Somaxon Pharmac has a market cap of $17.9 million; its shares were traded at around $0.32 with and P/S ratio of 1.1.
Highlight of Business Operations:In June 2011, we entered into a license agreement with Paladin pursuant to which Paladin has the exclusive right to commercialize Silenor in Canada, South America, the Caribbean and Africa subject to the receipt of marketing approval in each such territory. We received an upfront payment of $500,000 in connection with the execution of this agreement. We recorded the upfront payment as deferred revenue and are recognizing the upfront payment as license revenue over the period of our significant involvement under the agreement, which we are estimating to be 15 years. As of March 31, 2012, the deferred revenue balance associated with the license agreement is $472,000, of which $439,000 is recorded as a non-current liability and the remainder is recorded as a current liability within accrued liabilities. We recognized $8,000 as revenue during the three months ended March 31, 2012, which is recorded in interest and other income.
Prompt Pay Discounts. As an incentive for prompt payment, we offer a 2% cash discount to customers. We calculate the discount based on the gross amount of each invoice as we expect that all customers will comply with the contractual terms to earn the discount. We record the discount as an allowance against accounts receivable and a corresponding reduction of revenue. At March 31, 2012 and December 31, 2011, the allowance for prompt pay discounts was $31,000 and $39,000, respectively.
Patient Discount Programs. We offer discount programs to patients of Silenor under which the patient receives a discount on his or her prescription. We reimburse pharmacies for these discounts through third-party vendors. We estimate the total amount that will be redeemed based on the dollar amount of the discounts, the timing and quantity of distribution and historical redemption rates. We accrue the discounts and recognize a corresponding reduction of revenue. At March 31, 2012 and December 31, 2011, the accrual for patient discount programs was $400,000 and $414,000, respectively.
We recognized net product sales of $2.7 million and $2.3 million for the three months ended March 31, 2012 and 2011, respectively. Sales discounts and allowances totaled $1.7 million for the three months ended March 31, 2012, compared to $0.6 million for the same period in 2011. As a percentage of gross sales, the discounts and allowances were 37.6% and 19.3% for the three months ended March 31, 2012 and 2011, respectively. The increases in gross product sales and sales discounts and allowances are due to growth of sales of Silenor since the commencement of Silenor sales in the third quarter of 2010. The increase in sales discounts as a percentage of gross product sales is primarily due to an expansion in our participation in payor rebate programs.
We recognized cost of sales of $0.3 million and $0.4 million for the three months ended March 31, 2012 and 2011, respectively, relating to product with respect to which revenue was recognized. The decrease in cost of sales expense was due to a reduction in personnel and related costs resulting from cost reduction initiatives we implemented in the fourth quarter of 2011. Gross profit was $2.5 million and $2.0 million for the three months ended March 31, 2012 and 2011, respectively. Expressed as a percentage of net product sales, gross margin was 90.0% and 84.4% for the three months ended March 31, 2012 and 2011, respectively.
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