Medicines Company Reports Operating Results (10-Q)
Medicines Company acquires, develops and commercializes biopharmaceutical products in late stages of development. U.S. Food and Drug Administration intends to approve its first product, Angiomax, for use in the treatment ofpatients with unstable angina undergoing coronary balloon angioplasty. The company is also developing Angiomax for additional potential applications for use in the treatment of ischemic heart disease, a condition which occurs when organs receive an inadequate supply of oxygen as a result of decreased blood flow. Medicines Company has a market cap of $404.6 million; its shares were traded at around $7.67 with and P/S ratio of 1.2. Highlight of Business Operations: Under the terms of the transitional distribution agreement with Nycomed, upon the sale by Nycomed to third parties of vials of Angiox purchased by Nycomed from us prior to July 1, 2007, which we refer to as existing inventory, Nycomed agreed to pay us a specified percentage of Nycomeds net sales of Angiox, less the amount previously paid by Nycomed to us for the existing inventory. Under the transitional distribution agreement, upon the termination of the agreement, Nycomed had the right to return any existing inventory for the price paid by Nycomed to us for such inventory. We recorded a reserve of $3.0 million in the fourth quarter of 2007 for the existing inventory at Nycomed which we did not believe would be sold prior to the termination of the transitional distribution agreement and would be subject to purchase in accordance with the agreement. During 2008, we reduced the reserve by $2.2 million as Nycomed sold a portion of its existing inventory during the year. Included within our accrual for product return is a reserve of $0.8 million at December 31, 2008 for existing inventory at Nycomed that Nycomed has the right to return at any time. In July 2009, we reimbursed Nycomed $0.8 million for the final amount of inventory held by Nycomed at December 31, 2008. The transitional distribution agreement terminated on December 31, 2008.
We incurred total costs of $45.7 million in connection with the reacquisition of the rights to develop, distribute and market Angiox in the Nycomed territory. This total costs amount includes transaction fees of approximately $0.7 million and agreed upon milestone payments of $20.0 million paid to Nycomed on July 2, 2007, $15.0 million paid to Nycomed on January 15, 2008 and $5.0 million paid to Nycomed on July 8, 2008, as well as an additional $5.0 million paid to Nycomed on July 8, 2008 in connection with our obtaining European Commission approval to market Angiox for ACS in January 2008.
During the third quarter of 2007, we allocated $30.8 million of these costs as expense attributable to the termination of the prior distribution agreement with Nycomed and $14.9 million to intangible assets. The $30.8 million expense was offset in part by the write-off of approximately $2.7 million of deferred revenue, which amount represented the unamortized portion of deferred revenue related to milestone payments received from Nycomed in 2004 and 2002. We included such amounts in selling, general and administrative expense on the consolidated statements of operations for the year ended December 31, 2007. We allocated approximately $14.9 million of the costs associated with the reacquisition of the rights to develop, distribute and market Angiox in the European Union to intangible assets. We are amortizing these intangible assets over the remaining patent life of Angiox, which expires in 2015. The period in which amortization expense will be recorded reflects the pattern in which we expect the economic benefits of the intangible assets to be consumed.
The total cost of the acquisition was approximately $23.7 million, which consisted of a purchase price of approximately $22.9 million and direct acquisition costs of $0.8 million. Since the acquisition date, we have included results of Curacyte Discoverys operations in our consolidated financial statements. We allocated the purchase price to the estimated fair value of assets acquired and liabilities assumed based on a third-party valuation and management estimates. We allocated approximately $21.4 million of the purchase price to in-process research and development, which we expensed upon completion of the acquisition. We recorded this amount as research and development expenses in our consolidated statements of operations for the three months ended September 30, 2008. We allocated the remaining portion of the purchase price to net tangible assets.
As shown in the table below, cost of revenue during the three months ended September 30, 2009 was $28.3 million, or 29% of net revenue, compared to $22.1 million, or 25% of net revenue, for the three months ended September 30, 2008. The increase in cost of revenues as a percentage of net revenue was driven by a higher projected effective royalty rate for sales of Angiomax under our license agreement with Biogen Idec. Cost of revenue consisted of expenses in connection with the manufacture of Angiomax and Cleviprex sold, royalty expenses under our agreements with Biogen Idec, Health Research Inc. and AstraZeneca and the logistics costs of selling Angiomax and Cleviprex, such as distribution, storage, and handling. Cost of revenue increased $6.2 million during the three months ended September 30, 2009 compared to the three months ended September 30, 2008, primarily related to higher Angiomax sales and an increase in royalty expense due to a higher projected effective royalty rate for sales of Angiomax under our agreement with Biogen Idec.
Research and development expenses decreased by 49% to $22.5 million for the three months ended September 30, 2009, from $44.1 million for the three months ended September 30, 2008. The decrease in research and development expenses primarily reflects the inclusion in research and development expense in the third quarter of 2008 of $21.4 million of acquisition related in-process research and development in 2008 in connection with our acquisition of Curacyte in August 2008, partially offset by a $5.0 million technology license fee paid to Eagle in connection with the acquisition of the rights to a ready-to-use formulation of Argatroban which was recorded in research and development expense in the third quarter of 2009 and increased expenditures in the third quarter of 2009 in connection with the continued development efforts for Cleviprex and the products acquired in the Curacyte Discovery and Targanta
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