimate.

 

Distribution Service Fees.   Consistent with industry practice, we enter into distribution and inventory management agreements with our key wholesalers to provide incentives to effectively manage channel inventory and provide timely and accurate data with respect to inventory levels and data regarding sales activity.

 

The distribution service fees paid to each wholesaler are based on agreements and are unique to each wholesaler. Therefore, the reserve fluctuates based on the product mix and sales levels to each wholesaler. As of December 31, 2008 and 2007, the reserves for distribution service fees related to agreements with wholesalers were approximately $266,000 and $340,000, respectively, and were recorded as a reduction of gross accounts receivable. The decreased reserve balance compared to the prior year is the result of decreased sales combined with the timing of the deductions taken by wholesalers. The reserve is calculated and recorded as a reduction of gross sales at the time the product is sold but the deduction is taken by the wholesaler against a future payment. Based on the unique formula to record these fees for each wholesaler, there have been minimal adjustments to these balances.

Chargebacks and Rebates.   Chargebacks and rebates represent the difference between the prices at which we sell our products to wholesalers and the sales price ultimately paid under fixed price contracts by third-party payers, including governmental agencies. We record an estimate at the time of sale of the amount to be charged back to us or rebated to the end user.

 

As of December 31, 2008 and 2007, reserves for chargebacks were approximately $97,000 and $238,000, respectively, and recorded as a reduction of gross accounts receivable. The reserves for Medicaid rebates were approximately $67,000 and $183,000, respectively, for the same periods and were recorded within Accrued expenses and other current liabilities. The decreases in the reserve balance compared to prior year is driven by decreased sales in 2008 compared to 2007 combined with the timing of payment and deductions taken against the reserves and a review of historical experience.

 

We have recorded reserves for chargebacks and rebates based upon various factors, including current contract prices, historical trends, estimated inventory levels and our future expectations. The amount of actual chargebacks and rebates claimed could be either higher or lower than the amounts we have accrued. Changes in our estimates would be recorded in the income statement in the period of the change. The accrual rates for chargebacks and rebates are more predictable than for product returns due to the amount of the chargeback or rebate generally being based on contracted dollar amounts or percentages. Additionally, chargebacks and Medicaid rebates are typically accrued and paid out (or deducted by customers) within one to three fiscal quarters compared to product returns which could take up to three years subsequent to the date of sale. As a result of the more predictable nature of chargebacks and Medicaid rebates, we do not believe that the actual amounts claimed will be materially different than the amounts previously accrued and reflected in our financial statements.

 

Other Sales Allowances and Reserves.   We also record other sales allowances and reserves that reduce the total of our gross product revenue. These allowances and reserves include cash discounts, coupon redemption estimates and pricing discounts. Cash discounts are for prompt payments from customers and are estimated based on customer payment terms and historical experience. Cash discount reserves are recorded as an allowance against accounts receivable. Coupon redemptions are based on the specific terms of the coupon and timing and quantity of distribution combined with historical redemption rates. The reserve for coupon redemption is recorded as a liability within Accrued expenses and other current liabilities. Pricing discounts are based on the specific terms of each discount and are recorded at the time of the sale of such discounted product.

 

The following table shows the balances of liabilities and accounts receivable valuation accounts resulting from sales reserves and allowances at each balance sheet date:

 

 

 

 

For the years ended December 31, 2008 and 2007, 94.6% and 93.5%, respectively, of net sales were attributable to three customers: Cardinal Health, McKesson and AmerisourceBergen. As a result of this concentration of our sales among a few customers and the similarity of our KEFLEX products, we have been able to closely

monitor our reserves against sales and have made minimal adjustments to our assumptions to date. Therefore, most of our provisions made during 2008, 2007 and 2006 have been associated with products sold during the respective year. The following table summarizes the activity of accrued returns, distribution fees, chargebacks and other sales allowances:

 

 

Inventories

 

Inventory is stated at the lower of cost or market with cost determined under the first-in, first-out method. Inventory consists of KEFLEX finished capsules. We purchase our KEFLEX products from third-party manufacturers only at the completion of the manufacturing process, and accordingly have no raw material or work-in-process inventories. At least on a quarterly basis, we review our inventory levels and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. Inventory levels are evaluated by management relative to product demand, remaining shelf life, future marketing plans and other factors, and reserves for obsolete and slow-moving inventories are recorded for amounts which may not be realizable.

 

Foreign Exchange Forward Exchange Contracts

 

We have entered into three foreign currency forward exchange contracts to hedge forecasted inventory and sample purchase transactions that are subject to foreign exchange exposure to either the euro or British pound sterling. These instruments are designated as cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, No. 138 and No. 149, SFAS 133, and are recorded in our consolidated balance sheet at fair value in either other current assets (for unrealized gains) or other current liabilities (for unrealized losses).

 

We formally document our hedge relationships, including identifying the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking the hedge transaction. This process includes identifying the designated derivative to forecasted transactions. We also formally assess, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value of the hedged item. The maturities of the forward exchange contracts generally coincide with the settlement dates of the underlying exposure.

 

We do not use derivatives for trading purposes and restrict all derivative transactions to those intended for hedging purposes.

Intangible Assets

 

Acquired Intangible Assets.   We originally acquired the U.S. rights to the KEFLEX brand of cephalexin in 2004. During November 2007 we sold these rights to Deerfield and then reacquired them in September 2008. We may acquire additional pharmaceutical products in the future that include license agreements, product rights and other identifiable intangible assets. When intangible assets are acquired, we review and identify the individual intangible assets acquired and record them based on relative fair values. Each identifiable intangible asset is then reviewed to determine if it has a definite life or indefinite life, and definite-lived intangible assets are amortized over their estimated useful lives.

 

Impairment.   We assess the impairment of identifiable intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include significant underperformance compared to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of these factors, we first perform an assessment of the asset’s recoverability based on expected undiscounted future net cash flow, and if the amount is less than the asset’s value, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

 

Accrued Expenses

 

As part of the process of preparing financial statements, we are required to estimate accrued expenses for services performed and liabilities incurred. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated accrued expenses for services include professional service fees, such as lawyers and accountants; contract service fees, such as amounts paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials; fees paid to our contract sales organization; and fees paid to contract manufacturers in conjunction with the production of clinical materials. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us in accordance with GAAP. We also make estimates for other liabilities incurred, including health insurance costs for our employees. We used to be self-insured for claims made under our health insurance program and recorded an estimate at the end of a period for claims not yet reported. Our risk exposure is limited, as claims over a maximum amount are covered by an aggregate stop loss insurance policy.

 

Stock-Based Compensation

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” or SFAS 123R. We adopted SFAS 123R using the modified prospective transition method, which requires the recognition of compensation expense under the SFAS 123R on a prospective basis only. Accordingly, prior period financial statements were not restated. Under this transition method, stock-based compensation cost for the years ended December 31, 2008, 2007 and 2006 includes (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the fair value provisions of SFAS 123R.

 

SFAS 123R also requires us to estimate forfeitures in calculating the expense related to share-based compensation rather than recognizing forfeitures as a reduction in expense as they occur. To the extent actual

forfeitures differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. We plan to refine our estimated forfeiture rate as we obtain more historical data.

 

We determine the value of stock option grants using the Black-Scholes option-pricing model. Our determination of fair value of share-based payment awards on the date of grant 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 over the term of the awards and projected employee stock option exercise behaviors. This model requires that we estimate our future expected stock price volatility as well as the period of time that we expect the share-based awards to be outstanding.

 

 

Income Taxes

 

As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes by the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As required by FAS 109, income tax expense or benefit for the year is allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income, and items charged or credited directly to shareholders equity. Pursuant to this intraperiod allocation requirement, $174,498 of tax benefit has been allocated to the loss from continuing operations, and $174,498 of tax expense has been allocated to the unrealized gains that were recorded in other comprehensive income due to FAS 115 and FAS 133. We have not recorded any tax provision or benefit for the years ended December 31, 2007 and 2006. We have provided a valuation allowance for the full amount of our net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss carry forwards cannot presently be sufficiently assured. At December 31, 2008 and 2007, we had federal and state net operating loss carryforwards of approximately $186.3 million and $161.7 million, respectively, available to reduce future taxable income, which will begin to expire in 2020. Under the provisions of Sections 382 and 383 of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating loss and research and experimentation tax credit carry forwards which can be used in future years. During 2001, 2005 and 2008, we may have experienced such ownership changes.

In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” or SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We applied the provisions of FIN 48 effective January 1, 2007. The implementation of FIN 48 had no impact on our financial condition, results of operations, or cash flows, as we had no unrecognized tax benefits.

 

Warrants

 

Freestanding financial instruments, such as detachable warrants, must be evaluated under the authoritative accounting literature to determine whether they should be classified as assets or liabilities (derivative accounting), temporary equity, or permanent equity. Management initially evaluates whether the instruments are covered by SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150. If the instrument is not governed by SFAS 150, then management determines whether it meets the definition of a derivative under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” To determine whether a specific warrant agreement would follow derivative accounting under SFAS 133, management must first evaluate whether the warrant would meet the definition of equity under the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” or EITG 00-19. Financial instruments such as warrants that are classified as permanent or temporary equity are excluded from the definition of a derivative for purposes of SFAS 133. Financial instruments, including warrants, that are classified as assets or liabilities are considered derivatives under SFAS 133, and are marked to market at each reporting date, with the change in fair value recorded in the income statement.

 

Under EITF 00-19, contracts that require physical settlement or net-share settlement and contracts that give the issuer the choice of settlement (in cash or shares) are classified as equity. Contracts that require net-cash settlement or that give the counterparty a choice which includes net-cash settlement are classified as assets or liabilities, not equity. If a transaction is outside the control of the issuer and there is the possibility that the issuer could net-cash settle, then for purposes EITF 00-19 it is assumed that the issuer will have to net-cash settle, which may preclude accounting for a contract as equity of the company except in certain circumstances where the existing common stockholders would also receive cash.

 

Management’s judgment is required in evaluating the terms of freestanding instruments, such as warrants, and the application of authoritative accounting literature. In November 2007, we issued 3.0 million warrants to affiliates of Deerfield in connection with the sale and license of certain non-PULSYS KEFLEX tangible and intangible assets. The warrant agreement contains provisions for cash settlement under certain conditions, including a major asset sale or acquisition in certain circumstances, which is available to the warrant holders at their option. As a result, management concluded that the warrants should be classified as a liability at their contractual fair value in our consolidated balance sheet. These warrants were redeemed for cash on September 4, 2008, in accordance with the Deerfield Agreement dated July 1, 2008. All other warrants, including those issued to EGI in September 2008, are classified as equity based on the provisions of each warrant agreement.

 

Registration Payment Arrangements

 

We view a registration rights agreement containing a liquidated damages provision as a separate freestanding contract which has nominal value, and we have followed that accounting approach, consistent with FASB Staff Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,” or FSP No. EITF 00-19-2. Under this approach, the registration rights agreement is accounted for separately from the financial instrument. Under FSP No. EITF 00-19-2, registration payment arrangements are measured in accordance with SFAS No. 5, “Accounting for Contingencies.” Should we conclude that it is more likely than not that a liability for liquidated damages will occur, we would record the estimated cash value of the liquidated damages liability at that time.

Consolidation of Variable Interest Entities

 

FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities,” or FIN 46R, clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The usual condition for a controlling financial interest is ownership of a majority of voting interest; however, there may be situations where the controlling financial interest may be achieved through arrangements that do not involve voting interests.

 

Variable interest entities are entities that are subject to consolidation because they meet the provisions of FIN 46R. Management’s judgment is required in identifying potential variable interest entities and in evaluating the application of the provisions of FIN 46R to those potential variable interest entities. Paragraph 5 of FIN 46R specifies that an entity shall be subject to consolidation under FIN 46R if (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (b) the equity investment holders lack (1) the direct or indirect ability to make decisions about an entity’s activities, (2) the obligation to absorb the expected losses of the entity, or (3) the right to receive the expected residual returns of the entity. If management concludes that an entity is a variable interest entity under FIN 46R, an analysis must then be made to determine if there is a primary beneficiary, using either a qualitative or quantitative approach.

 

In accordance with FIN 46R, our management evaluated whether the Deerfield affiliates Kef and Lex are variable interest entities and, if so, whether there is a primary beneficiary with a controlling financial interest. Because MiddleBrook made the important decisions with respect to the ongoing activities involving the assets owned by Kef and Lex, the Kef and Lex entities were determined to be variable interest entities for this characteristic. Because we had a fixed price repurchase option, the equity holders in Kef and Lex did not have rights to all of the residual returns of the entities; accordingly Kef and Lex were determined to be variable interest entities for this characteristic. Management used a qualitative analysis to determine whether Deerfield or MiddleBrook was the primary beneficiary of the entities. MiddleBrook was determined to be the primary beneficiary, because it was the party exposed to the majority of the risks. Thus, we consolidated the financial condition and results of operations of Kef and Lex in accordance with FIN 46R.

 

In connection with the EGI Transaction, we repurchased those certain KEFLEX assets previously sold to Kef and Lex in November 2007 by purchasing all of the outstanding capital stock of both Kef and Lex. Accordingly, subsequent to September 4, 2008, we no longer eliminate the noncontrolling interest of Kef and Lex from our consolidated financial condition and results of operations.

 

Recent Accounting Pronouncements

 

In June 2007, the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” or EITF 07-03. EITF 07-03 concludes that nonrefundable advance payments for future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. This consensus is effective for fiscal years beginning after December 15, 2007. Adoption of EITF 07-03 did not have a material effect on our results of operations and financial condition.

 

In December 2007, the EITF reached a consensus on EITF Issue No. 07-01, “Accounting for Collaborative Arrangements, ” or EITF 07-01. EITF 07-01 requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (or made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. In addition, a participant in a collaborative arrangement should provide the following disclosures separately for each collaborative arrangement: (a) the nature and purpose of the arrangement, (b) its rights and obligations under the collaborative arrangement, (c) the accounting policy for the arrangement in accordance with APB Opinion 22, “Disclosure of Accounting

Policies,” and (d) the income statement classification and amounts arising from the collaborative arrangement between participants for each period an income statement is presented. EITF 07-01 will be effective for annual periods beginning after December 15, 2008. Adoption of EITF 07-01 is not expected to have a material effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” or SFAS 141R, which is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired in the business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R will be applied prospectively. We will adopt SFAS 141R prospectively on January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” or SFAS 160. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 also requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 will be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The adoption of SFAS 160 is not expected to have a material effect on our results of operations and financial condition.

 

In February 2008, the FASB issued a FASB Staff Position, or FSP, to defer the effective date of SFAS No. 157, “Fair Value Measurements,” or SFAS 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The delay is intended to provide the FASB additional time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. We are currently evaluating the effect that the adoption of SFAS 157 will have on our results of operations and financial condition.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133,” or SFAS 161. SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective as of January 1, 2009. We are currently assessing the impact of SFAS 161 on our consolidated financial statements.

 

Research and Development Expenses

 

We expect our research and development expenses to be significant as we continue to develop our product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, development costs for contract manufacturing prior to FDA approval of products, costs of materials required to validate the manufacturing process and prepare for commercial launch, depreciation of capital resources used to develop our products, and other costs of facilities. We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these investments, assuming sufficient financial resources are available, in order to be in a position to realize the potential of our product candidates and proprietary technologies.

 

Summary of Product Development Initiatives.   The following table summarizes our product development initiatives for the fiscal years ended December 31, 2008, 2007 and 2006. Included in this table is the research and

development expense recognized in connection with each product candidate currently in clinical development and all preclinical product candidates as a group.

 

See Item 1. Business Section: “Our Product Pipeline” above for our current priority product candidates.

 

 

 

 

Net Losses

 

We have a limited history of operations. We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, including the progress of our research and development efforts, the approval and commercial launch of new products, and the timing and outcome of regulatory approvals. Our limited operating history makes predictions of future operations difficult or impossible. Since our inception, we have incurred significant losses. As of December 31, 2008, we had an accumulated deficit of approximately $236.9 million. We anticipate incurring additional annual operating losses in 2009 and into 2010.

Results of Operations

 

Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007

 

Revenues.   We recorded revenues of $8.8 million during the fiscal year ended December 31, 2008 compared to $10.5 million during the fiscal year ended December 31, 2007, composed of KEFLEX product sales as follows:

 

 

Net sales of KEFLEX decreased 15% during 2008 compared to 2007 while units sold decreased 24%. A price increase during October 2007 helped partially offset the impact of declining units sold on our net revenue. We believe the primary driver of the decreased sales is fewer prescriptions being written as a result of fewer physicians being detailed about the benefits of KEFLEX 750 mg by our contract sales representatives. In order to reduce expenses, we decreased our contract sales force from 75 in 2007 to 30 during 2008. The contract for the sale force was terminated in November 2008.

 

Cost of Product Sales.   Cost of product sales represents the purchase cost of the KEFLEX products sold during the year, provisions for obsolescence, as well as royalties, if applicable. The following table discloses the major components of cost of product sales:

 

 

The decrease in product manufacturing costs during the year reflects the decrease in units sold during 2008 compared to 2007, partially offset by an increase in cost per unit across all products. The royalty to Eli Lilly also reflects the decrease in sales during 2008 as the royalty is calculated based on sales of KEFLEX 750 mg. The decrease in the obsolescence provision is due to a large provision recorded in 2007 to cover excess inventory of KEFLEX 750 mg after initial sales forecasts were lowered resulting in slow-moving inventory. Most of this excess inventory was destroyed in 2008. Obsolescence provisions result from projections of future sales compared to inventory levels, and a determination that a portion of inventory may not be sold prior to expiration date.

 

Consignment and royalty payments we owed to Kef and Lex based on sales of all KEFLEX non-PULSYS products are eliminated in the consolidated statement of operations in accordance with FIN 46R. These payments approximated $1.0 million from January 1, 2008 through September 4, 2008, and $0.3 million for the period from November 8, 2007 through December 31, 2007, the periods during which we consolidated Kef and Lex under the provisions of FIN 46R.

 

Research and Development Expenses.   Research and development expenses decreased $2.9 million, or 13%, to $19.1 million for the fiscal year ended December 31, 2008 from $22.0 million for the fiscal year ended December 31, 2007. Research and development expenses consist of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects, as well as clinical studies and manufacturing validation in advance of commercial launch of MOXATAG. Indirect research and development costs include facilities, depreciation, and other indirect overhead costs.

The following table discloses the components of research and development expenses reflecting our project expenses.

 

 

Personnel, benefits and related costs decreased $2.9 million, or 43%, during the year ended December 31, 2008 compared to 2007 as a result of lower headcount due to expense reductions. The lower headcount also drove lower stock-based compensation expense for the period.

 

Consultants, supplies, materials and other direct costs also dropped significantly from $6.5 million to $2.9 million, or 56%, due to reduced research and development activity as we prepared for the commercial launch of MOXATAG. The 2007 activity primarily related to our contract manufacturer’s facility modifications in Clonmel, Ireland that were completed by the end of 2007. The 2008 activity relates to the manufacturing and validation activities to prepare for commercial supply.

 

Indirect project costs increased by $4.0 million, primarily due to costs related to our ceasing to use parts of our Germantown, Maryland research facilities, including loss on sales of assets, impairment of leasehold improvements and accelerated expense associated with the lease. These additional expenses more than offset reductions in other indirect costs.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses decreased $1.7 million, or 6%, to $24.4 million for the year ended December 31, 2008 from $26.0 million for the year ended December 31, 2007.

 

 

Selling, general and administrative expenses consist of salaries and related costs for executive, marketing, selling and other administrative personnel, selling and product distribution costs, professional fees and facility costs. Overall expenses decreased by $1.7 million, or 6%, compared to prior year.

 

The driver of the decrease is due to a reduction in the contract sales force from 75 representatives in 2007 to 30 representatives during most of 2008. The agreement with the contract sales force provider was terminated during the fourth quarter of 2008. Marketing expenses associated with the KEFLEX 750 mg product also decreased year over year. These reductions were partially offset by a severance charge recorded during the third quarter of 2008 associated with the departure of executives and other employees in connection with the EGI Transaction in

September 2008, along with hiring additional employees as the commercially-focused management team began to prepare for the launch of MOXATAG in the first quarter of 2009.

 

Other expenses increased 7% over prior year, primarily reflecting increased activity in preparation of hiring our field sales force and other general expenses including insurance, accounting, facility and equipment expenses.

 

Net Interest Income (Expense).   Net interest income was $0.7 million for the year ended December 31, 2008 compared to net interest expense of $41,000 for the year ended December 31, 2007. The income increase of $0.8 million represents interest income on increased cash and short-term investment balances invested during the year combined with no interest expense during the current year as our Merrill Lynch Capital term debt facility was paid off in November 2007.

 

 

Early Extinguishment of Debt.   In connection with the payoff of the Merrill Lynch Capital debt facility in November 2007, we incurred expenses of $0.2 million. We did not have any similar expenses in 2008.

 

Warrant Expense.   Warrant expense in 2008 of $6.7 million resulted from recording the full warrant liability of $8.8 million paid to Deerfield in connection with the re-acquisition of the KEFLEX intangibles assets during the third quarter of 2008 in connection with the EGI Transaction. As of December 31, 2007, $2.1 million of warrant liability had already been expensed.

 

Other Income.   Other income of $0.1 million in 2007 represents forgiveness of our debt to Montgomery County, Maryland. During 2007 we received notice from Montgomery County that we had met the conditions required for our development loan to be forgiven, and accordingly the full amount was recognized as Other income in the quarter. We had no Other income amounts during 2008.

 

Noncontrolling Interest.   Pursuant to the agreements that we entered into with Deerfield in November 2007, we consolidated the financial condition and results of operations of Kef and Lex in accordance with FIN 46R until we acquired these entities in September 2008. Accordingly, during 2008, we have deducted the losses of $0.5 million attributable to the noncontrolling interest (the losses of Kef and Lex) from our net loss in the consolidated statement of operations, and we also reduced the noncontrolling interest holders’ ownership interest in Kef and Lex in the consolidated balance sheet by the losses of Kef and Lex. This loss represents the loss from January 1, 2008 through the acquisition date of September 4, 2008. During 2007, we deducted losses associated with the noncontrolling interest of $0.2 million which represents the loss from when we entered into the agreements in November 2007 through December 2007. Subsequent to our acquisition of the entities, we fully consolidated them in our financial condition and result of operations without eliminating any associated losses.

 

Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31, 2006

 

Revenues.   We recorded revenues of $10.5 million during the fiscal year ended December 31, 2007 compared to $4.8 million during the fiscal year ended December 31, 2006, composed of KEFLEX product sales as follows:

 

 

Prior to the third quarter of 2006, net product sales consist primarily of shipments of the KEFLEX 250 mg and 500 mg strengths to wholesalers. In July 2006, we launched a 750 mg strength capsule, supported by a targeted and dedicated national contract sales force of 75 sales representatives and eight MiddleBrook district sales managers. Sales of 750 mg in 2007 reflected a full 12 months of shipments as compared to six months in 2006. Sales of

KEFLEX 250 mg and 500 mg capsules increased in 2007 primarily due to price increases implemented during the year.

 

Cost of Product Sales.   Cost of product sales represents the purchase cost of the KEFLEX products sold during the year, provisions for obsolescence, as well as royalties, if applicable. The following table discloses the major components of cost of product sales:

 

 

The increase in product manufacturing costs and Eli Lilly royalty expense reflect a full year of sales activity for the KEFLEX 750 mg product in 2007 versus six months in 2006. Only the KEFLEX 750 mg product is currently subject to Eli Lilly royalty cost. Consignment and royalty payments due to affiliates of Deerfield from MiddleBrook based on sales of all KEFLEX non-PULSYS products, beginning in November 2007, which approximated $0.3 million for the period from November 8, 2007 through December 31, 2007, are eliminated in the consolidated statement of operations in accordance with FIN 46R. Obsolescence provisions result from projections of future sales compared to inventory levels, and a determination that a portion of inventory may not be sold prior to expiration date.

 

Research and Development Expenses.   Research and development expenses decreased $4.0 million, or 15%, to $22.0 million for the fiscal year ended December 31, 2007 from $26.0 million for the fiscal year ended December 31, 2006. Research and development expenses consist of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects, as well as clinical studies. Indirect research and development costs include facilities, depreciation, and other indirect overhead costs.

 

The following table discloses the components of research and development expenses reflecting our project expenses.

 

 

Personnel, benefits and related costs increased due to an increased bonus payout of $0.2 million resulting from our successfully achieving FDA approval of the MOXATAG NDA, increased healthcare and other benefits costs of $0.2 million, and annual pay increases. Stock-based compensation decreased $0.7 million as certain grants awarded in prior years became fully amortized, and as the total number of new options awarded declined due to the decline in employee headcount.

 

Consultants, supplies, materials and other direct costs increased $1.6 million as we continued developing our manufacturing capability in anticipation of the launch of MOXATAG. Clinical trials expense decreased $5.9 million overall, as we conducted a single Phase III adult amoxicillin PULSYS trial in 2006, and none in 2007.

Indirect project costs increased by $0.5 million, primarily due to costs related to our ceasing to use one of our Germantown, Maryland research facilities.

 

Selling, General and Administrative Expenses.   Selling, general and administrative expenses increased $4.8 million, or 22%, to $26.0 million for the year ended December 31, 2007 from $21.3 million for the year ended December 31, 2006.

 

 

Selling, general and administrative expenses consist of salaries and related costs for executive and other administrative personnel, selling and product distribution costs, professional fees and facility costs. Major increases in 2007 include costs of promoting sales of our KEFLEX 750 mg line extension for a full year in 2007 versus six months in 2006.

 

Salaries, benefits and related costs increased $0.6 million versus 2006, due in part to having a full year of sales managers in place compared to six months in 2006, and to increased bonus and benefits costs compared to the prior year.

 

Severance costs related to a reduction in the number of administrative employees in the fourth quarter, as compared to 2006 when a credit to expense was recognized upon the rehire of an executive who had been terminated in 2005.

 

Stock-based compensation decreased $0.8 million as certain grants awarded in prior years became fully amortized, and as the total number of new options awarded declined due to the reduction in employee headcount.

 

Other expenses increased $0.4 million as we incurred a regulatory filing fee of $0.9 million in connection with our MOXATAG NDA, versus a prior year fee of $0.3 million, and other regulatory fees of $0.2 million.

 

Marketing and contract sales expenses totaled $12.3 million versus $8.7 million in 2006 reflecting costs to promote sales of our KEFLEX 750 mg product for a full year, versus part year in 2006.

 

Net Interest Income (Expense).   Net interest income was $41,000 for the year ended December 31, 2007 compared to net interest income of $0.4 million for the year ended December 31, 2006. Interest income overall declined $0.4 million due to reduced cash balances available for investing during the year.

 

Interest expense in 2007 increased compared to 2006 due to incurred interest costs related to our Merrill Lynch Capital term debt facility, which was in place for approximately six months in 2006 versus over 10 months in 2007 before being paid off in November 2007.

 

Warrant expense.   Warrant expense in 2007 of $2.1 million resulted from an initial charge of $2.6 million, reduced by a credit at year end of $0.5 million as the warrants were revalued based upon the year end stock price, which had declined since the warrants were issued on November 7, 2007.

 

Other Income.   Other income of $0.1 million in 2007 represents forgiveness of our debt to Montgomery County. During 2007 we received notice from Montgomery County that we had met the conditions required for our development loan to be forgiven, and accordingly the full amount was recognized as Other Income in the quarter.

 

Other income of $1.0 million in 2006 represents the recognition in income of an advance payment received in 2005 from a potential buyer of our KEFLEX brand. We did not enter into a definitive agreement for the asset sale, and in January 2006 we decided to retain the KEFLEX assets. The agreement in principle expired on February 28, 2006. Under the circumstances, the advance payment of $1.0 million was not refundable and was therefore recognized as income in 2006.

 

Noncontrolling Interest.   Pursuant to the agreements that we entered into with Deerfield in November 2007, we consolidated the financial condition and results of operations of Kef and Lex in accordance with FIN 46R. Accordingly, we have deducted the losses of $0.2 million attributable to the noncontrolling interest (the losses of Kef and Lex) from our net loss in the consolidated statement of operations, and we have also reduced the noncontrolling interest holders’ ownership interest in Kef and Lex in the consolidated balance sheet by the losses of Kef and Lex.

 

Liquidity and Capital Resources

 

We have funded our operations principally with the proceeds of $54.5 million from a series of five preferred stock offerings and one issue of convertible notes over the period 2000 through 2003, the net proceeds of $54.3 million from our initial public offering in October 2003, and private placements of common stock for net proceeds of $25.8 million, $16.7 million, $22.4 million, $19.9 million, and $96.0 million in April 2005, December 2006, April 2007, January 2008, and September 2008, respectively. In addition, we have received funding of $8.0 million and $28.25 million from GlaxoSmithKline and Par Pharmaceutical, respectively, as a result of collaboration agreements for the development of new products. Since July 2004, we have also received cash of approximately $33.8 million from sales of our KEFLEX products.

 

We received a $1.0 million advance payment in 2005 from a potential buyer of our KEFLEX brand, which we recognized in income in 2006 as the sale was not completed and the amount was not refundable. In the second quarter of 2006, we received proceeds of $6.9 million from a term loan, net of costs and the payoff of existing debt. In November 2007, we sold certain of our KEFLEX assets in exchange for $7.5 million (less a $0.5 million payment to the purchaser to cover their expenses related to the transaction), while retaining the right to continue operating the KEFLEX business subject to certain royalty payments to the purchaser as well as the right to repurchase the assets at a future date at predetermined prices. These assets were re-purchased when we acquired the Deerfield Entities in September 2008. See Review of Strategic Alternatives Concluded in $100 Million Equity Investment above and footnote 14, Noncontrolling Interest — Deerfield Transaction, of the consolidated financial statements for additional information.

 

On July 1, 2008, we announced that we concluded our review of strategic alternatives with an agreement for a $100 million equity investment in us by EGI. The transaction closed, following stockholder approval, on September 4, 2008.

 

Cash and Marketable Securities

 

At December 31, 2008, unrestricted cash, cash equivalents and marketable securities were $74.8 million compared to $2.0 million at December 31, 2007.

 

 

Our cash and cash equivalents are highly-liquid investments with a maturity of 90 days or less at date of purchase and consist of time deposits, investments in money market funds with commercial banks and financial institutions, and commercial paper of high-quality corporate issuers. Our marketable securities are highly-liquid investments and are classified as available-for-sale, as they can be utilized for current operations. Our investment policy requires the selection of high-quality issuers, with bond ratings of AAA to A1+/P1. We do not invest in auction rate securities. Due to our current liquidity needs we do not anticipate holding any security with a maturity greater than 12 months, and at December 31, 2008 and December 31, 2007, we held no security with a maturity greater than 365 days from those dates.

 

Also, we maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances.

 

Cash Flow

 

The following table summarizes our sources and uses of cash and cash equivalents for fiscal years ending December 31, 2008, 2007, and 2006.

 

 

Operating Activities

 

Net cash used in operating activities for the three years ended December 31, 2008 is presented in the following table, which displays cash received and cash disbursed by major element.

 

 

Cash received from product sales decreased from $10.7 million in 2007 to $9.6 million in 2008. The decrease is primarily driven by the decrease in product sales during the same period. Cash received from product sales in 2007 of $10.7 million exceeded product sales cash receipts in 2006 of $6.1 million, reflecting the positive impact of a full year of sales of our KEFLEX 750 mg product as compared to a half-year in 2006. Cash paid for employee compensation decreased by $0.4 million to $10.8 million in 2008 as the result of an overall reduction in headcount as part of an expense reduction program. Cash paid for employee compensation and benefits increased in 2007 compared to 2006,

as we employed sales managers throughout 2007 as compared to only a part of 2006, and we added certain staff positions to prepare the Stada’s manufacturing facility for FDA approval and eventual launch of MOXATAG. The 42% decrease in cash paid to vendors from 2007 to a total of $23.7 million in 2008 reflects the impact of a reduction in expenses as part of the expense reduction plan and the completion of the development of MOXATAG. Cash paid to vendors in 2007 reflects a full year of marketing and external sales force costs to market KEFLEX 750 mg capsules, as well as payments to complete the buildout of Stada’s manufacturing facility in Clonmel, Ireland for MOXATAG. Clinical trials spending decreased in 2007 as compared to 2006, as we did not conduct any Phase III trials in the year.

 

Investing Activities

 

Net cash used in / provided by investing activities for the three years ended December 31, 2008 is presented in the following table, which displays cash received and cash disbursed by major element.