| CEPHALON INC Item 1A Risk Factors 27 ITEM 1A RISK FACTORS You should carefully consider the risks described below, in addition to the other information contained in this report, before making an investment decision |
| Our business, financial condition or results of operations could be harmed by any of these risks |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations |
| A significant portion of our anticipated 2006 revenues is derived from our US products, and our future success will depend on the continued acceptance and growth of these products |
| For the year ended December 31, 2005, approximately 86prca of our worldwide net sales were derived from sales of PROVIGIL, ACTIQ and GABITRIL We cannot be certain that these products will continue to be accepted in their markets |
| Specifically, the following factors, among others, could affect the level of market acceptance of PROVIGIL, ACTIQ and GABITRIL: • a change in the perception of the healthcare community of their safety and efficacy, both in an absolute sense and relative to that of competing products; • the level and effectiveness of our sales and marketing efforts; • any unfavorable publicity regarding these products or similar products; • the price of the product relative to other competing drugs or treatments; • the entrance of generic competition to ACTIQ in late 2006; • any changes in government and other third-party payer reimbursement policies and practices; and • regulatory developments affecting the manufacture, marketing or use of these products |
| Any adverse developments with respect to the sale or use of PROVIGIL, ACTIQ and GABITRIL could significantly reduce our product revenues and have a material adverse effect on our ability to generate net income and positive net cash flow from operations |
| We may be unsuccessful in our efforts to obtain regulatory approval for new products or for new formulations or indications for our existing products, which would significantly hamper future sales and earnings growth |
| Our long-term prospects, particularly with respect to the growth of our future sales and earnings, depend to a large extent on our ability to obtain FDA approval for our near-term product candidates: NUVIGIL, SPARLON, FEBT, VIVITROL and GABITRIL for GAD We do not know whether we or, in the case of VIVITROL, our partner, will succeed in obtaining final regulatory approval to market any of these products or what level of market acceptance these products may achieve |
| It is also possible that the sale of a generic version of ACTIQ by Barr in late 2006 could negatively impact sales of FEBT For GABITRIL, we have not yet completed Phase 3 studies of the product for use in treating GAD If the results of some of these additional studies are negative or adverse, this could undermine physician and patient comfort with the current product, limit its commercial success, and diminish its acceptance |
| Even if the results of these studies are positive, the impact on sales of GABITRIL may be minimal unless we are able to obtain regulatory approval to expand the authorized uses of this product |
| FDA regulations limit our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining regulatory approval for any expanded uses |
| 27 _________________________________________________________________ We may not be able to maintain adequate protection for our intellectual property or market exclusivity for our key products and, therefore, competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully and limit our commercial success |
| We place considerable importance on obtaining patent protection for new technologies, products and processes |
| To that end, we file applications for patents covering the compositions or uses of our drug candidates or our proprietary processes |
| The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions |
| Accordingly, the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology |
| Patent disputes in our industry are frequent and can preclude commercialization of products |
| If we ultimately engage in and lose any such disputes, we could be subject to competition or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using the technology or product in dispute |
| In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us |
| PROVIGIL The US composition of matter patent for modafinil expired in 2001 |
| We own US and foreign patent rights that expire between 2014 and 2015 and cover pharmaceutical compositions and uses of modafinil, specifically, certain particle sizes of modafinil contained in the pharmaceutical composition |
| Ultimately, these patents might be found invalid as the result of a challenge by a third party, or a potential competitor could develop a competing product or product formulation that avoids infringement of these patents |
| While we intend to vigorously defend the validity of these patents and prevent infringement, these efforts will be both expensive and time consuming and, ultimately, may not be successful |
| The loss of patent protection for PROVIGIL would significantly and negatively impact future PROVIGIL sales |
| As of the filing date of this Annual Report on Form 10-K, we are aware of six ANDAs on file with the FDA for pharmaceutical products containing modafinil |
| Each of these ANDAs contains a Paragraph IV certification in which the ANDA applicant certified that the US particle-size modafinil patent covering PROVIGIL either is invalid or will not be infringed by the ANDA product |
| In March 2003, we filed a patent infringement lawsuit in the US District Court in New Jersey against four companies—Teva Pharmaceuticals USA, Inc, Mylan Pharmaceuticals, Inc, Ranbaxy Laboratories Limited and Barr Laboratories, Inc |
| —based upon the ANDAs filed by each of these companies with the FDA seeking approval to market a generic form of modafinil |
| The lawsuit claimed infringement of our US Patent Nodtta RE37cmam516 ( "e the "e 516 Patent "e ) which covers the pharmaceutical compositions and methods of treatment with the form of modafinil contained in PROVIGIL and which expires on October 6, 2014 (subject to a six-month extension to April 6, 2015 upon acceptance by the FDA of the pediatric study data submitted by us on December 21, 2005) |
| We believe that these four companies were the first to file ANDAs with Paragraph IV certifications and thus are eligible for the 180-day exclusivity provided by the provisions of the Federal Food, Drug and Cosmetic Act |
| In late 2005 and early 2006, we announced that we had entered into settlement agreements with each of these four defendants |
| As part of these separate settlements, we agreed to grant to each of Teva, Mylan, Ranbaxy and Barr a non-exclusive royalty-bearing right to market and sell a generic version of PROVIGIL in the United States |
| These licenses will become effective in October 2011, unless we obtain a pediatric extension for PROVIGIL, which would permit entry by these firms in April 2012 |
| An earlier entry may occur based upon the entry of another generic version of PROVIGIL Each of these settlements has been filed with both the FTC and the Antitrust Division of the DOJ as required by the Medicare Modernization Act |
| The FTC has requested from us, and we have provided, 28 _________________________________________________________________ certain information in connection with its review of the settlements |
| The FTC, the DOJ, or a private party could challenge in an administrative or judicial proceeding any or all of the settlements if they believe that the agreements violate the antitrust laws |
| If the settlements are challenged, there is no assurance that we could successfully defend against such challenge and, in that case, we could be subject to, among other things, damages, fines and possible invalidation of the settlement agreements |
| In early 2005, we also filed a patent infringement lawsuit in the US District Court in New Jersey against Carlsbad Technology, Inc |
| based upon the Paragraph IV ANDA filed related to modafinil that Carlsbad filed with the FDA Carlsbad has asserted counterclaims for non-infringement of the "e 516 Patent and invalidity of the "e 516 Patent |
| Carlsbad also has asserted a counterclaim for non-infringement of our US Patent Nodtta 4cmam927cmam855 (which we have not asserted against Carlsbad) |
| We have moved to dismiss all of Carlsbadapstas counterclaims; Carlsbad has opposed the motion, and a decision is pending |
| Discovery in this action has only recently commenced |
| This ongoing litigation with Carlsbad is unaffected by each of the settlement agreements we have signed with Teva, Mylan, Ranbaxy and Barr |
| also filed a Paragraph IV ANDA with the FDA seeking to market a generic form of PROVIGIL We have not filed a patent infringement lawsuit against Caraco to date |
| ACTIQ With respect to ACTIQ, we hold an exclusive license to US patents covering the currently marketed compressed powder pharmaceutical composition and methods for administering fentanyl via this composition that are set to expire in September 2006 |
| If we are successful in our efforts to complete a clinical study of ACTIQ in pediatric patients prior to September 2006, the FDA could grant us six months of exclusivity beyond this September 2006 patent expiration |
| Corresponding patents in foreign countries are set to expire between 2009 and 2010 |
| Our patent protection with respect to the ACTIQ formulation we sold prior to June 2003 expired in May 2005 |
| In February 2006, we announced that we had agreed to settle with Barr our pending patent infringement dispute in the United States related to Barrapstas ANDA filed with the FDA seeking to sell a generic version of ACTIQ Under the settlement, we will grant Barr an exclusive royalty bearing right to market and sell a generic version of ACTIQ in the United States, effective on December 6, 2006 |
| This license could become effective prior to December 6, 2006 if we receive final FDA approval of FEBT before this date or if we have not received a pediatric extension of exclusivity for ACTIQ The entry of Barr with a generic form of ACTIQ likely will significantly and negatively impact future ACTIQ sales |
| GABITRIL With respect to GABITRIL, we hold an exclusive sublicense to four US composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance contained in GABITRIL; a patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent; a patent claiming the pharmaceutical formulation; and a patent claiming anhydrous crystalline tiagabine hydrochloride and processes for its preparation |
| These patents currently are set to expire in 2011, 2012, 2016 and 2017, respectively |
| Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011 |
| We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position |
| Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how |
| Moreover, others could independently develop substantially equivalent proprietary 29 _________________________________________________________________ information and techniques or otherwise gain access to our trade secrets and know-how |
| In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue |
| As a result, we could be subject to allegations of trade secret violations and other claims |
| Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply |
| We currently have a number of products that have been approved for sale in the United States, foreign countries or both |
| All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion |
| The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products, could result in, among other things: • fines, recalls or seizures of products; • total or partial suspension of manufacturing or commercial activities; • non-approval of product license applications; • restrictions on our ability to enter into strategic relationships; and • criminal prosecution |
| In September 2004, we announced that we had received subpoenas from the US Attorneyapstas Office in Philadelphia |
| That same month, we received a voluntary request for information from the Office of the Connecticut Attorney General |
| Both the subpoenas and the voluntary request for information appear to be focused on Cephalonapstas sales and promotional practices with respect to ACTIQ, GABITRIL and PROVIGIL, including the extent of off-label prescribing of our products by physicians |
| We are cooperating with the US Attorneyapstas Office and the Office of the Connecticut Attorney General and are providing documents and other information to both offices in response to these and additional requests |
| These matters may involve the bringing of criminal charges and fines, and/or civil penalties |
| We cannot predict or determine the outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from an adverse outcome |
| However, an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations |
| It is both costly and time-consuming for us to comply with these inquiries and with the extensive regulations to which we are subject |
| Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market |
| With respect to our product candidates, we conduct research, preclinical testing and clinical trials, each of which requires us to comply with extensive government regulations |
| We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority |
| The approval process is highly uncertain and requires substantial time, effort and financial resources |
| Ultimately, we may never obtain approval in a timely manner, or at all |
| Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected |
| In addition, because our products PROVIGIL and ACTIQ and our product candidates SPARLON, NUVIGIL and FEBT contain active ingredients that are controlled substances, we are subject to regulation by the DEA and analogous foreign organizations relating to the manufacture, shipment, sale and use of the applicable products |
| These regulations also are imposed on prescribing physicians and other third parties, making the storage, transport and use of such products relatively complicated and 30 _________________________________________________________________ expensive |
| With the increased concern for safety by the FDA and the DEA with respect to products containing controlled substances and the heightened level of media attention given to this issue, it is possible that these regulatory agencies could impose additional restrictions on marketing or even withdraw regulatory approval for such products |
| In addition, adverse publicity may bring about a rejection of the product by the medical community |
| If the DEA, FDA or a foreign medical authority withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our ability to promote our products and product sales could be substantially affected |
| We rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services, product distribution services, customer service activities and product returns processing |
| Although we actively manage these third party relationships to ensure continuity and quality, some events beyond our control could result in the complete or partial failure of these goods and services |
| Any such failure could have a material adverse effect on our financial condition and result of operations |
| Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue and an increase in costs of sales, and damage commercial prospects for our products |
| The manufacture, supply and distribution of pharmaceutical products, both inside and outside the United States, is highly regulated and complex |
| We, and the third parties we rely upon for the manufacturing and distribution of our products, must comply with all applicable regulatory requirements of the FDA and foreign authorities, including cGMP regulations |
| In addition, we must comply with all applicable regulatory requirements of the DEA and analogous foreign authorities for certain of our products that contain controlled substances |
| The facilities used to manufacture, store and distribute our products also are subject to inspection by regulatory authorities at any time to determine compliance with regulations |
| These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material |
| For certain of our products and near-term product candidates in the United States and abroad, we depend upon single sources for the manufacture of both the active drug substances contained in our products and for finished commercial supplies |
| The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or European medical authority approval and is very time-consuming |
| If we are unable to manage this process effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage commercial prospects for our products and adversely affect operating results |
| With respect to VIVITROL, Alkermes is obligated to provide to us finished commercial supplies of the product under the terms of a supply agreement |
| While Alkermes has manufactured VIVITROL in small quantities for use in clinical trials, we cannot be sure that they will be able to successfully manufacture VIVITROL at a commercial scale in a timely or economical manner, or at all, if the product is approved by the FDA If Alkermes is unable to successfully increase its manufacturing scale or capacity, the commercial launch of VIVITROL could be delayed or there could be a shortage in supply of the product, either of which could harm the commercial prospects for the product |
| In addition, Alkermes is responsible for the entire supply chain for VIVITROL, including the sourcing of raw materials and active pharmaceutical agents from third parties |
| Alkermes has no previous experience in managing a complex, cGMP supply chain and issues with its supply sources could impair its ability to supply VIVITROL under the supply agreement and have a material adverse effect on our commercial prospects for VIVITROL 31 _________________________________________________________________ As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur that could result in additional regulatory controls, adverse publicity and reduced sales of our products |
| During research and development, the use of pharmaceutical products, such as ours, is limited principally to clinical trial patients under controlled conditions and under the care of expert physicians |
| The widespread commercial use of our products could identify undesirable or unintended side effects that have not been evident in our clinical trials or the relatively limited commercial use to date |
| For example, in February 2005, working with the FDA, we updated our prescribing information for GABITRIL to include a bolded warning describing the risk of new onset seizures in non-induced patients without epilepsy |
| In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict |
| Additionally, incidents of product misuse, product diversion or theft may occur, particularly with respect to products such as ACTIQ and PROVIGIL, which contain controlled substances |
| These events, among others, could result in adverse publicity that harms the commercial prospects of our products or lead to additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market |
| In particular, ACTIQ has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use |
| Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market |
| We face significant product liability risks, which may have a negative effect on our financial performance |
| The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an injury |
| Furthermore, our products may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time |
| As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase |
| Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance |
| The cost of product liability insurance has increased in recent years, and the availability of coverage has decreased |
| Nevertheless, we maintain product liability insurance in amounts we believe to be commercially reasonable but which would be unlikely to cover the potential liability associated with a significant unforeseen safety issue |
| Any claims could easily exceed our current coverage limits |
| Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business |
| Our product sales and related financial results will fluctuate, and these fluctuations may cause our stock price to fall, especially if investors do not anticipate them |
| A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and expenses, and have established earnings expectations based upon those models |
| These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly |
| Forecasting future revenues is difficult, especially when we only have a few years of commercial history and when the level of market acceptance of our products is changing rapidly |
| As a result, it is reasonably likely that our product sales will fluctuate to an extent, which may not meet with market expectations and which also may adversely affect our stock price |
| There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including: • cost of product sales; 32 _________________________________________________________________ • achievement and timing of research and development milestones; • collaboration revenues; • cost and timing of clinical trials, regulatory approvals and product launches; • marketing and other expenses; • manufacturing or supply disruptions; and • costs associated with the operations of recently-acquired businesses and technologies |
| We may be unable to repay our substantial indebtedness and other obligations |
| During the fourth quarter of 2005, our 2dtta0prca Notes became convertible and, in January 2006, our 2008 and 2010 Zero Coupon Notes also became convertible |
| As a result, the 2dtta0prca Notes have been classified as a current liability on our balance sheet as of December 31, 2005 (see Note 9 of our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for summary of our convertible debt, note hedges and call warrants) and, as of the filing date of this report, our Zero Coupon Notes are now also considered to be current liabilities |
| All of our convertible notes are presently convertible and, under the terms of the indentures governing the notes, we are obligated to repay in cash and common stock the aggregate principal balance of any such notes presented for conversion |
| As of the filing date of this report, we do not have available cash, cash equivalents and investments sufficient to repay all of the convertible notes, if presented |
| In addition, there are no restrictions on our use of this cash and the cash available to repay indebtedness may decline over time |
| If we do not have sufficient funds available to repay the principal balance of notes presented for conversion, we will be required to raise additional funds |
| Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not have cash available or be able to obtain funding to permit us to meet our repayment obligations, thus adversely affecting the market price for our securities |
| Our research and development and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, which may limit our efforts to develop and market potential products |
| To maximize our growth opportunities, we have entered into a number of collaboration agreements with third parties |
| For example, in the United States, we are party to an agreement with McNeil Consumer & Specialty Pharmaceuticals Division of McNeil-PPC, Inc |
| under which McNeil will co-promote SPARLON, our proprietary pediatric formulation of modafinil for ADHD, for up to three years following the commercial launch of the product, if approved by FDA Our ability to successfully commercialize SPARLON will depend to a significant degree on the efforts of our partner |
| If McNeil fails to meet its obligations under the co-promotion agreement, is ineffective in its efforts, or determines to terminate the agreement prior to the end of its term, the launch and subsequent marketing of SPARLON could be materially and negatively impacted |
| Additionally, if McNeil elects to terminate the agreement early as provided for by the agreement, we may be unsuccessful in our efforts to hire the McNeil sales representatives, as permitted under the agreement, or in our efforts to promote SPARLON on our own |
| In certain countries outside the United States, we have entered into agreements with a number of partners with respect to the development, manufacturing and marketing of our products |
| In some cases, our collaboration agreements call for our partners to control: • the supply of bulk or formulated drugs for use in clinical trials or for commercial use; • the design and execution of clinical studies; 33 _________________________________________________________________ • the process of obtaining regulatory approval to market the product; and/or • marketing and selling of an approved product |
| In each of these areas, our partners may not support fully our research and commercial interests because our program may compete for time, attention and resources with the internal programs of our corporate collaborators |
| As such, our program may not move forward as effectively, or advance as rapidly, as it might if we had retained complete control of all research, development, regulatory and commercialization decisions |
| We also rely on some of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products |
| Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we ultimately might not be successful in establishing any such new or additional relationships |
| The efforts of government entities and third party payers to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products |
| In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control, including the control over the amount of reimbursements provided to the patient who is prescribed specific pharmaceutical products |
| For example, we are aware of governmental efforts in France to limit or eliminate reimbursement for some of our products, particularly SPASFON and FONZYLANE, which could impact revenues from our French operations |
| In the United States, there have been, and we expect there will continue to be, various proposals to implement similar controls |
| The commercial success of our products could be limited if federal or state governments adopt any such proposals |
| In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans |
| These third party payers are increasingly utilizing their significant purchasing power to challenge the prices charged for pharmaceutical products and seek to limit reimbursement levels offered to consumers for such products |
| Moreover, many governments and private insurance plans have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals |
| In the United States in particular, generic substitution statutes have been enacted in virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of an original branded drug |
| These third party payers could focus their cost control efforts on our products, especially with respect to prices of and reimbursement levels for products prescribed outside their labeled indications |
| In these cases, their efforts could negatively impact our product sales and profitability |
| On January 1, 2006, the US Department of Health & Human Services began implementing Medicare Part D in accordance with the Medicare Modernization Act |
| Under this plan, voluntary prescription drug coverage, subsidized by Medicare, is offered to over 40 million Medicare beneficiaries through competing private prescription drug plans (PDPs) and Medicare Advantage (MA) plans |
| We cannot predict the potential impact that this program will have on our business, as it is not clear how the law will be implemented by regulators or received by consumers and physicians |
| While the overall usage of pharmaceuticals may increase as the result of the expanded access to prescription drugs afforded under Medicare Part D, this may be offset by reduced pharmaceutical prices resulting from limited coverage of particular products in a therapeutic category and the enhanced purchasing power of the Medicare Part D plan sponsors |
| In addition, it is unclear what impact this legislation will have on the pricing, rebates and discounts for our products |
| 34 _________________________________________________________________ We experience intense competition in our fields of interest, which may adversely affect our business |
| Large and small companies, academic institutions, governmental agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development in competition with us |
| Products developed by any of these entities may compete directly with those we develop or sell |
| In addition, ACTIQ will face generic competition in late 2006 |
| The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with many drugs, several of which have been available for a number of years or are available in inexpensive generic forms |
| With respect to PROVIGIL, and, if approved, NUVIGIL, there are several other products used for the treatment of excessive sleepiness or narcolepsy in the United States, including methylphenidate products such as RITALIN® by Novartis, and in our other territories, many of which have been available for a number of years and are available in inexpensive generic forms |
| If we are successful in obtaining final FDA approval of SPARLON, we will face well established and intense competition from stimulants such as RITALIN® by Novartis, STRATERRA® by Eli Lilly, and CONCERTA® by McNeil, as well as from amphetamines such as DEXEDRINE® by GlaxoSmithKline and ADDERALL® by Shire |
| With respect to ACTIQ and, if approved, FEBT, we face competition from numerous short-and long-acting opioid products, including three products—Johnson & Johnsonapstas DURAGESIC® and Purdue Pharmaceuticalapstas OXYCONTIN® and MS-CONTIN®—that dominate the market |
| In addition, we are aware of numerous other companies developing other technologies for rapidly delivering opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray and inhaled delivery systems, among others, that will compete against ACTIQ and, if approved, FEBT With respect to GABITRIL, there are several products, including NEURONTIN® (gabapentin) by Pfizer, used as adjunctive therapy for the partial seizure market |
| In addition, several treatments for partial seizures are available in inexpensive generic forms |
| If we are successful in our efforts to expand the label of GABITRIL to include anxiety disorders, we will face significant competition from well-established Selective Serotonin Reuptake Inhibitor products such as Paxil®, Effexor XR® and Lexapro® |
| With respect to TRISENOX, the pharmaceutical market for the treatment of patients with relapsed or refractory APL is served by a number of available therapeutics, particularly those that are indicated for the treatment of hematologic cancers, such as THALOMID® by Celgene and VELCADE® by Millennium Pharmaceuticals |
| For all of our products, we need to demonstrate to physicians, patients and third party payers that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient |
| Many of our competitors have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products |
| These entities represent significant competition for us |
| In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive |
| Competition and innovation from these or other sources, including advances in current treatment methods, could potentially affect sales of our products negatively or make our products obsolete |
| Furthermore, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can |
| Any failure to maintain our competitive position could adversely affect our business and results of operations |
| 35 _________________________________________________________________ We plan to consider and, as appropriate, make acquisitions of technologies, products and businesses, which may subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our stock price, operating results and financial condition |
| As part of our efforts to acquire businesses or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction |
| Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realize the intended advantages of the acquisition |
| If we fail to realize the expected benefits from acquisitions we may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected |
| For example, in connection with our recent acquisitions of Zeneus, Salmedix and TRISENOX and the license and collaboration agreement with Alkermes, we estimated the values of these transactions by making certain assumptions about, among other things, likelihood of regulatory approval for unapproved products and the market potential for each of the marketed products and the product candidates |
| Ultimately, our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions |
| In addition, we have experienced, and will likely continue to experience, significant charges to earnings related to our efforts to consummate acquisitions |
| For transactions that ultimately are not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisers in connection with our efforts |
| Even if our efforts are successful, we may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges |
| In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods |
| We may be unable to successfully consolidate and integrate the operations of businesses we acquire, which may adversely affect our stock price, operating results and financial condition |
| We must consolidate and integrate the operations of acquired businesses with our business |
| During the past year, we completed the acquisitions of Zeneus and Salmedix, purchased assets related to TRISENOX, entered into a license agreement with Alkermes for VIVITROL, and executed a co-promotion agreement with McNeil for SPARLON Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources and could prove to be more difficult and expensive than we predicted |
| The diversion of our managementapstas attention and any delays or difficulties encountered in connection with these recent acquisitions, any future acquisitions we may consummate, could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings |
| The results and timing of our research and development activities, including future clinical trials, are difficult to predict, subject to potential future setbacks and, ultimately, may not result in viable pharmaceutical products, which may adversely affect our business |
| In order to sustain our business, we focus substantial resources on the search for new pharmaceutical products |
| These activities include engaging in discovery research and process development, conducting preclinical and clinical studies and seeking regulatory approval in the United States and abroad |
| In all of these areas, we have relatively limited resources and compete against larger, multinational pharmaceutical companies |
| Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain because the majority of compounds discovered do not enter clinical studies and the 36 _________________________________________________________________ majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization |
| In the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch |
| During each stage of this process, there is a substantial risk of failure |
| Preclinical testing and clinical trials must demonstrate that a product candidate is safe and efficacious |
| The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and these clinical trials may not demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates |
| A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials |
| For ethical reasons, certain clinical trials are conducted with patients having the most advanced stages of disease and who have failed treatment with alternative therapies |
| During the course of treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested |
| Such events can have a negative impact on the statistical analysis of clinical trial results |
| The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients |
| Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all |
| In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for one or more of our product candidates |
| Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals |
| Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to generate product sales from these product candidates in the future |
| The price of our common stock has been and may continue to be highly volatile, which may make it difficult for stockholders to sell our common stock when desired or at attractive prices |
| The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future |
| For example, from January 1, 2005 through February 28, 2006 our common stock traded at a high price of dlra80dtta93 and a low price of dlra37dtta35 |
| Negative announcements, including, among others: • adverse regulatory decisions; • disappointing clinical trial results; • disputes and other developments concerning our patents or other proprietary products; or • sales or operating results that fall below the marketapstas expectations could trigger significant declines in the price of our common stock |
| In addition, external events, such as news concerning economic conditions, our competitors or our customers, changes in government regulations impacting the biotechnology or pharmaceutical industries or the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating performance |
| Our internal controls over financial reporting may not be considered effective, which could result in possible regulatory sanctions and a decline in our stock price |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to furnish annually a report on our internal controls over financial reporting |
| The internal control report must contain an assessment by our management of the effectiveness of our internal control over financial reporting (including the 37 _________________________________________________________________ disclosure of any material weakness) and a statement that our independent auditors have attested to and reported on managementapstas evaluation of such internal controls |
| The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting |
| In order for management to evaluate our internal controls, we must regularly review and document our internal control processes and procedures and test such controls |
| Ultimately, we or our independent auditors could conclude that our internal control over financial reporting may not be effective if, among others things: • any material weakness in our internal controls over financial reporting exist; or • we fail to remediate assessed deficiencies |
| In early 2006, we implemented a new worldwide financial reporting system that requires changes to certain aspects of our existing system of internal control over financial reporting |
| Due to the number of controls to be examined, both with respect to the new reporting system and our other internal controls over financial reporting, the complexity of these projects, and the subjectivity involved in determining the effectiveness of controls, we cannot be certain that, in the future, all of our controls will continue to be considered effective by management or, if considered effective by our management, that our auditors will agree with such assessment |
| If, in the future, we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our managementapstas report is fairly stated or they are unable to express an opinion on our managementapstas evaluation, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities |
| A portion of our revenues and expenses is subject to exchange rate fluctuations in the normal course of business, which could adversely affect our reported results of operations |
| Historically, a portion of our revenues and expenses has been earned and incurred, respectively, in currencies other than the US dollar |
| For the year ended December 31, 2005, approximately 14dtta7prca of our revenues were denominated in currencies other than the US dollar |
| In 2006, we expect this percentage to increase as a result of the Zeneus acquisition |
| We translate revenues earned and expenses incurred into US dollars at the average exchange rate applicable during the relevant period |
| A weakening of the US dollar would, therefore, increase both our revenues and expenses |
| Fluctuations in the rate of exchange between the US dollar and the euro and other currencies may affect period-to-period comparisons of our operating results |
| Historically, we have not hedged our exposure to these fluctuations in exchange rates |
| Our customer base is highly concentrated |
| Our principal customers are wholesale drug distributors |
| These customers comprise a significant part of the distribution network for pharmaceutical products in the United States |
| Three large wholesale distributors, Cardinal Health, Inc, McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network |
| These three wholesaler customers, in the aggregate, accounted for 86prca of our worldwide net sales for the year ended December 31, 2005 |
| Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions or other factors outside of our control, could significantly affect the level of our net sales on a period to period basis |
| Because of this, the amounts purchased by these customers during any quarterly or annual period may not correlate to the level of underlying demand evidenced by the number of prescriptions written for such products, as reported by IMS Health Incorporated |
| Furthermore, the loss or bankruptcy of any of these customers could materially and adversely affect our results of operations and financial condition |
| 38 _________________________________________________________________ We are involved, or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition |
| As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging employment discrimination, product liability, patent or other intellectual property rights infringement, patent invalidity or breach of commercial contract |
| In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition |
| We currently are vigorously defending ourselves against certain litigation matters in addition to those matters specifically described in Note 12 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K While we currently do not believe that the settlement or adverse adjudication of these other litigation matters would materially impact our results of operations or financial condition, the final resolution of these matters and the impact, if any, on our results of operations, financial condition or cash flows is unknown but could be material |
| Our dependence on key executives and scientists could impact the development and management of our business |
| We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel |
| There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and management of our business |
| Although we do not believe the loss of one individual would materially harm our business, our business might be harmed by the loss of the services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner |
| Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel |
| While we have employment agreements with our key executives, we do not ordinarily enter into employment agreements with our other key scientific, technical and managerial employees |
| We do not maintain "e key man "e life insurance on any of our employees |
| We may be required to incur significant costs to comply with environmental laws and regulations, and our related compliance may limit any future profitability |
| Our research and development activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the environment |
| We store these materials, and various wastes resulting from their use, at our facilities pending ultimate use and disposal |
| We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with related existing and future environmental laws and regulations |
| While we believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials |
| In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs |
| These damages could require payment by us of significant amounts over a number of years, which could adversely affect our results of operations and financial condition |
| 39 _________________________________________________________________ Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders &apos ability to profit from such a transaction |
| Our board of directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock, dlra0dtta01 par value, of which 1cmam000cmam000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders |
| Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock |
| We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a "e business combination "e with an "e interested stockholder "e for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner |
| The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon |
| Section 203, the rights plan, and certain provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices |